Author: churchlitigationupdate

CHURCH BANKRUPTCY

Fortunately, there are few church bankruptcies. The bankruptcies that are of note are usually of larger hierarchical church organizations. Local churches may be foreclosed but after that typically they simply dissipate or meet in rented space or homes.

In Re: The Archdiocese of Saint Paul and Minneapolis, Slip Op. (8^th Cir. 2018), four hundred clergy sexual abuse claimants represented by a creditors committee sought to consolidate all of the 200 affiliated non-profit corporations related to the archdiocese so that their assets could be added to the estate of the archdiocese. These 200 affiliated non-profit corporations included local parish churches, schools, charities and foundations. The 200 affiliated non-profit corporations were formed consistent with state law and as a result their boards were composed of the archbishop, vicar general, parish priest and two lay members appointed by the other three. The affiliates were allegedly directly or heavily controlled by the archbishop, and occasionally abolished some of the affiliates. However, the Unites States Court of Appeals for the 8^th Circuit affirmed the trial courts that refused to grant consolidation. The 8^th Circuit noted that the bankruptcy code allowed substantive consolidation only as an extra-ordinary equitable remedy to be ordered in rare cases. The occasional failure to adhere to corporate forms or the occasional discontinuation of an affiliate and absorption of its assets was not enough to warrant the remedy. The remedy was generally expected to be used only when affiliates were part of a Ponzi scheme or were, in fact, mere alter egos of the debtor, neither of which were before the trial court.

Failure to follow corporate forms if sufficiently pervasive that it results in commingling of assets may lead to a conclusion an affiliate is a mere alter ego. The sufficiency would seem to be reached if corporate forms are disregarded in a cavalier or criminal manner and not in a few isolated incidents. That the archbishop served on every board and had the power to remove board members, in the case reported herein, resulted as much from state corporation law applicable to all non-profit corporations. Thus, state corporation law should be consulted to make sure the composition of affiliate’s boards is either expressly authorized or expressly required.

THE DEAD HAND OF THE PAST

Courts will typically refrain from resolving church leadership succession controversies. A court might make certain the process dictated by the church governing documents is followed such that usurpation is not likely to succeed, especially when in dispute are positions in congregational churches. In hierarchical church organizations, the courts seem less likely to resolve a dispute because church government is presumptively able to manage its own internal process for elections.

In our post on April 4, 2017, we reported the opinion in Puri v Khalsa, 844 F3d 1152 (9^th Cir. 2017) in which the Oregon federal court dismissed the case on the pleadings and on appeal the United States Court of Appeals for the 9^th Circuit reversed an Oregon federal district court decision. On remand, in Puri v Khalsa, Opinion and Order, (D. Or. Portland Div. 2018), discovery proceedings were followed by motions for summary judgment. Also, a state court four-week jury trial had been concluded on state law theories of recovery. In the case on remand, the Oregon federal court had all the evidence the parties could muster in discovery and the prior trial, too. The issue was whether the succession plan of the founding religious leader was enforceable or whether the boards of the denomination could revise or revoke the succession plan. The founding religious leader died and left written instructions with the lawyer of the corporation regarding the identities of the persons the late religious leader was appointing to the controlling boards. The Oregon federal court held that the boards could revise the succession plan. Also, the Oregon federal court concluded the evidence proved that while they may not be conventional churches the defendants were religious organizations. Also, the court held the board members, because of their authority to choose and remove religious leaders in the church, were governed by the Ministerial Exemption Doctrine. Finally, finding the entities to be religious organizations brought their internal decision-making into the Ecclesiastical Abstention Doctrine. Thus, the Oregon federal court dismissed the case.

Succession plans that involve binding beyond the grave are likely to fail. A founder that wants to preserve a legacy should do so before retirement or death. Governing documents that invest denominational boards with the authority to select clergy or other church leaders may likewise place the election of board members beyond the reach of a secular court. Internal processes that select these board members should be carefully designed to avoid over reaching and usurpation because secular court rescue may not be available. As the foregoing demonstrates, the founder’s legacy was costly to preserve or inherit, and may not, in fact, belong to the founder or the founder’s heirs.

LANDLORD CHURCHES

Churches often own property and when that property is no longer mission critical the churches lease the property to a tenant. It provides the church a source of income from an asset that may one day again be needed. It allows the church to retain control of what is typically adjacent or nearby property. Of course, the Ecclesiastical Abstention Doctrine may apply to some disputes, in whole or in part, about church property. In Neutral Principles jurisdictions, secular issues may be decided and religious issues ignored or the reserved for decision by the church.

Beluah Pilgrim Holiness Church v Otto, Slip Op., Memorandum and Order (Mass. App. 2018) was an interlocutory appellate order concluding that the Housing Court had jurisdiction to hear eviction proceedings against tenants of church property. The Housing Court in Massachusetts, apparently from the opinion, conducts “summary proceedings,” which are probably cases tried only on written submissions and a due process hearing. Most likely, if either party desires trial of issues not suitable for that minimal process, the matter is transferred to a court of general jurisdiction.

The takeaway is that in Neutral Principles jurisdictions church landlords, and tenants, should be able to use limited jurisdiction courts and proceedings. The flip side is that they can be forced to participate in proceedings before those limited jurisdiction tribunals and should not assume the church will be able to easily ascend to a court of general jurisdiction.

CHURCH MORALITY LAWSUITS

Church employees that run afoul of basic moral tenets of church employers are often terminated. Whether this is good church policy or not depends on the situation and depends on the alternatives available. Unfortunately, sometimes it is a financial question because some members may not want their offerings used to deal with the consequences of sin in others who fail to hide the sin.

In Kelley v Decatur Baptist Church, Memorandum and Order (ND Ala., NE Div. 2018), the federal district court did not dismiss the Plaintiff’s case because the Plaintiff alleged she was terminated because she was pregnant in violation of Title VII. She also alleged she was a “maintenance” and child daycare employee. The church alleged the pregnancy was out of wed lock and that the Plaintiff “sowed discord” among the daycare employees, neither reason being governed by Title VII. The church also asserted the first reason for termination was driven by beliefs protected by the Ecclesiastical Abstention Doctrine and the Ministerial Exception Doctrine because the Plaintiff was a “minister.” The case was not dismissed because the Court had to assume as true the allegations in the Complaint at this stage of the proceedings and that at best there was a factual dispute that could not be resolved at this stage. The case will proceed into discovery and possibly other proceedings.

There might not have been a factual dispute if as a new employee the Plaintiff had acknowledged by signing a document describing her position and its duties as ministerial or if there had been an employee handbook similarly acknowledged that contained similar language. Such an employee handbook might have contained a morals clause that expressly listed pregnancy out of wed lock, for the father and the mother, as disqualifying criteria for working with the children entrusted to the church. The troubling aspects of the situation may have been reduced if the church had engaged and paid a license professional counselor to counsel the Plaintiff to reduce or end the “discord” among child care workers, especially if that effort failed, and to help her make the adjustment to motherhood. The Scarlet “S” approach, if the church took that approach as the Court’s opinion seems to suggest, did not seem to work so well.