Tag: church finances

REMOVAL AND THE ECCLESIASTICAL ABSTENTION DOCTRINE

Generally, federal courts can only hear cases in which the Plaintiff is from a state other than the state from which the Defendant hails or if the case involves a federal law. Generally, assuming the parties are from the same state, a federal court will review the state court Petition or Complaint that was removed by the Defendant to federal court to determine if the Petition or Complaint raises a question under federal law. If none is found, the case will be remanded to the state trial court from which it came. The Ecclesiastical Abstention Doctrine and the Ministerial Exception are federal constitutional law doctrines but typically they are raised in a case as defenses by the Defendant. If the state trial court Petition or Complaint only mentions state law, unless there is a federal law lurking in the Petition or Complaint, the federal court will not have jurisdiction and will remand the case to state trial court.

In Savoy v Savoy, Slip Op., 2017 WL 1536158 (D. Nev. 2017), the Plaintiff demanded an accounting from the church corporation under the state law governing corporations. The Plaintiff also alleged that the corporate officers breached their fiduciary duty of loyalty to the corporation as defined by state law. The Defendant removed the case from state court to federal court based on the Defendants’ defensive assertion of the Ministerial Exception and the Ecclesiastical Abstention Doctrine. But, following normal federal policy, the case was remanded to state court because the Plaintiff and Defendant were residents of the same state and because the Plaintiff did not assert a right under federal law. That the Defendant asserted a right under federal constitutional law was not enough.

The facts of the case are not explicated in the Court’s opinion with sufficient detail to make a guess why removal to federal court was considered by the Defendant a good idea. But, the Ecclesiastical Abstention Doctrine and the Ministerial Exception may be raised in a state court proceeding probably to the same or similar effect. Indeed, state courts sometimes are more reluctant to delve into church splits than federal courts.

DONOR DO OVERS

In the typical church, fund raising to achieve an objective is not always successful. To raise enough money to build a fellowship hall, or a youth facility, or some other adjunct facility is often started and not finished. If insufficient money is collected to achieve a stated purpose what happens to the money that is collected can be a source of angst. Returning the money may present administrative problems like identifying exactly who gave what because many donations are “anonymous.” Most churches have a church treasurer sworn to secrecy but donations that have to be documented for tax purposes may make anonymity sometimes illusory. Also, most churches do not have clear policies regarding whether donative intent is binding and if it is, for how long. Also, if the money is returned to identified givers, must the money be returned with an IRS form 1099 requiring the church to have or obtain the donor’s social security number?

Rogers v St. John United Methodist Church, Slip Op., (unpublished) (Mich. App. 2017) was the reversal of a trial court’s grant of a Motion to Dismiss. In most jurisdictions, obtaining a dismissal by motion based on the pleadings is problematic at best. Also, at that stage, without discovery or a trial, the factual evidence is often not complete or cannot be considered. However, it seems the donation for a new fellowship hall was probably not enough to build and additional fund raising was apparently not successful or for some other reason leadership decided not to build. After a passage of time, the donors sought a refund. Apparently the donors were sufficiently well identified and the money sufficiently segregated that it was identifiable as to amount.

The opinion of the court, again based on and reversing a trial court’s dismissal founded only on pleadings, was that “resolution of plaintiffs’ claims does not require a court to analyze questions of religious doctrine or ecclesiastical polity” and for that reason the trial court received the case back on remand for further proceedings. In other words, the court was holding donative intent could be determined without considering religious considerations.

The opinion was silent about the law of donations in general, i.e., whether once donated the donor retains any authority over the use of proceeds. The opinion was silent about the bylaws of the church. Often well drafted bylaws clearly state a policy that donative intent is not binding on leadership and that no return of donated funds can occur even if a donative intent cannot be fulfilled. Bylaws often also make donations religious by reciting Scriptural edicts regarding donations.

Thus, the opinion of the appellate court in Rogers should be viewed as provisional and not viewed as a general statement of law. That intent could be determined may have been a projection based on the what the court had before it. As the case proceeds, if it does, that intent may not be so easily determined.

UNINCORPORATED ASSOCIATIONS AND CHURCH CORPORATIONS

In the beginning, all churches were unincorporated associations. The demands of modern accounting and property ownership, including liability risk management, pressed the unincorporated association to incorporate. However, in order to successfully incorporate, the unincorporated association has to follow steps outlined in the law of the state of residence. Even done amicably, such a transition can be challenging to volunteer led churches and pastors that do not also happen to be lawyers. In the middle of a church split, the transaction cannot be completed in most states.

An example of this is Church of the First Born of Tennessee, Inc. v Slagle, Slip Op. (Tenn. App. 2017). Church of the First Born outlived two generations of founders and desperately needed a new organizational structure that would ensure smooth leadership transitions going forward. This was especially true after the church grew into a multi-campus church and established a church school sited on what probably was millions of dollars of real estate.

Before such an amicable restructuring took place, a church split arose. The Court was unsure whether the split arose due to the financial pressures of supporting the church school or whether it was a doctrinal issue that arose because after the founders passed away, new leadership did not command the unanimity that the founders earned but surrendered upon their passing. While the dispute roared around those issues, indeed, those issues were not terribly critical to the resolution.

The Plaintiff was a newly minted church corporation that tried to step into ownership of some of the church assets on behalf of one side of the split. But, because asset ownership transfers are impossible unless all of the members of the unincorporated association have notice and vote to approve the transaction, the mere incorporation by one group in the split did not have the effect of transferring assets. The Plaintiff was, therefore, without standing to bring any claim at all and the case was dismissed.

Church leaders have a duty to recognize their own mortality and plan for leadership succession in a fair process. While many church leaders bristle at the idea of church bylaws or other written policies adopted as the governing rule of the church by a vote of the members, every church that does not have them and does not periodically review and update them increases the risk that a rift in the membership will shatter the peace of the church or in fact doom the church. A church that can own millions of dollars of property should be able to hire a competent lawyer to lead the church to adopt bylaws or written rules. Incorporation is a low cost and relatively well understood first step and makes asset management much easier.

YOU CAN’T FIGHT CITY HALL – OR THE BANK

A church split of “longstanding” resulted at the end in an interpleader action brought by a bank. The bank paid the proceeds of the church accounts into the registry of the court. For the interpleader action, the bank sought attorney fees, expenses, and a reservation of some of the proceeds (and maybe all of the remainder to be reserved) for future legal expenses. One of the parties objected and alleged the bank was not an impartial stakeholder, and counterclaimed against the bank. However, the court awarded legal fees and expenses to the bank. Bank of America, NA v Jericho Baptist Church Ministries, Inc., Memorandum Opinion, (D. Maryland 2017).

A short Memorandum Opinion of this type does not usually contain detailed recitations of facts. Thus, the actual fury of the church split was not detailed. Resolution of the church split by the court, if the court did so, is not detailed in this opinion.

The only lesson that should starkly leap from the opinion is that a church split that results in litigation will not stay between the parties and will lead to legal expenses of substantial amounts in many instances. Certainly, if the dispute forces a bank to choose sides, it will usually not do so and will usually ask a court to resolve its role. If the parties resist, the bank will seek and typically obtain legal fees and expenses. Although typically interpleader legal fee awards are modest, as such things go, but often they are not the only awards of legal fees possible.