On June 27, 2025, the Texas Supreme Court rendered a 32-page opinion in the case of Southern Methodist Univer. v. South Central Jurisdictional Conference of the United Methodist Church, No. 23-0703, __ S.W.3d __ (Tex. June 27, 2025) (“SMU”). This Insights blog breaks down the opinion.
Primary Holding
Under Texas law, a person who is not a member of a Texas nonprofit corporation but is expressly identified and granted rights in the corporation’s charter may pursue a third-party beneficiary breach of contract and/or declaratory judgment causes of action for the corporation’s failure to comply with the rights granted to such person by the charter.
Facts (SMU at pg. 1-5)
In 1911, SMU was formed as a corporation to exist as a university for higher learning. SMU’s original charter stated, in part, that the university was “to be owned, controlled and managed by the Texas Conferences of the Methodist Episcopal Church South,” being a predecessor-in-interest to South Central Jurisdictional Conference of the United Methodist Church (the “Conference”). SMU’s charter was amended in 1916 to give approval rights over charter amendments to the Conference, stating:
No amendment to this charter shall ever be made unless the same shall have been first affirmatively authorized and approved by the General Conference of the Methodist Episcopal Church, South, or by some authorized agency of said General Conference.
In 1996, SMU, with consent of the Conference, amended its charter to reflect, among other things, that (1) SMU was formed for the establishment of an institution of higher learning “to be forever owned, maintained and controlled by the” Conference; (2) SMU is nonprofit and has no members; (3) no amendment to the charter “shall ever be made” unless first authorized and approved by the Conference or an authorized agency thereof.
The 1996 charter remained in place until, in 2019, doctrinal disagreements caused some within the Methodist denomination to disaffiliate from the national Methodist Church. SMU’s board of trustees voted 34-to-1 to amend the 1996 charter to delete all references to the Conference. The Conference did not authorize the amendments.
The Conference sued SMU, asserting, essentially, that SMU’s effort to amend its charter without Conference approval was an ultra vires act, meaning that SMU, according to the Conference, acted beyond the scope of SMU’s purpose or inconsistent with a limitation on the authority of an officer or director as that purpose or limitation is expressed in SMU’s charter.
Leaning on that ultra vires basis, the Conference asserted (1) that the 1996 charter is SMU’s effective articles of organization; (2) that the 2019 amendments, and any actions taken by SMU in reliance thereon, are void; and (3) any amendment to the 1996 articles must first be authorized by the Conference. The Conference also asserted breach of contract and claims that, in filing the 2019 amendment, SMU filed a false instrument in violation of Texas law.
Lower Court Rulings
At the trial court level, SMU moved to dismiss the claims under Rule 91a of the Texas Rule of Civil Procedure, asserting that the Conference is not among the group of persons to whom the Texas Business Organizations Code grants authority to sue to enjoin SMU’s allegedly ultra vires acts and that there was no enforceable contract between SMU and the Conference. SMU at pg. 6.
Under Rule 91a of the TRCP, a party may move to dismiss an action if it has no basis in law or fact. “A cause of action has no basis in law if the allegations, taken as true, together with inferences reasonably drawn from them, do not entitle the claimant to the relief sought. A cause of action has no basis in fact if no reasonable person could believe the facts pleaded.” Tex. R. Civ. P. 91a.1.
The trial court granted SMU’s motion to dismiss. The Conference appealed.
On appeal, the court of appeals reversed and remanded the matter back to the trial court. The court of appeals found that while the Texas Business Organizations Code does not allow the Conference from challenging an action of SMU as invalid because it is ultra vires. In this regard, the court found that, if the act breaches some other legal duty in addition to being ultra vires, the act may be challenged on that additional ground. The court found that the Conference’s pleadings sufficiently supported a breach-of-contract claim. As such, the Conference’s claims regarding the validity of the 2019 amendments to SMU’s charter, the breach-of-contract claim premised on SMU’s alleged violations of the 1996 charter, and the false-filing claim were all remanded to the trial court. SMU at pg. 7-8.
Texas Supreme Court
SMU requested that the Texas Supreme Court review the court of appeals’ decision, and the Texas Supreme Court granted SMU’s petition for review.
Subject Matter Jurisdiction – Neutral Principles of Law Apply (SMU at pg. 9-12)
First, the Texas Supreme Court analyzed whether the First Amendment prohibits the court from adjudicating the Conference’s claims. Texas courts are constitutionally required to adjudicate claims over which they have jurisdiction and must refrain from adjudicating claims where subject matter jurisdiction is lacking. When addressing disputes among religious organizations or that involve potential ecclesiastical issues, the line between what is and is not appropriate for adjudication by a secular court is not always bright.
In this regard, courts have no jurisdiction to decide questions of an ecclesiastical or inherently religious matters, and those questions must be deferred to the decisions of the appropriate ecclesiastical decision makers. at pg. 9; see Masterson v. Diocese of Nw. Tex., 422 S.W.3d 594, 605–06 (Tex. 2013) (“Courts do not have jurisdiction to decide questions of an ecclesiastical or inherently religious nature, so as to those questions they must defer to decisions of appropriate ecclesiastical decision makers.”). However, courts must apply neutral principles of law to non-ecclesiastical issues involving religious entities – such as land titles and corporate formation, governance, and dissolution – in the same manner as the courts apply those principles to secular entities and issues. at pg. 9; Masterson, 422 S.W.3d at 606.
The Court found that the SMU-Conference dispute “does not require us to impermissibly opine on matters of church doctrine and that we therefore have jurisdiction over the Conference.” SMU at pg. 9.
Ultra Vires Acts and Texas Nonprofit Corporations
Under Section 20.002 of the Texas Business Organizations Code, a corporate act, whether of a for-profit corporation or a nonprofit corporation, is not necessarily invalid because the act was ultra vires, that is, “beyond the scope of the [corporation’s] purpose” or “inconsistent with a limitation on the authority of an officer or director” as that purpose or limitation “is expressed in the corporation’s certificate of formation.” Tex. Bus. Org. Code § 20.002(b).
However, if a corporate act is beyond the scope of the expressed purpose of the corporation, or is inconsistent with an expressed limitation on an officer’s or director’s authority, Texas law permits certain specific stakeholders to challenge the action. Those stakeholders are limited to (1) a shareholder or member who may seek to enjoin the performance of the particular ultra vires act or the transfer of property by or to the corporation; (2) the corporation itself, either directly or derivatively, who may sue an officer or director for exceeding the scope of his or her authority; and (3) the attorney general who may also seek to enjoin performance of an unauthorized corporate act. Id. § 20.002(c).
A Texas nonprofit corporation “may have one or more classes of members” or “may have no members.” Id. § 22.151(a). SMU asserted that, since SMU had no shareholders or members (and thus, since the Conference was not a shareholder or member), the Conference was not permitted to challenge the 2019 charter amendment.
However, the Texas Supreme Court viewed the matter focusing on Chapter 22 of the Texas Business Organizations Code which provides the main and specific statutory regime for Texas nonprofit corporations. In particular, the Court highlighted Section 22.207, which provides:
The board of directors of a religious, charitable, educational, or eleemosynary corporation may be affiliated with, elected, and controlled by an incorporated or unincorporated convention, conference, or association organized under the laws of this or another state, the membership of which is composed of representatives, delegates, or messengers from a church or other religious association.
Tex. Bus. Org. Code § 22.207(a).
The Court found that Section 22.207, while applicable to a narrow set of circumstances, applies given SMU’s nonprofit corporation status, the Conference’s status as a religious entity, and SMU’s 1996 charter that expressed recognition of the Conference’s right of control. The Court noted that “the far more general provisions of Section 20.002(c) cannot control over the specific requirements of Section 22.207.” SMU at pg. 18.
The Court held that Section 22.207 of the Texas Business Organizations Code protects the Conference’s authority to sue SMU to enforce its rights under SMU’s 1996 charter and that Section 20.002 of the Texas Business Organizations Code does not deprive the Conference of that authority. SMU at pg. 19.
Breach of Contract – Third-Party Beneficiary Rights Under a Nonprofit’s Charter
The Court noted that, in the for-profit corporation context, a corporation’s charter creates a contractual relationship between the corporation and its shareholders and concerns the pursuit of the objects for which the corporation is created. The shareholders and the corporation, between themselves, must abide by the charter and the corporation’s bylaws. At pg. 28. The Court found that the Texas Business Organizations Code expressly envisions this contractual relationship. Id. (citing Tex. Bus. Org. Code § 21.101(b)(1)).
On the other hand, a nonprofit corporation has no shareholders, and except in very limited circumstances, there is no right or permission to distribute income to members of a nonprofit corporation as there may be (and usually is) for shareholders of a for-profit corporation. However, the charter of a nonprofit corporation can give rise to contractual obligations between the nonprofit corporation and its members.
The issue in SMU is whether the Conference may assert a breach of contract against SMU, even though the Conference is not a member of SMU’s nonprofit corporate governance. The Court found that SMU’s charter is not a contract between SMU and the Conference but rather is a contract between SMU and the State of Texas. SMU at pg. 23. While the charter indicated that SMU would be “controlled by” the Conference, the Court found that SMU was not required to act for the Conference’s benefit in the way that for-profit corporations must act for the benefit of their shareholders or members.
However, the Conference also asserted that it was a third-party beneficiary to the SMU charter and thus may pursue its breach-of-contract claim in that capacity. The Texas Supreme Court agreed. “Although, as a general rule, only parties to a contract can sue to enforce it, an exception applies to a nonparty who qualifies as a third-party beneficiary of the contract.” SMU at pg. 23. The Court noted that “SMU’s articles include numerous unequivocal statements that expressly and directly benefit the Conference.” Id. at pg. 24. The Court, returned to Section 22.207 of the Texas Business Organizations Code, noting:
In this case, the key provision is Business Organizations Code Section 22.207, which, as discussed above, expressly authorizes a religious association to “be affiliated with” a nonprofit educational corporation and to “elect[]” and “control[]” the corporation’s board. That statute ensures the lawfulness of the 1996 articles’ provisions giving the Conference—a “third party” to the contract—such control. Considering Section 22.207 in conjunction with SMU’s 1996 articles’ terms, we agree with the Conference that it qualifies as a third-party beneficiary of those articles and may thus pursue its breach-of-contract claim against SMU.
SMU at pg. 26 (internal citations omitted).
The Court emphasized that “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.” SMU at pg. 27. Since SMU’s charter “repeatedly single[d] out the Conference and expressly articulate[d] precise powers the Conference may wield[,]” the Court recognized the Conference’s right to survive SMU’s Rule 91a motion to dismiss.
Ultra Vires Acts Statute – Texas Business Organizations Code, Section 20.002
(a) Lack of capacity of a corporation may not be the basis of any claim or defense at law or in equity.
(b) An act of a corporation or a transfer of property by or to a corporation is not invalid because the act or transfer was:
(1) beyond the scope of the purpose or purposes of the corporation as expressed in the corporation’s certificate of formation; or
(2) inconsistent with a limitation on the authority of an officer or director to exercise a statutory power of the corporation, as that limitation is expressed in the corporation’s certificate of formation.
(c) The fact that an act or transfer is beyond the scope of the expressed purpose or purposes of the corporation or is inconsistent with an expressed limitation on the authority of an officer or director may be asserted in a proceeding:
(1) by a shareholder or member against the corporation to enjoin the performance of an act or the transfer of property by or to the corporation;
(2) by the corporation, acting directly or through a receiver, trustee, or other legal representative, or through members or shareholders in a representative suit, against an officer or director or former officer or director of the corporation for exceeding that person’s authority; or
(3) by the attorney general to:
(A) terminate the corporation;
(B) enjoin the corporation from performing an unauthorized act; or
(C) enforce divestment of real property acquired or held contrary to the laws of this state.
(d) If the unauthorized act or transfer sought to be enjoined under Subsection (c)(1) is being or is to be performed or made under a contract to which the corporation is a party and if each party to the contract is a party to the proceeding, the court may set aside and enjoin the performance of the contract. The court may award to the corporation or to another party to the contract, as appropriate, compensation for loss or damage resulting from the action of the court in setting aside and enjoining the performance of the contract, excluding loss of anticipated profits.
[View source.]
