AUSTIN — A regional branch of the United Methodist Church with jurisdiction over Southern Methodist University can sue SMU for breach-of-contract claims as a third-party beneficiary, the Texas Supreme Court ruled Friday.
SMU’s Board of Trustees in 2019 voted overwhelmingly to amend the university’s articles of incorporation to remove references to the church’s South Central Jurisdictional Conference. The document — which hadn’t been updated since 1996 — previously reflected that SMU was “owned” and “controlled” by the conference, whose approval at the time was required to amend the articles.
The university’s governing language was changed without the conference’s approval about nine months after the United Methodist Church voted to strengthen bans on gay weddings and pastors in same-sex relationships.
The conference sued SMU after it filed its amended articles with the Texas secretary of state’s office, seeking a court declaration that the amendments are void. The conference also alleged SMU breached its contract and filed a materially false statement with a government agency.
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A Dallas County district court ruled in February 2020 that the conference lacked standing and dismissed its claim. The Dallas-based 5th Court of Appeals ruled that the conference had standing to challenge the 2019 amendments. The appellate court also found that the trial court erred in granting summary judgment on the conference’s false filing claim and in dismissing its claims for breach of contract and a court declaration.
SMU petitioned for the Texas Supreme Court to review the case. It held oral arguments in January.
Writing for the majority, Justice Debra Lehrmann said “the conference has statutory authority to sue SMU to enforce its rights under the articles” and state business organization law. The conference may also pursue its claim for breach of contract, Lehrmann wrote, though the justices agreed SMU is entitled to summary judgment on the false filing claim.
The Texas Supreme Court sent the case back to district court for further proceedings on the breach-of-contract claim.
Bishop Laura Merrill, president of the conference’s College of Bishops, and the Rev. Derrek Belase, chair of the conference’s Mission Council, said in a joint statement that the court’s opinion supports their original position that the university must seek the conference’s approval to amend its articles of incorporation.
“Our desire is to see this matter brought to a peaceful resolution so that our historic connection to the university can be fruitfully maintained for future generations,” they wrote.
Megan Jacob, an SMU spokeswoman, said the university was still reviewing the 32-page opinion as of Friday afternoon but is pleased the justices recognized SMU’s compliance when filing amendments with the secretary of state’s office.
“We’re prepared to return to the trial court on the remaining issues, where we will continue to defend the SMU Board of Trustees’ right to act in the best interests of the university,” Jacob said in a statement. “SMU remains proud of its Methodist heritage as we move forward with advancing SMU’s mission and providing enriching education for all students.”
SMU is considered a nonmember, nonprofit corporation that operates for the public’s benefit. Its articles of incorporation are not a contract between SMU and the conference, Lehrmann wrote.
“While the articles reflect that SMU would be ‘controlled by’ the conference, SMU is not required to act for the conference’s benefit in the way that corporations must act for the benefit of their shareholders or members,” she wrote. “Nor does the code provide for the equivalent of a shareholders’ agreement in the nonprofit context.”
She continued: “However, as with for-profit corporations, a nonprofit corporation’s articles do constitute a contract between SMU and the state of Texas. The conference alternatively alleges in its petition that it is a third-party beneficiary of that contract and may pursue its breach-of-contract claim in that capacity. We agree.”
A section of the state’s business organization law authorizes religious associations to be affiliated with a nonprofit educational corporation and elect and control the corporation’s board, Lehrmann wrote.
“That statute ensures the lawfulness of the 1996 articles’ provisions giving the conference — a ‘third party’ to the contract — such control,” she wrote. “The right to sue is available only to the third party to whom the contract expressly grants contractual rights — here, the conference. The fact that others (individual members of the conference and Methodist Church) might be within the class of people the corporation is intended to benefit would not entitle them to sue to enforce the articles as third-party beneficiaries because the articles confer no rights upon them.”
In a dissenting opinion that disagrees only with the majority’s breach-of-contract analysis, Justice Jane Bland said the court went too far.
“We should hold that a nonprofit’s charter does not confer third-party beneficiary status via the state,” she wrote. “By recognizing such a claim — one not even the conference advances — the court breaks new ground on its own.”