Nonprofit Board Lending: Why Counsel Matters

[Mike Burns]

The case of a New York City minister, his wife and the executive director have agreed to pay-back loans with interest and penalties they borrowed from their church and two related nonprofits. I am scratching my head a bit over the "must pay back clause" because the Wall Street Journal doesn't really indicate there was any intention not to pay back their loan (which they used to buy a house and property. Some of the loan was also used to buy a car (yes, a BMW). Alas, additional monies were used to purchase trips for the couple to visit their sons in college.

So, we have here a few issues. According to the Attorney General, it is state law that directors and officers may not be the beneficiary of a nonprofit's loans. I will admit that this was new to me. Over the years I have known of a number of instances where boards have indeed made financial loans to their execs particularly for a house to live-in.

This particular case came to the forefront of the news because these loans were viewed externally as diverting nonprofit money away from their intended purpose. But the couple did actually conduct related transactions that were less than legally or even morally acceptable and indeed, action should be taken, I think, beyond just getting the money with penalties paid.

And indeed, this is likely the reason boards should be cautious about lending. That there were legal prohibitions agains these transactions was news to me so I poked around the web and found that such transactions are not actually prohibited in every state in the US. And, when their are sanctions, their are circumstances. The lesson: boards should seek legal counsel should the subject arise and their is not already a board-developed policy in place recognizing that federal and state laws always trump a nonprofit's laws when there is a difference between the two.

But, to wrap this story up, the Journal article also notes that: Three former members of the Glad Tidings' board agreed to pay $50,000 in penalties for neglecting their oversight duties. Whoa -- gotta hand it to the AG who took all of this very seriously. And nonprofit boards everywhere should do the same. Ignorance is not blissful.