Tag: church property

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. (8th 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 8th Circuit affirmed the trial courts that refused to grant consolidation.  The 8th 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 (9th 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 9th 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.

THE CHICKEN DID IT AGAIN

The tenth report posted herein in February 2017, entitled The Chicken Did It, was about a 2016 case out of California in which the California appellate court reversed for further proceedings a case involving over flow parking.  Well, there has been another one.  However, the lesson from these two cases is radically different.  The California case reversed for further proceedings because the church gave no warning about the busy street and took no other action to protect people jaywalking to the church.  This report is about the opposite.

In Charney v Reitz, Slip Op. (PA Supp. 2018), the church had only four paved parking spaces but was able to use a commercial parking lot across the street for over flow parking.  The use of the parking lot across the street was a practice that persisted for decades.  But, the street to be crossed, which may have not been in the distant past, became a very busy street.  The church sometimes had police or firefighters acting as crossing guards.  The church used reflective cones to warn drivers.  In a footnote, the court even reported the church tried to take other safety actions but was blocked by the state’s department of transportation.  What was the church’s reward for this diligence?  The court found the church voluntarily undertook the duty to safeguard persons crossing the street to attend church events.  The remand would be a jury trial over whether the church carried out its duty adequately in the fatality pedestrian auto accident that was the subject of the case.  The deceased was a church member and was actually the person that purchased the reflective cones, so the deceased knew about the risks of crossing the street.  But, the deceased was 84 years of age.

Trying to read the two cases side by side is disheartening because the church that did allegedly nothing, according to the court in California as reported in the February 2017 post, faced the same trial as the church reported in this post that did several things and may have been stopped from doing more.  Of course, as a practical matter, the church that tried to address the problem may with the right jury find exoneration.  Both churches hopefully had adequate insurance coverage and their legal fees were probably paid by those insurers.  In addition to making certain their insurance policies covered use of an over flow parking lot, the churches should petition, maybe repeatedly, state, county or city traffic authorities to install flashing yellow warning signs, an officially installed and painted cross walk, and other safeguards.  While the government in most states cannot be successfully joined as a party, they make a great “empty chair defendant.”  Your trial counsel can explain that one to you.

CHURCH BUILDING WOES AND WARS

A famous teacher of evangelical pastors once told me that pastors had no choice but to be jacks of all trades. In this blog, the cases reported involve everything from financial controls, zoning, internal security for vulnerable members, property titles, and corporate control issues, just to name a few.

In Christ’s Legacy Church v Trinity Group Architects, Inc., 2018 OK CIV APP 31 (oscn.net), a division of the Oklahoma Court of Appeals reviewed a trial court summary judgment in favor of an architectural firm in a case about the design of a church building. The church claimed the architectural firm was negligence and breached its contract. The Court of Appeals affirmed the judgment against the church as to the negligence claim but reversed and sent the case back to the trial court on the breach of contract claim. The architectural firm claimed the written proposal was not signed by the church so there was not a written contract. If there was only an oral contract, the statute of limitations was three years but if the contract was in writing the statute of limitations was five years. The Court of Appeals held it did not matter whether the proposal was actually signed if it, indeed, represented in writing the agreement of the parties and had been acknowledged in another way.

In the trial court, the church will have to prove the written proposal was the written contract under which the architectural firm did the work even without a signature. One change order to the “proposal,” or a couple of emails, or “in re” lines on a letter or a fax will probably do it. Thus, once again, a case may be determined on whether in the age of scanners and computers the church was a reasonable records custodian. The statute of limitations barred the negligence claim because the church did not, or could not, investigate fast enough to present a claim. Most volunteer run churches usually have no more than one or two FTEs neither of which are professional property managers so the time to investigate gets away quickly. Also, well-meaning church members tend to stand around and gawk at a problem none of them are fully competent to address. Church boards need to hire the professional that can address the problem, pay for the service, and get a definitive answer with dispatch, which may include trial counsel. Large engagements like engaging an architect to design a building require as stewardship a written contract signed by everyone. One more thing for the pastor to know, right?

HIEARCHIAL CHURCH RESULTING TRUST PROVISIONS – EVERYWHERE OR NOWHERE?

In jurisdictions that decide church property issues under the Neutral Principles of Law Doctrine, the difficult question is for a court to determine which organizational documents are binding authority on the local church.  For example, denominational handbooks, like employee handbooks, might in some instances create a contractual commitment for member churches.

In Presbytery of St. Andrew v First Presbyterian Church PCUSA of Starkville, Miss., Slip Op., (Miss. 2018, en banc), the Mississippi Supreme Court collided with the issue and the majority did not view the denominational handbook as a governing authority sufficient to impose a trust on the property of the local church while the dissent did.  The majority relied on an “opt out” clause in the Constitution of the denomination which the dissent considered as adopted too late in time to avoid the binding effect of the denominational handbook.  In response to the “opt out” provision, the local church opted out and did not include property reversionary clauses in property deeds or the local church bylaws or constitution.

Denominations that desire to govern through a handbook (regardless of what it is called), should update it regularly and the local churches asked to ratify it.  Ratification once a decade would likely be sufficient.  Failure to ratify should be explicitly prohibited as a ground for disobedience.  Reversionary provisions should be in all organizational documents and the denominational handbook and required in all local church organizational documents and property deeds for denominations that intend to use.  Everywhere or nowhere.

HIEARCHIAL CHURCH WARS – INFILTRATION STRATEGIES

Church splits in hierarchical churches almost uniformly end badly for the insurgents.  The only exceptions are when church governing documents, including incorporation documents, and land titles do not consistently tie the ownership to the denomination rather than the local group of congregations or the local congregation.  Because church property in hierarchical churches is typically amassed over many years and many generations of members, the local church members often cannot truthfully say they alone bought and built it.  The denomination must admit that offerings made by members, over multiple generations of members, bought and built the church property in question and that the denomination at best is a trustee for them.

In The Episcopal Church v Salazar, Slip Op. (Tex. Civ. App. 2018), the latest appellate decision in a church split that began in 2008 (or possibly earlier) built upon a prior Texas Supreme Court Decision in Episcopal Diocese of Fort Worth v Episcopal Church, 422 SW 3d 646 (Tex. 2013), cert den., 135 S. Ct. 435 (2014) and the trial court proceedings that followed the Supreme Court’s decision.  To reach this new decision, the latest intermediate appellate opinion only sued over 50,000 words in 177 pages and 114 footnotes.  Thus, in a blog post, the reader should expect only the most summary of coverage.  It should also be noted that in the Supreme Court case, the Texas Supreme Court adopted the neutral principles of law doctrine so that a civil court could determine ownership of property and other matters important to the State without infringing on ecclesiastical issues.  Given the new ground to plow, the length of the intermediate appellate decision about which this blog reports is at least understandable.  It contained both denominational and diocesan legal histories as well as documented the evolution of neutral principles doctrine.

The trial court on remand from the Supreme Court considered the evidence and determined by summary judgment that the right to control the non-profit corporation that was the shell of the diocese was and remained under the control of the denomination.  This church split, like many of this type, began with a theological dispute which resulted in an attempt by some member organizations or local churches to “disaffiliate.”  When “disaffiliation” failed because the organizational documents of the denomination and the local organizations and churches would not support it, the next effort was to attempt to have friendlies elected to the governing board of the non-profit corporation and to displace board members loyal to the denomination (if there were any serving).  But, in addition to organizations and churches that tried to “disaffiliate,” the trial court held that the insurgents elected to the board were disqualified from election from inception due to their own “disaffiliation” which ended their memberships under the governing documents.

The lesson for insurgents, and warning for denominations, is that if insurgents do not “disaffiliate” but remain members in good standing, and are elected to the board of the non-profit corporation that is the shell for a diocese or a local church, that board will have effective control of the assets.  “Loyalty oaths” have not worked, as history has taught, but restricting the power of the board to financially alienate itself from the denomination could blunt or contain the power of insurgents.  Indeed, the reason denominations have not used this technique, absent internal political necessities, was to preserve the borrowing power of the local organizations and churches to acquire church property.  The necessity of that practice may be sufficiently diminished in more mature denominations to allow greater financial oversight by the denomination.