The congregation doesn’t have to know everything about church operations.
BY Daniel P. Dalton
Consider this factual situation: A church discovered that an employee has embezzled money from its treasury. The employee is confronted, confesses to stealing money and agrees to pay everything back. Does the church have an obligation to inform the parishioners or members of the crime and penance? The issue will be governed by both state law and the particular denomination or bylaws of a church, and in general, the answer is no.
A recent Massachusetts’ Supreme Court looked at the issue and found that the mere fact that a person is a parishioner of a church is not enough to impose a fiduciary relationship on the congregation thereby requiring legal disclosure. However, other states have found the existence of a fiduciary relationship where, due to an acceptance of a duty, a relationship has developed beyond the impersonal. Such cases usually involve litigation evolving out of the sexual abuse of parishioners at the hands of a church authority, and relate to a breach of a duty of care based in tort.
In a recent Michigan case the court held that “Michigan law does not recognize a fiduciary duty on the part of a religious organization‚ [and] determining whether a fiduciary relationship exists between a parishioner and a religious entity would involve inquiry into religious doctrine and ecclesiastical polity — [which] [t]his Court has previously declined to exercise jurisdiction over.”
Under most hierarchal religious institutions governing rules, membership is composed of Christians who have accepted the teachings, doctrines, and government of the particular denomination and who have been formally received into its fellowship pursuant to the guidelines established by the governing body. In general, members may attend regularly scheduled meetings and vote on major issues.
Further, members have the ability to bring a derivative action in the name of the corporation for an injury caused by a board member, officer or third party, when the board refuses to do so. However, members are not involved in the day-to-day operations of the organization, as direction and supervision of the nonprofit corporation remain solely within the control of the board of directors.
The direction and supervision of the nonprofit corporation remain solely within the control of the board of directors. The function of the board of directors is to manage the “internal” day-to-day operations of the organization, and further to manage the organizations “external” functions. State nonprofit corporation statutes also provide that directors owe a duty of care, loyalty, good faith, and obedience to the entity.
The duty of care requires that a director discharge his or her duty in good faith, with the care an ordinarily prudent person in a similar position would exercise, and with a reasonable belief that the action to be taken is in best interests of the organization. Board members’ business decisions are afforded the protection of the business judgment rule. Where it applies, the business judgment rule is a presumption that church directors, when making a business decision, acted on an informed basis, in good faith, and with the honest belief that their decision was in the religious entity’s best interest. The business judgment rule has application as a potential defense in two situations: (1) where officers or directors face personal liability; and (2) where a corporation (generally through shareholders in a derivative action) seeks to void a decision of or transaction approved by the board.
Such business decisions are not subject to judicial scrutiny unless the decision or transaction involved self dealing or was wholly irrational, therefore amounting to an egregious breach of a director’s or officer’s duty of care or exercise of such duty in good faith. Most states hold a director or officer to a willful disregard or gross negligent standard.
With a factual scenario, similar to the one presented above, that does not involve self dealing transactions but is merely a business decision involving the internal management of the organization’s day-by-day operations, disclosure is not required. Because a religious organization’s board of directors retains wide discretion over the day-to-day decisions and operations, it has no legal duty to disclose to its members/parishioners the activity of its employees. The reason is that the situation does not involve a self dealing transaction and is merely a business decision involving the internal management of the organization’s day-to-day operations.
Other considerations may play into the decision to disclose information, such as public relations or an underlying simmering in a congregation to find out what is happening in the church. But from a legal perspective, based on most religious denominations governing rules and state non for profit statutes, disclosure is not warranted.
Daniel P. Dalton is a founding partner of Dalton, Tomich & Pensler, PLC, Bloomfield Hills, MI. www.dtplawfirm.com
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Check your copier contract
Of the top 10 legal issues I address for religious organizations, the one issue I spend the most time on is copier contracts. The typical scenario occurs when a religious institution has a copier contract and in an attempt to lower cost, contacts a competitor copier company to perform a price comparison. A new sales agent arrives at the church, underbids the existing contract and verbally agrees to pay off the existing contract. The church enters into a new long-term copier contract; a new copier arrives a few days later and for a period of 60-90 days, the church is happy.
Then a collection letter comes from the financing company for the original copier company notifying the church that they are in default and demands payment. And shortly thereafter, the “new” copier is broken and calls to the new copier company and salesperson go unanswered. The church decides that it will not pay for the second copier and sends a letter to the second company demanding that they take the copier back. The demand letter is ignored.
Instead, demand letters are sent by both the new and old financing companies for the first copier and the second copier and a lawsuit follows shortly thereafter.
The church then contacts an attorney and is advised that (1) they agree to have the copier company assign the contract to finance companies; (2) the copier company disclaimed any warranties and do not have to fix the machines; (3) the church agreed that all claims are to be litigated in the state of Minnesota using Minnesota law; and (4) they must pay the attorney fees of the companies suing them, litigation irrespective if they win or lose the case.
This is a very familiar scenario. Depending on the facts of the case, there may be some defenses to a copier contract lawsuit. Contact with an attorney familiar with these cases is essential. The key lesson learned is carefully review copier contracts before entering into them. You can negotiate the terms of the agreement. Spend the time with an attorney familiar with the agreements to avoid paying later. Otherwise, you may find yourself on the short end of the bad agreement.
— Daniel P. Dalton
Does this apply when a church member is accused of child sexual molestation? This happened at a church I was attending; I wasn’t aware until many years after the event(s). Some members are angry that they were not informed, noting the potential danger to other children.
I take it by reading the above, that church officers are not responsibile to the state if any issue of defalcation occures with the church’s finances.