It has historically been difficult for small churches to obtain mortgage financing.  It has been far too easy in the recent era for denominations and very large churches to obtain enormous mortgages.  In either case, fraudulent transfers by deed have been used to convert illiquid church assets to cash.

In In Re AME Western Episcopal District, Slip. Op. ____ B.R. ____ (ED Cal., 2021), the federal bankruptcy court heard a motion to dismiss from a creditor as to the mortgage it had funded to the tune of $3.64 million on a local denominational church property which had long paid off its original mortgage.  The local church members first learned of the new mortgage when it was declared in default.  The local church never received any of the proceeds of the mortgage.  The local churches had been instructed to deed their properties to a corporate entity that was not an officially recognized part of the denomination.  The properties deeded represented substantially all of the accumulated assets of the local churches.  The deeds the local churches signed did not contain the “in trust” restriction required by denominational governing documents.  Two officers as required by state statute did not sign the deeds.  The deed did not contain an attestation that the church membership approved the transfer of substantially all of its assets.  As a result, the creditor’s motion to dismiss was overruled because the Court held it was on notice by the irregularities in the deed that there was a prior interest, that of the local church, that was not properly conveyed.  Further, the local church still worshipped at the church property, unaware of the mortgage, and the notice of the inappropriate deed would have led to a duly diligent review by the lender prior to the loan of the interest of the congregation that worshipped there.  A creditor, or lender, on notice that the current owner may not own or some or all of the interest represented in the deed, could face a claim of rescission or other claims.

Not every state will have the requirements that apply to transfers of property that constitutes substantially all of the assets of a non-profit corporation such as a church like that reported herein.  However, even in states with lesser requirements, the governing documents of the denomination and the local church can set the same requirements.  A creditor or lender may have a difficult time claiming ignorance of the authority of the signatory on a deed or contract.  Most legitimate creditors or lenders at a minimum will require a resolution of the governing board of the local church attested by the corporate secretary under oath to engage in any major transaction or mortgage.

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