Category: Church Governance

SUING CHURCH ADVISORS

Churches sometimes hire “experts” based on referrals or recommendations and never inquire as to licensure. Generally, these “experts” are bookkeepers that are not Certified Public Accountants or Public Accountants, or non-lawyers providing legal advice. The internet has exacerbated this practice. Small evangelical churches are especially prone to do so. The economics that drive these decisions sometimes are not reviewed even after the church has outgrown its hand to mouth beginnings.

In El Pescador Church, Inc. v Ferrero, Slip Op. (Tex. Civ. App. 8th 2019), a letter from three church board members, or former board members, requested access to a filing cabinet containing church financial records. It may have been that the records were lost. Indeed, no copy of the church bylaws were placed in the court record. The pastor denied access to the financial records. Thereafter, the dispute widened into a church split. The church split resulted in an unsuccessful lawsuit against the pastor. The trial court dismissed the case as to the pastor and the appellate court affirmed based on the Ecclesiastical Abstention Doctrine. The issues raised regarding the pastor involved only church governance issues including congregational votes and similar issues. None of the issues involved property ownership, control of church property, and no issue as to who the officers or directors of the church could be. Also sued was an advisor engaged to advise regarding church governance and financial issues. The advisor was not licensed as an accountant or a lawyer even though he was asked to conduct an “audit” and advised the church regarding legal matters. The case against the advisor continued, at least as far as further amended pleadings in the trial court, because the church was a “consumer” under the Texas Deceptive Trade Practices Act and because the church alleged the advisor did not disclose the lack of licensure.

Church “advisors” that are not licensed to provide the service being sold typically cannot respond in damages and have no insurance. Without licensure, there is no regulatory oversight of the “advisor.” An “advisor” caught in a church split is also taking a risk. In the reported case, the pastor that engaged the “advisor” was shielded by the Ecclesiastical Abstention Doctrine but the “advisor” was not. While it remained to be seen whether on remand to the trial court the claim against the “advisor” would survive, the “advisor” was still left “holding the bag.” The church had a claim against the “advisor” because the pastor that engaged the “advisor” was an agent of the church. Thus, the “advisor’s” argument the “advisor” was not engaged by the church failed.

RELIGIOUS BYLAWS

There is sometimes a thin line between ecclesiastical language in church bylaws and secular language intended to satisfy state law requirements. Enforcement of church bylaws is generally possible in a contract action in a secular court. However, religious language in bylaws may not be.

In Weare Bible Baptist Church v Fuller, Slip Op. (NH, 2019), the New Hampshire trial court tried to enforce the bylaws as written using its contempt powers. The founding pastor was permanently incapacitated by stroke. The wife of the founding pastor refused to give up the parsonage resulting in its loss of property tax exemption. The wife also led a faction, primarily of family members, that usurped the corporate seal and office of the Treasurer. Using the corporate seal, the wife’s faction attempted to terminate the successor pastor’s employment and notified the Secretary of State in a writing sealed with the corporate seal that only the wife’s faction retained control of the corporation. Resolution of the issues in the trial court required a three day evidentiary hearing that included testimony from an expert witness in denominational practice and polity. The appellate court reversed and remanded ordering the trial court to consider only deeds, trusts, and statutes. If the trial court could not resolve ownership and control issues with those documents, church governance documents would next be considered but only within the confines of Neutral Principles of Law.

The opinion is silent regarding whether the disabled pastor was provided for through disability insurance or other church purchased safety nets. The opinion is silent regarding whether the parsonage was fungible in some reasonable manner. The silence prevents a determination as to motivations: such as whether the wife was trying to retain control or was acting in desperation because of an involuntarily imposed vow of poverty. The lesson that can be gleaned however is that religious language in bylaws can be internally enforced by the church or not at all. To be enforced regarding corporate governance rather than church governance, the bylaws should give unto Ceasar.

AUTOPSY OF A CHURCH EMBEZZLER

Most church embezzler’s go unreported in courts and media. The exceptions are when church embezzlers are charged publicly by law enforcement or sued by the victim. A recent report of a church embezzler charged by law enforcement for stealing a quarter million dollars over a decade reminded me of the invisibility of this topic. Called upon to investigate church embezzlers more than I ever wanted, that experience led me to the following observations.

Lawsuits against embezzlers are rarely successful or cost-effective. Also, lawsuits keep the wound open and usually reveal lapses in internal financial processes with which church leadership may wish to avoid public confrontation.

Church embezzlers can often be “profiled” in a sense.

1) Church embezzlers are often long-time members or employees that have ingratiated themselves into the trust of church leaders. Month after month and year after year they process financial information that after a time looks routine. Even well-made financial processes are over the years subject to entropy: as trust increases oversight diminishes. Eventually, there comes a time when the embezzler was trusted with small things that became large things.

2) Church embezzlers have either no financial oversight or audit oversight. This systems failure develops as trust increases. Also, financial oversight discipline is hard to maintain over time in volunteer organizations. Professional pastors rarely have the training or the discipline to remain focused on financial oversight discipline year after year and decade after decade.

3) Church embezzlers begin to look at compensation paid to church co-workers, the financial success or wealth of other church members, or their own financial problems and rationalize about the lack of financial justice. They become increasingly self-centered and this is accelerated if the church is imposing on the employed embezzler an involuntary vow of poverty or the embezzler believes it be so.

4) When the trust of the church embezzler reaches a threshold sufficient for the church embezzler to bypass, discontinue or override financial oversight, and this is combined with the rationalization of financial injustice, the church embezzler will often take a small step. A personal expense, usually a small one, will find itself among other church expenses and paid. Offering cash might not all be counted.

5) Bypassed financial oversight, bypassed by stealth or by disuse, does not react to the small defalcation. Another follows. In this manner the defalcations mount and get larger but the very slight trimming of the financial results of the church are not noticed by sleeping financial oversight systems.

6) The church embezzler’s personal justification based on perceived financial injustice, even if includes the firm conviction that all will be repaid in some future circumstance that never seems to arrive, flowers into self-confidence that the pilfering will not be detected. The pilfering slowly over time grows into larger and larger defalcations. That is the reason the amounts stolen often reach six figures.

7) At some point, financial oversight discipline accidently reasserts itself through an event the emboldened embezzler in arrogance thought would neve be noticed. Usually, the event is precipitated by double dipping by the embezzler. There are several examples. Payroll taxes may no longer match the amounts actually paid in payroll. Unpaid or slow paid routine church bills may accumulate or trigger a complaint by a vendor. In smaller churches the leadership may notice a decline in reported giving that does not match the routine giving of the main supporters. Church tax reports to members may not match the amounts deposited in church bank accounts.

Church financial oversight discipline in larger churches and para-church organizations should not be maintained by volunteers but should be designed and occasionally reviewed by a Certified Public Accountant that is not a church member. A review by the CPA annually might be enough surveillance but periodic audits might be needed. Gifts and offerings should be handled, counted and deposited using the “buddy system” where no less than “two or more are gathered.” The two gathered should not be a married couple. Giving records and bank records should be periodically reconciled. Bank account access should be strictly controlled and reviewed for accountability.

Six figure losses to embezzlers reported in the news media, especially after a public criminal charge, will depress giving and destroy the trust of members in pastors and church leaders. Members will remember building repairs deferred or not done, ministries not funded, and the sense of financial injustice may creep into a church. Financial oversight discipline is not optional. Pastors and church leaders in their arrogance may assume they have complete financial control while blind to their own ignorance of financial oversight in the digital banking age.

MANDATORY CHURCH DISPUTE ARBITRATION

The United States Arbitration Act, and the arbitration statutes of each state, may require arbitration between two parties that have voluntarily agreed to arbitrate. Generally, a written contract between the two parties suffices to prove the voluntary agreement to arbitrate. In rare cases, a party seeking to be a third party beneficiary under a contract may be required to arbitrate as if they voluntarily agreed to do so because to take the benefit of a contract usually means consent to all terms. However, voluntary agreement usually cannot be inferred.

In Harbor Christian Fellowship v Southern California District Council of the Assemblies of God, Slip Op. (CA App., 2019) (unpublished) the appellate court reversed the trial court’s order compelling arbitration and vacated the arbitration award in favor of the denomination. The dispute arose because the local church property was deeded by the District Council to itself by quitclaim deed as part of the financial salvage operation necessitated because the local church fell on hard times. The trial court held that the local churches’ participation as an “affiliate” of the District Council constituted acquiescence to the bylaws of the District Council. The District Council bylaws contained a mandatory arbitration provision. However, the appellate court rejected participation as an “affiliate” alone as proof of submission to the bylaws or voluntary agreement to arbitrate. The trial court did not examine the bylaws of the local church. The appellate court held the local church bylaws adopted in 1955 explicitly defined it as a “cooperative fellowship” in contradiction to the bylaws of the District Council. The appellate court noted the District Council did not put forward any other document proving the local church agreed to be bound by the bylaws of the District Council.

The problem with the decision reported is that the courts, both at the trial and appellate level, interfered in church governance contrary to the Ecclesiastical Abstention Doctrine. The trial court interfered by compelling the local church to arbitrate with the denomination. The denomination should have been required to enforce its own arbitration provision by the internal means available to it even if that was only harsh scolding. The appellate court did exactly the same thing in reverse by deciding that a “cooperative fellowship,” as that term is used by the denomination, meant something different than “affiliate” of the District Council in order to vacate the arbitration decision. Both courts should have decided only whether the quitclaim deed was valid or invalid on its face just like any other quitclaim deed in dispute. Either the denomination could prove its authorization using Neutral Principals of Law to file the quitclaim deed or it could not. The arbitration and its outcome were irrelevant.