Category: church property

CHURCH SPLITS: MONEY GRABS

We reported a case out of Florida in January 2020 in which the founding pastor died leading to a succession civil war.  See, Church Succession Title Bouts.  In Eglise Baptiste v Seminole Tribe, Omnibus Order, 19-cv-62591 (SD FL, 2020), aff’d, 824 F. Appx 680 (11th Cir. 2020), the battle for control of the church was marked by a congregational meeting that turned into a brawl that required police intervention to restore order.  Apparently, a congregational vote survived the brawl and the wife of the late pastor led the winning faction elected by the congregation to succeed.  The following week the worship service led by the losing faction was interrupted by the widow and her faction.  They retook the church building from the “losing” faction accompanied by “six armed officers from the Seminole [Tribal] Police Department.”  The widow’s faction’s opponents were removed from the church property, the locks changed, and the gates to the property locked.  The “losing” faction sued the Seminole Tribe but could not defeat the tribe’s sovereign immunity.  The widow and her faction were also dismissed from the lawsuit because the Plaintiff’s claims represented “non-justiciable questions of church governance” excluded from review by the Ecclesiastical Abstention Doctrine.

The next chapter follows.

In Eglise Baptiste v Bank of America, NA, Slip Op. (FL. App. 4th 2021), the “losing” faction sued alleging the bank accounts of the church were wrongfully transferred to the “winning” successor faction led by the deceased founding pastor’s widow.  The trial court dismissed the case holding that to determine the issue of which faction was the “winner” and which was the “loser,” and whether the widow of the pastor had authority or was a rightful leadership successor, would require intrusion of the Court prohibited by the Ecclesiastical Abstention Doctrine into internal church management affairs.  The appellate court affirmed the dismissal.

The lesson is the same for both cases and both of our reports.  Most courts will not play referee in a title bout between factions in a church split.  If there is a documented congregational vote in congregational churches or a hierarchical action in denominational churches, and if the vote or action is arguably consistent with organizational governing documents, such as bylaws, even should a court need to address property ownership or control, usually those are the facts that will control the decision.  A written succession plan adopted by the governing authority of the church or the denomination, or both may, if drafted with sufficient clarity and due regard for other laws, such as rules against perpetuities, which may or may not apply to churches, be a determinative piece of evidence.

FRAUDULENT CHURCH DEEDS

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.

PARSONAGE WARS – YES, THEY STILL HAPPEN

Generally, the “parsonage” is an obsolete tool of compensation because most ministers with families came to understand in the 20th century that home ownership was the largest and best investment working people could make.  Parsonages were useful to some churches with high ministerial turnover and as an in-kind compensation tool.  Nevertheless, some churches still use parsonages for a variety of good reasons.

In West Michigan Annual Conference of the United Methodist Church v City of Grand Rapids, Slip Op. (Mich. App. 2021), the city was so desperate for revenue it decided to deny parsonage status, and therefor exemption from ad valorem taxes, to the parsonage inhabited by the District Superintendent over 91 churches.  The assessed value was under $100,000.  The city argued the District Superintendent was an ordained minister but did not supervise a particular church making the parsonage ineligible.  The Court of Appeals affirmed the appeals board of the city in holding that the statute did not require that the minister be “over a particular church” and contained no such qualifying language.

Churches faced with a rogue local government attempting to impose taxation without justification or legal basis should not challenge the taxation without counsel.  A lawyer with a little experience with the local government in question can save a church a lot of money and consternation.  It is very rare that such questions arise and are litigated to this extent.  But, sometimes, even stupid lawsuits take on a life of their own and are impervious to common sense.

CHURCH ASSOCIATIONS – THE 19TH CENTURY IS OVER

Most denominations, their subdivisions and local churches, generally prove their existence and right to own property by incorporating.  However, while this may be the best practice, it is not the only way.  Indeed, prior to the era of incorporation, most churches were associations of members and most denominations were associations of churches.  While most now have governing documents and corporate documents filed with a regulatory authority, for purposes of real estate ownership if nothing else, that was not always the case even during the latter stages of the Twentieth Century.  One of the reasons the organizational structure of the “association” fell into disuse was because of the need to obtain clear title to own real estate and bank accounts.

In Embassy University v Institute in Basic Life Principles, Inc., 2020 IL App (2d) 191140-U (2020), the trial court dismissed the case because the defendant alleged the Plaintiffs could not prove they were an association, and, indeed, could not prove up their own existence in order to be a party to a lawsuit.  The Plaintiffs were claiming they were part of an association of churches or parachurch organizations and that the defendant owed them a fiduciary duty in the disposition of denominational assets.  Further, to prove the point, the defendants noted that the Plaintiff university’s name was a “DBA” and not the name of the underlying entity.  The appellate court reversed so that through discovery, and if necessary trial, the Plaintiffs could prove they were an association with the defendant imposing on the defendant a fiduciary duty as to denominational assets.

The lesson of history has been that associations have a harder time proving their existence, their governance, who can speak for them, and who can own their property.  The Plaintiffs in the reported case might have an easier time than some because their founder, William Gothard, Ph.D, is still living, well known, even though he had to depart from leadership for a time, and can testify as to the formation of most of the entities.  The Plaintiffs should have incorporated.  It is still the cheapest and tried and true method of becoming an entity that can own property and accounts.