Professional Services by a Director of a Charitable Corporation

Ontario (Public Guardian & Trustee) v. Unity Church of Truth, a 1998 decision of the Ontario Court of Justice (General Division), involved a director of a charitable corporation who received a commission in his capacity as a licensed real estate broker on two real property transactions involving the church.

1. Facts

The Unity Church of Truth was incorporated in 1941. Reverend James Sherman became minister of the church in 1975 and Mr. Doug Cameron became a director in 1991. Later, allegations were raised about Mr. Sherman's past conduct and the extent of the compensation and benefits that he had been receiving from the church. However, the narrower focus here is on the transactions involving the church and Mr. Cameron, who had become board chair. Mr. Cameron was a licensed real estate broker.

The church owned the residence (called the manse) that its minister occupied. While Mr. Cameron was a director, the board approved the disposition of the old manse and the acquisition of a replacement manse at a significantly greater cost. Mr. Cameron's firm had an exclusive listing and acted on the sale of the old manse. It was sold for $306,000. The firm earned a 2.5% commission on the sale (for a total of $7,650, of which Mr. Cameron was paid $4,016).

On the purchase of the new manse, which had a purchase price of $750,000, the firm earned another 2.5% commission on the sale (for a total of $18,750, of which Mr. Cameron was paid a commission of $13,125). Therefore, his firm earned total commissions of $26,400 out of which Mr. Cameron personally received $17,141. Out of the commission paid to him, Mr. Cameron personally donated $1,000 to the church.

By the time the matter came before Justice Sheard, Mr. Cameron had ceased to be a director of the church and was not named as a party to the litigation proceedings. Mr. Cameron was, therefore, neither seeking court approval of his remuneration nor defending his remuneration from attack.

2. Ruling

Despite the context in which the issue came before the court, Justice Sheard commented on the remuneration that Mr. Cameron received in his capacity as a real estate broker acting for the church on the two transactions. First, Justice Sheard noted that Mr. Cameron was not seeking the court's approval of the commission payments. Second, if Mr. Cameron had requested that approval, Sheard, J. stated that he would have granted it. He added that, once the decision had been made to sell the old property and buy a new one, it was quite appropriate to employ the real estate firm in which a member of the church was a salesman. It was not alleged that Mr. Cameron participated in the decision to sell the old property and buy the new. Third, if there was a breach of the rule prohibiting the receipt of profits (in the form of real estate commissions) while a director, Sheard, J. would have excused the director, stating that retroactive approval of the payment of commissions would be appropriate.

Finally, with respect to the complaint about the level of remuneration and benefits paid to Reverend Sherman, who was also a director, Sheard, J. stated that, as a director, any payment or benefit to Reverend Sherman was improper. However, he commented that he presumed that it would not be argued that Reverend Sherman should refund all the salary and benefits he has received over the years since he became the minister. The question would become: what portion should be excused from refunding? However, Justice Sheard dismissed the application and, therefore, did not need to answer the question that he posed.

3. Key Observations

While much of the court's discussion in Unity Church was not required for its decision, it is nevertheless highly instructive on the issue of professionals who sit on the boards of charitable corporations and, as a result, are picked to act for the charity on matters for which the board member is professionally qualified. The court recognized that board members who provide professional services at prevailing market rates are entitled to be paid and that no issue should be taken with this practice. The key factors spelled out in Unity Church were that the decision to sell one property and buy another was made by the church without the broker-director participating in the decision. Once that decision was made, the director can be a candidate to receive the listing. He must disclose the nature and extent of his interest in the real estate firm that the corporation engages. He must also abstain from voting on the contract between the charitable corporation and his firm. The compensation payable by the charitable corporation should be at prevailing market rates and this should be transparent and easily established.

If these steps are taken, it appears from Unity Church that court approval of the contract becomes unnecessary. The court did not approve the contract in Unity Church. Nor did it indicate that it needed to approve it. The payments to the director's firm (and to the director by his firm) were made and they were not set aside, approved or required to be refunded.

Therefore, Unity Church supports the engagement of firms with which directors are professionally associated without court approval as long as the corporation, the conflicted director and the board as a whole are careful to take steps to ensure that the charitable corporation's substantive interests are adequately protected. The guidelines are (i) full disclosure of the nature and extent of the conflict, (ii) approval by non-conflicted directors, in which the conflicted director does not vote or otherwise participate, and (iii) substantive terms that are at least as good as the charitable corporation would receive in the relevant open market. However, Unity Church should not be extrapolated to other situations, such as a director who is a paid employee of the charity, which Unity Church affirms remains improper without a court order.

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