Members Block Church’s Disposition of Assets

In some states, members may challenge a church board’s decision to dispose of assets.

Bio

State: Georgia
Categories: Church Property

• Key point: Church members may have the right under state law to have a receiver appointed by a civil court to oversee the disposition of the church's assets.

A Georgia court ruled that church members could obtain a court order blocking a church's planned disposition of its assets, and appointing a receiver to oversee the church's property.

A church was organized in 1976 and at one time had as many as 80 members. By late 1989, membership had dwindled to 23 and the church's board of trustees (consisting of the pastor, the pastor's son-in-law, and a third person) decided to sell the church property to a commercial buyer for $725,000. From these proceeds the church paid off a first mortgage loan of $164,000, a second mortgage loan of $156,000 owed to the pastor, and closing costs of $75,000 ($29,000 of which was paid to the pastor who was a licensed real estate broker and who served as a broker in the sale).

The last church meeting occurred in 1990, at which time a majority of the members present approved as "retirement benefits" for the pastor a lump sum gift of $100,000 and transfer of the parsonage. The remaining proceeds of the sale were to be used for religious activities with the pastor having control of the funds.

Some of the church members brought a lawsuit against the pastor and the church in which they sought a court order dissolving the church corporation, the appointment of a receiver to take control of the church's assets, an injunction prohibiting the pastor or church from disposing of church assets, and proper disposition of those assets.

A trial court appointed a receiver over some of the church's assets and forbade the pastor from disposing of the assets in his control. The pastor later sued one of the members who brought the lawsuit, claiming that he had defamed him by referring to him as "Jim Bakker on a smaller scale." A jury later awarded the members who brought the lawsuit $56,000 of the $156,000 mortgage debt paid to the pastor, the full $29,000 real estate commission paid to the pastor, and the remaining church funds of $200,000.

However, the pastor was awarded the parsonage and the $100,000 retirement gift, but the pastor's defamation suit was dismissed. The pastor appealed this ruling to a state appeals court, claiming that (1) the trial court's exercise of jurisdiction over this dispute was prohibited by the first amendment's guaranty of religious freedom; (2) the members who brought the lawsuit lacked "standing" to do so since they did not represent a majority of the church's members; and (3) the first amendment prohibits the appointment of a receiver over church assets.

The appeals court rejected all of these claims. In rejecting the pastor's claim that civil court resolution of this dispute violated the first amendment, the court quoted from a 1969 decision of the United States Supreme Court:

[T]he first amendment severely circumscribes the role that civil courts may play in resolving church property disputes. It is obvious, however, that not every civil court decision as to property claimed by a religious organization jeopardizes values protected by the first amendment. Civil courts do not inhibit free exercise of religion merely by opening their doors to disputes involving church property. Presbyterian Church in the United States v. Mary Elizabeth Blue Hull Memorial Presbyterian Church, 393 U.S. 440 (1969).

The court concluded that the trial court's exercise of jurisdiction over this dispute was permissible since "the property dispute here was capable of resolution by reference to neutral principles of law … without infringing upon any first amendment values." Next, the court rejected the pastor's claim that the members who brought the lawsuit lacked "standing" to do so. It observed:

Courts are reluctant to [intervene] in questions affecting the management of the temporalities of a church; but when property is devoted to a specific doctrine or purpose, the courts will prevent it from being diverted from the trust …. [I]f the majority of the church depart from its organization and doctrines, they do not represent the church, and such majority cannot divest the church property from the trust to which it has been devoted. Accordingly, under the circumstances presented by the [this] case, particularly where the resolution of the property dispute strictly followed neutral principles of law, the [members who brought the lawsuit] had standing in this action alleging a diversion of the church property from the purpose for which the church and its assets had been devoted.

In rejecting the pastor's contention that the first amendment prohibits a civil court from appointing a receiver over church assets, the court observed:

Under [state] law the superior court has full power to liquidate the assets and affairs of a nonprofit corporation when it is established that the acts of the directors or those in control of the corporation are illegal or fraudulent, the assets are being misapplied or wasted, or where the corporation is unable to carry out its purposes. [State law] authorizes the superior court to issue injunctions or appoint a receiver as needed to preserve the corporate assets. Inasmuch as the church chose to incorporate under the Georgia Nonprofit Corporation Code, and appointment of a receiver is authorized under those codified neutral principles of law regarding liquidation of nonprofit corporations, we reject the contention that the first amendment prohibited the involuntary receivership in this case.

This case illustrates some of the legal remedies that are available to church members in some states who want to challenge decisions of the church board to dispose of church assets. Crocker v. Stevens, 435 S.E.2d 690 (Ga. App. 1993).

Legal Developments

“Just Compensation” for Condemned Property

Churches are entitled to compensation for condemned property.

Richard R. Hammar, Attorney, CPA

Bio

State: Montana
Categories: Church Property

Church Law and Tax 1994-03-01 Recent Developments

Eminent Domain

Richard R. Hammar, J.D., LL.M., CPA

• Key point: While church property can be taken by a city pursuant to “condemnation” (eminent domain), a church is entitled to “just compensation” for any property that is taken.

• The Montana Supreme Court was asked to determine if a trial court properly computed the amount of money to be paid to a church whose property was taken by condemnation. A city condemned 0.31 acres of a church’s parking lot to facilitate the construction of a sewer main. The city offered to pay the church $25,000 for the property, but the church determined (on the basis of an appraisal) that $58,000 would be a reasonable settlement. After a jury trial the church was awarded $14,500 for the parcel taken and $2,500 for damages to its remaining property, for a total award of $17,000. The church appealed this decision to the state supreme court on three grounds. First, it argued that the trial court erred in not allowing the church to present evidence to the jury about the “cost to cure” method of valuing the condemned property. This method would require the city to compensate the church for the cost of additional property purchased by the church to replace the condemned property. The supreme court rejected the church’s position: “[J]ust compensation for a public taking of private land is to be computed as: fair market value of land taken plus value of remainder before taking minus value of remainder after taking. The cost to cure method is an alternative method of compensation. The [trial court] was under no obligation to allow discussion or testimony of such a method.” Second, the church argued that the trial court had erred in not allowing church representatives to testify regarding the value of the condemned property. The supreme court also rejected this position: “The history of the church from its beginnings until the present, and its plans for the future, are irrelevant in determining the actual damage as of the valuation date. The [trial court] did not err in limiting the testimony of the property owner.” Finally, the church argued that the trial court erred in refusing to inform the jury that the city had determined that the parking requirements for the church were 272 spaces. The supreme court agreed with the church. The court observed:

[T]he church was entitled to damages for the fair market value of that property which was taken by the city’s condemnation. However, it was also entitled to damages for the depreciation to its remaining property which resulted from the taking. The property taken was the church’s parking lot. In order to evaluate the depreciation to the church’s remaining property, the jury had to know what is parking requirements were and whether those requirements could be satisfied on the remaining property. Prior to trial, the parties entered tin the following stipulation: “Parking requirements under city’s zoning ordinance for the subject property are 272 spaces.”

Based upon its reliance on that stipulation, the church offered proof that it would have to either purchase additional property at a cost of about $50,000, or make alterations to its remaining property at a cost of $26,350, in order to satisfy the city’s parking requirement and receive a certificate of occupancy after completing the building improvements that were then under way ….

Apparently uncertain about what the future parking requirements would be, the jury awarded damages for the depreciation of the church’s remaining property in the amount of $2,500. This was one-tenth of the minimum amount which the testimony established would be necessary to comply with what the city had previously agreed would be the church’s parking requirements. The church had a right to rely on the stipulation when preparing for trial and putting on proof of its damages. We hold that the [trial court] erred by not instructing the jury that the city had agreed that 272 parking spaces were required and that failure to do so prejudiced the [church].

The supreme court reversed the jury’s verdict of $17,000 and sent the case back to the trial court for further consideration with the understanding that the jury would be instructed that the church would need 272 parking spaces after the condemnation. Great Falls v. Temple Baptist Church, Inc., 859 P.2d 1015 (Mont. 1993).

Members Sue to Dissolve Church

Their lawsuit was dismissed.

Richard R. Hammar, Attorney, CPA

Bio

State: Illinois
Categories: Church Property

Key point: In some states church members have the authority to dissolve the church corporation if the church is unable to carry out its purposes due to internal dissension. However, members who have left the church or no longer meet the church bylaws' definition of "members" will not have the authority to do so.

An Illinois appeals court dismissed a lawsuit brought by members of a church seeking to dissolve their church and have a receiver appointed to liquidate church assets.

A schism occurred in a Baptist church over the retention of the pastor. Problems worsened due to disagreements over the pastor's plan to use church funds to build a school. Some members opposed placing a mortgage on the debt-free church building to raise construction funds. When efforts to remove the pastor and those deacons who supported him failed, some of the disgruntled members filed a lawsuit in civil court seeking an order dissolving the church and transferring its assets to a receiver for distribution to another nonprofit organization.

Illinois law permits a voting member or director to "involuntarily dissolve" a nonprofit corporation that is unable to carry out its purposes. The disgruntled members claimed that this procedure was available since the church was unable to carry out its purpose of conducting religious worship because of the controversy.

The pastor and those who supported him opposed this action on the grounds that the members who brought the lawsuit were not voting member of the church and the lawsuit was not a matter that could be resolved by the civil courts. The pastor and his supporters pointed out that the church bylaws defined a voting member as one who contributed at least $15 each month to the support of the church and that none of the members who brought the lawsuit satisfied this condition.

A trial court agreed to dissolve the church and turn over its assets to a receiver for distribution to another nonprofit organization. It acknowledged that these individuals did not satisfy the church's definition of voting members, but it concluded that this did not matter since the church bylaws contained no procedure for terminating a person's membership.

The court concluded that both sides of the dispute failed to operate the nonprofit corporation according to its charter and bylaws and thus the corporate status of the church had been abandoned. The pastor and his supporters appealed this ruling and a state appeals court reversed the trial court's decision.

The appeals court began its opinion by emphasizing that one must have "standing" to bring a lawsuit. Standing refers to some real interest or right in the subject matter of a lawsuit. The court concluded that the disgruntled members who filed the lawsuit lacked standing since they did not satisfy the church's definition of membership.

The court observed: "None [of these members] were currently making their $15 a month donations to the church as provided in the bylaws …. We are aware of the hostile atmosphere which undoubtedly prevailed against these [persons] at [the church]; however, this does not dissuade us from finding that [they] had relinquished their memberships at [the church] and were, at best, inactive or nonvoting members as of the filing of their [lawsuit]. As such, [they] could not bring an action for involuntary judicial dissolution …."

The court noted that even if the former members had standing to sue, they could not prevail since the civil courts lack jurisdiction to determine whether or not the church "could carry out its purposes since the court's decision of that issue [would violate] the first amendment's prohibition against civil courts' involvement in religious matters. The courts' authority to resolve disputes is narrowly circumscribed by the first amendment's guaranty that the right to the free exercise of religion will not be abridged. With the exception of certain types of property disputes, Illinois courts have generally refused to decide cases that require a judicial interpretation of religious doctrine or church law …. [T]he underlying dispute, who will be the pastor at [the church], is an ecclesiastical matter which is not within the court's purview." Hines v. Turley, 615 N.E.2d 1251 (Ill. App. 1993).

Legal Developments

Church Buildings as Historical Landmarks

Designation of a church as a landmark may violate the First Amendment.

Richard R. Hammar, Attorney, CPA

Bio

State: Washington
Categories: Church Property

Key point: City ordinances that allow church buildings to be designated as historical "landmarks" may violate the constitutional guaranty of religious freedom.

The Washington Supreme Court ruled that a Seattle ordinance that allowed city officials to designate a church building as a "landmark," thereby limiting a church's authority to sell or modify its building, violated the constitutional guaranty of religious freedom.

The city of Seattle adopted an ordinance giving the city authority to declare any building to be a landmark. The ordinance was designed to preserve and protect those sites reflecting significant elements of the city's cultural or historic heritage. Buildings designated as a landmark by the city could not be structurally altered without city approval. The city designated a church to be a landmark, and the church sued the city arguing that the landmarks ordinance violated the church's constitutional right to freely exercise its religion.

Specifically, the church claimed that its designation as a landmark impaired its religious freedom in the following ways: (1) city approval and bureaucratic "red tape" would be required prior to making any structural alterations in the sanctuary; (2) a secular government had the authority to grant or deny a church's request to develop its worship facility; (3) the value of the church property was decreased significantly by the landmark designation; and (4) the ability of the church to sell its property was diminished.

A trial court rejected the church's claims, but the case was then appealed directly to the state supreme court which agreed with the church's position. However, the United States Supreme Court later "vacated" the Washington Supreme Court's ruling and ordered it to reconsider the case in light of the recently decided Smith case.

In Smith, the United States Supreme Court repudiated a longstanding rule that a government practice that interferes with the free exercise of religion must be supported by a compelling government interest to be valid. Presumably, the Supreme Court assumed that the Smith case would require the Washington Supreme Court to reverse its previous ruling. Such was not the case.

The Washington Supreme Court ruled that the Smith case did not compel a reversal of its prior ruling in favor of the church. It based this conclusion on two considerations. First, the landmarks ordinance was not a neutral law of general applicability. Second, the court relied on the Smith case itself, in which the Supreme Court concluded that the "compelling government interest" requirement would still be required in "hybrid" cases involving not only freedom of religion but also a second constitutional right.

In this case, the court concluded that the city's landmark designation law violated not only the church's first amendment right to freely exercise its religion, but also its first amendment right of free speech since a church building is itself "an expression of Christian belief and message" that is "freighted with religious meaning." Since the city's landmark law burdened two of the church's constitutional rights, it had to be supported by a compelling government interest.

Such an interest, the court concluded, simply did not exist: "We hold that the city's interest in preservation of aesthetic and historic structures is not compelling and it does not justify the infringement of [the church's] right to freely exercise religion. The possible loss of significant architectural elements is a price we must accept to guarantee the paramount right of religious freedom." The court also concluded that its decision was mandated by the Washington state constitution, which contains a broader protection of religious liberty than that contained in the federal constitution. First Covenant Church v. City of Seattle, 840 P.2d 174 (Wash. 1992).

Legal Developments

Churches Can Lose Property Upon Leaving Denomination

Be informed before you vote to secede.

Richard R. Hammar, Attorney, CPA

Bio

State: Connecticut
Categories: Church Property

Key point: The property of a local church affiliated with a hierarchical denomination may revert to the denomination if the church votes to disaffiliate.

The Connecticut Supreme Court ruled that title to a local Episcopalian church reverted to the Episcopal Diocese of Connecticut following its vote to disaffiliate from the Diocese.

The church had been affiliated with the Diocese for more than a century, but voted to disaffiliate and join the Anglican Church in 1986. Both the church and Diocese claimed ownership of the church property, and a civil court was asked to resolve the controversy.

A trial court concluded that the constitution and canons of the Diocese, as well as the historical relationship between the church and Diocese, created a trust in favor of the Diocese on the property held by the local church. As a result, the Diocese was declared to be the rightful owner of the church's property. The church appealed this decision to the state supreme court, which also ruled in favor of the Diocese.

The supreme court began its decision by observing that the civil courts may resolve church property disputes so long as they do so without any inquiry into religious doctrine. The court interpreted decisions of the United States Supreme Court to permit the following approach to resolving church property disputes:

[I]n resolving ownership disputes over church property, a civil court must first determine whether an express trust exists, and if it does, the court must enforce its terms. If no express trust is found, the court must determine whether an implicit trust exists in favor of the general church. In conducting this inquiry, the court must examine the polity of the church, in addition to the church constitutions and its canons, for language of trust in favor of the general church. Inasmuch as the polity of the church represents the agreement of the church members in a particular system of government, including the structural allocation of authority, a civil court must ascertain the facts to determine whether members of a parish within a hierarchical church organization have agreed to be bound by the higher ecclesiastical authority within the church.

The court noted that the national Episcopal Church adopted the following provision at a national conference in 1979 creating an express trust over local church properties in favor of the national church: "All real and personal property held by or for the benefit of any parish, mission or congregation is held in trust for this church and the diocese thereof in which such parish, mission or congregation is located." Because this provision was not adopted until 1979, the court concluded that it did not apply in this case since the church's properties were acquired long before 1979. However, the court noted that the next step was to determine whether or not an implied trust existed in favor of the Diocese:

[I]n determining whether the [local church members] and their predecessors had agreed to the manner in which their property would be held in regard to the Diocese, the trial court was required to determine whether there was, nonetheless, an implied trust. Where the nature of the relationship may, without entanglement in religious doctrine, be judicially determined by reference to the polity of the church, by its constitution and canons, and by the clear factual evidence regarding the historical subordinate relationship between the local church and the general church, there is no reason for a court not to enforce the terms of that relationship. If a trust has been implicitly acknowledged by the parties and is embodied in some legally cognizable form, it must be respected.

The court concluded that the polity of the Episcopal denomination and the historical relationship of local churches with the denomination clearly demonstrated an implied trust in favor of the Diocese over the property of local churches. The court based this conclusion on the following factors:

Local churches accepted the doctrine of the denomination.
The Diocesan canons permit the establishment of a church only with the permission of the bishop.
The Diocesan canons permit the disaffiliation of a local church from the diocese only with the permission of the bishop.
The Diocesan canons prohibit the transfer of local church property without the permission of the bishop.
The local church in this case submitted annual reports to the Diocese, as required by Diocesan canons.
The local church in this case sent delegates (both clergy and laypersons) to the annual conventions of the Diocese.
The local church in this case paid its annual assessments to the Diocese as required by Diocesan canons.

The court concluded that these factors "strongly reflect the polity of the church as one in which the parish is the local manifestation of [the denomination] to be used for its ministry and mission." Accordingly, the express trust provision adopted by the denomination in 1979 "merely codified in explicit terms a trust relationship that has been implicit in the relationship between local parishes and dioceses since the founding of [the national church] in 1789." The court concluded: "[T]he panoply of constitutional and canonical provisions of [the denomination] and the Diocese strongly indicate that the local church property was to be held for the benefit of the general church …."

This case is important, for it illustrates that ownership of local church properties may vest in a national church following a vote to disaffiliate from the national church if the polity and history of the national church suggest that an "implied trust" exists in its favor with respect to the properties of local churches. Rector, Wardens and Vestrymen of Trinity-St. Michael's Parish, Inc. v. Episcopal Church in the Diocese of Connecticut, 620 A.2d 1280 (Conn. 1993).

Legal Developments

Court Concluded That Churches Can Be Used for Polling Places

Benefits of holding elections at churches outweighs slight burden on freedom of religion.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Church Property

Key point: The use of churches as polling places in local elections does not violate the constitutional prohibition of the establishment of a religion.

A federal appeals court rejected an atheist's contention that the use of churches as polling places violated the first amendment.

The court observed that "we find frivolous plaintiff's argument that his atheistic beliefs do not permit him to enter a church and that, therefore, he is denied his right to vote when his precinct polling place is an Episcopal church."

A state election board defended the practice of using churches as polling places as follows: "Church buildings are located throughout a city, including in the residential areas of which many precincts consist; they have parking lots; and they typically have a commons areal, parish hall, foyer, nursery or some other such nonconsecrated portion of the church building which can be used as a polling place." The election board pointed out that churches representing several denominations were used, and that none was favored.

The court concluded: "[W]e conclude that by voting in a church building plaintiff is not required to attest to the nature of his religious beliefs, and that the burden of free exercise of religious beliefs is so slight that it does not begin to outweigh the interest of the state in having available to it the additional polling places which the use of the churches affords." Otero v. State Election Board of Oklahoma, 975 F.2d 738 (10th Cir. 1992).

Legal Developments

Church Not Responsible for Injuries from Fall

Decision overturns earlier jury verdict.

Richard R. Hammar, Attorney, CPA

Bio

State: Minnesota
Categories: Church Property, Personal Injuries on Church Property or During Church Activities

Key point: Church members injured on church premises are not necessarily entitled to money damages, even if the injury was due to the church's failure to comply with a safety code.

A Minnesota appeals court concluded that a church was not responsible for injuries sustained by a member who tripped on a dark stairway. A member left a Sunday morning worship service to use the restroom, which was located in the church basement. To reach the restroom, the member had to go the church basement, cross the fellowship hall, ascend three uneven stairs, and walk down a hall. When the member went to the basement, the lights were on and she had no difficulty reaching the restroom. However, when she left the restroom, all the basement lights were off and the basement was completely dark. The member attempted to find her way back upstairs. Although there was a light switch in the hall leading to the restroom, the member could not find it because of the darkness. When she reached the three uneven stairs that led to the fellowship hall, she tripped and sustained serious injuries.

The member later sued the church, alleging that her injuries were caused by the church's negligence. She relied on a state fire code requiring all exits to be illuminated when a building is occupied. A jury agreed that the church was responsible for the woman's injuries, and the church appealed.

A state appeals court reversed the trial court's decision, and ordered a new trial. The court agreed that the state fire code requires exits to be illuminated when a building is occupied, but it concluded that this could not be a basis for finding the church negligent. It observed:

"It is well-settled law that in an action for neglect of duty, it is not enough for the [victim] to show that the defendant neglected a duty imposed by statute, and that he would not have been injured if the duty had been performed, but that he must also show that the duty was imposed for his benefit, or was one which the defendant owed to him for his security."

The court concluded that the church's violation of the state fire code could not establish its responsibility for the member's injuries, since the member's injuries were not "a hazard against which the fire code was designed to protect."

The court emphasized that the fire code was designed to prevent fires rather than to prevent falls, and accordingly it could not be used to establish the church's negligence. Further, the court noted that "evidence of the church's negligence was minimal. [The member] did not establish that the lights were turned off by a person for whose negligence the church could be held vicariously liable." As a result, the court reversed the trial court's decision, and ordered a new trial. Thies v. St. Paul's Evangelical Lutheran Church, 489 N.W.2d 277 (Minn. App. 1992). [PCL12B]

Injuries in Church Parking Lots

A woman sued a church after slipping and falling on their icy parking lot.

Richard R. Hammar, Attorney, CPA

Bio

State: Pennsylvania
Categories: Church Property, Personal Injuries on Church Property or During Church Activities

Church Law and Tax1992-11-01Recent Developments

Taxation – Church Property

Richard R. Hammar, J.D., LL.M., CPA

• A Pennsylvania appeals court ruled that a Catholic church and diocese were not responsible for the injuries sustained by a woman who slipped and fell on an icy church parking lot. The woman, who was attending the church to participate in a bingo game, alleged that the parking lot was covered with a sheet of ice and also 5 inches of new snow. She alleged that the church had been negligent in failing to “implement some remedial measure (placing salt or ashes, warning visitors of the presence of ice, or barricading the icy area),” and accordingly the church was responsible for her injuries. A trial court ruled in favor of the church, and the woman appealed. A state appeals court agreed that the church was not responsible for the woman’s injuries. It observed:

[A]n owner or occupier of land is not liable for general slippery conditions, for to require that one’s walks be always free of ice and snow would be to impose an impossible burden in view of the climatic conditions in this hemisphere. Snow and ice upon a pavement create merely a transient danger, and the only duty upon the property owner or tenant is to act within a reasonable time after notice to remove it when it is in a dangerous condition …. [I]n order to recover for a fall on an ice or snow covered sidewalk, a plaintiff must prove (1) that snow and ice had accumulated on the sidewalk in ridges or elevations of such size and character as to unreasonably obstruct travel and constitute a danger to pedestrians traveling thereon; (2) that the property owner had notice, either actual or constructive, of the existence of such condition; (3) that it was the dangerous accumulation of snow and ice which caused the plaintiff to fall.

The court concluded that the injured woman had failed to satisfy this test, and accordingly the church was not responsible for her injuries. The woman raised another interesting argument on appeal. She claimed that the trial court had improperly refused to exclude from the jury 3 individuals who were members of other churches within the diocese. The woman alleged that these 3 jurors (1) were biased in favor of the church, (2) had a “financial interest” in the outcome of the case, and (3) were subject to “moral intimidation” by the diocese that “nullified their oaths as jurors.” The appeals court concluded that the 3 jurors were not biased. It observed: “Courts in this Commonwealth have long held that a juror is not incompetent merely because he and one of the parties are members of the same religious denomination …. [M]embership in congregations associated with a general religious denomination do not give the jurors a sufficient interest in the outcome of the litigation to render [them biased].” Harmotta v. Bender, 601 A.2d 837 (Pa. Super. 1992).

© Copyright 1992, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m58 m86 m40 c0692

Legal Developments

Member Sues Unincorporated Church

He was injured while repairing the church’s sound system.

Richard R. Hammar, Attorney, CPA

Bio

State: South Carolina
Categories: Church Property, Personal Injuries on Church Property or During Church Activities

Church Law and Tax1992-11-01Recent Developments

Taxation – Church Property

Richard R. Hammar, J.D., LL.M., CPA

• The South Carolina Supreme Court ruled that a church member could sue his unincorporated church for injuries sustained while repairing the church sound system, but he could not recover more than the $200,000 “cap” allowed by state law. The member volunteered to enter the church attic to repair the sound system. While in the attic, he fell through the ceiling and landed on a concrete floor some ten feet below. His injuries required him to miss work for nearly a year. The victim sued his church, pastors, and church board members, alleging that they were all negligent and responsible for his injuries. A jury awarded him $300,000, and the defendants appealed. A state appeals court reversed the jury’s award and the case was appealed on to the state supreme court. The supreme court ruled that the injured member could sue his church, even though it was unincorporated. However, the court refused to permit the injured member to sue the pastors and church board members personally. It based its decision on a South Carolina statute that prevents individual members from being sued personally unless it is established that they acted “in a reckless, willful, or grossly negligent manner.” Since the injured member had failed to prove that the pastors and board members had acted recklessly or with gross negligence, these individuals could not be personally liable. Finally, the court reduced the jury’s award from $300,000 to $200,000 on the basis of a South Carolina statute that provides: “Any person sustaining an injury or dying by reason of the tortious act … of an employee of a charitable organization, when the employee is acting within the scope of his employment, may only recover in any action brought against the charitable organization in an amount not exceeding two hundred thousand dollars.” The court concluded that a church fit “squarely within the definition of a charitable organization” for purposes of this law. This case illustrates the importance of the South Carolina “charitable immunity” law which prohibits charities (including churches) from being sued for more than $200,000. It also illustrates that unincorporated churches may be sued in South Carolina by their members as a result of injuries sustained during church activities. Crocker v. Barr, 409 S.E.2d 368 (S.C. 1992).

Legal Developments

Congregation Loses Property Upon Disaffiliation from Denomination

A local church may lose its property when it withdraws from its denomination.

Richard R. Hammar, Attorney, CPA

Bio

State: Kentucky
Categories: Church Property

In a similar case, the Kentucky Supreme Court correctly ruled that a pastor and majority of members in a local Cumberland Presbyterian Church forfeited their right to use and occupy church property when they voted to withdraw from the parent church.

In 1987, while the pastor was under investigation by the denomination, he agreed to resign his ministerial credentials in return for the dropping of all charges against him by the denomination. Shortly after the pastor's ministerial credentials were revoked, the church membership voted (58 to 26) to withdraw from the Cumberland Presbyterian Church denomination. At its next meeting, the local presbytery removed the local church's leadership and appointed a commission to oversee the affairs of the church.

The commission asked the former pastor and the church board to turn over all funds and records of the church. Upon their refusal to do so, the presbytery sought a court order prohibiting the former pastor from conducting worship services, requiring the former pastor and board to turn over church funds and records, and prohibiting the former pastor and the majority of church members who supported him from exercising any control over the church's building and properties.

A trial court refused to issue such an order, and the presbytery appealed. A state appeals court also refused to grant the relief the presbytery had requested, and the presbytery thereafter appealed the case to the state supreme court. The state supreme court reversed the lower courts' judgments, and ruled in favor of the presbytery. The court based its decision on the so-called "compulsory deference rule." The compulsory deference rule is one method the United States Supreme Court has approved for resolving church property disputes. It was described by the Supreme Court in the landmark case of Watson v. Jones in 1871 as follows:

The case before us is one of this class, growing out of a schism which has divided the congregation and its officers, and the presbytery and synod, and which appeals to the courts to determine the right to the use of the property so acquired. Here is no case of property devoted forever by the instrument which conveyed it, or by any specific declaration of its owner, to the support of any special religious dogmas, or any peculiar form of worship, but of property purchased for the use of a religious congregation, and so long as any existing religious congregation can be ascertained to be that congregation, or its regular and legitimate successor, it is entitled to the use of the property.

In the case of an independent congregation we have pointed out how this identity, or succession, is to be ascertained, but in cases of this character we are bound to look at the fact that the local congregation is itself but a member of a much larger and more important religious organization, and is under its government and control, and is bound by its orders and judgments.

There are in the Presbyterian system of ecclesiastical government, in regular succession, the Presbytery over the session or local church, the Synod over the Presbytery, and the general assembly over all. These are called, in the language of the church organs, "judicatories," and they entertain appeals from the decisions of those below, and prescribe corrective measures in other cases …. In this class of cases we think the rule of action which should govern the civil courts, founded in a broad and sound view of the relations of church and state under our system of laws, and supported by a preponderating weight of judicial authority is, that, whenever the questions of discipline or of faith, or ecclesiastical rule, custom or law have been decided by the highest of these church judicatories to which the matter has been carried, the legal tribunals must accept such decisions as final, and as binding on them, in their application to the case before them.

The court also observed that the presbytery would prevail under the so-called "neutral principles" approach to resolving church property disputes. Under the neutral principles approach, church property disputes are resolved on the basis of neutral, nondoctrinal language in church deeds or bylaws, or denominational bylaws. The court noted that in the Jones v. Wolf decision in 1979 the United States Supreme Court urged denominations to avoid church property litigation through appropriate nondoctrinal provisions in deeds and bylaws. The Supreme Court observed:

At any time before the dispute erupts, the parties can ensure, if they so desire, that the faction loyal to the hierarchical church will retain the church property. They can modify the deeds or the corporate charter to include a right of reversion or trust in favor of the general church. Alternatively, the constitution of the general church can be made to recite an express trust in favor of the denominational church. The burden involved in taking such steps will be minimal. And the civil courts will be bound to give effect to the result indicated by the parties, provided it is embodied in some legally cognizable form.

The Kentucky Supreme Court noted that the Cumberland Presbyterian Church denomination amended its constitution in 1984 to include a provision subjecting all local church property to a trust in favor of the denomination. The amendment provides, in relevant part:

3.32 The Cumberland Presbyterian Church is a connectional church and all lower judicatories of the church to-wit: synod, presbytery, and the particular churches are parts of that body and therefore all property held by or for a particular church, a presbytery, a synod, the General Assembly, or the Cumberland Presbyterian Church, whether legal title is lodged in a corporation, a trustee or trustees, or an unincorporated association, and whether the property is used in programs of the particular church or of a more inclusive judicatory or retained for the production of income, and whether or not the deed to the property so states, is held in trust nevertheless for the use and benefit of the Cumberland Presbyterian Church.

3.33 Whenever property of, or held for, a particular church of the Cumberland Presbyterian Church, ceases to be used by the church, as a particular church of the Cumberland Presbyterian Church in accordance with this Constitution, such property shall be held, used, applied, transferred or sold as provided by the presbytery in which that particular church is located. 3.34 Whenever a particular church is formally dissolved by the presbytery, or has become extinct by reason of dispersal of its members, the abandonment of its work, or other cause, such property as it may have shall be held, used, and applied for such uses, purposes, and trusts as the presbytery in which said particular church is located may direct, limit, and appoint, or such property may be sold or disposed of as the presbytery may direct, in conformity with the Constitution of the Cumberland Presbyterian Church.

3.35 A particular church shall not sell, nor lease its real property used for purposes of worship, nurture or ministry, without the written permission of the presbytery in which the particular church is located, transmitted through the session of the particular church.

The court emphasized that the Cumberland Presbyterian Church denomination, by amending its constitution, had done precisely what the United States Supreme Court urged religious organizations to do in its 1979 ruling in Jones v. Wolf. That is, it adopted a nondoctrinal provision to resolve church property disputes without the need for civil court involvement. Cumberland Presbytery v. Branstetter, 824 S.W.2d 417 (Ky. 1992).

Legal Developments

Property Tax Exemption and Rental of Parsonages

Court concluded that the temporary rental of a church-owned parsonage affected the tax-exempt status of the property.

Richard R. Hammar, Attorney, CPA

Bio

State: Minnesota
Categories: Church Property

An Episcopal church owned a parsonage that was occupied by its priest. The priest resigned in 1988, and a temporary replacement priest was appointed. However, the temporary replacement priest chose to live in a neighboring metropolitan area so as to qualify for the special educational needs of his son. Accordingly, the church rented the parsonage, and used the rental income to pay a housing allowance to its temporary priest.

The church intended to hire a permanent priest in the near future who would live in the parsonage. A local tax assessor claimed that the parsonage lost its tax exemption when it ceased to be used as a parsonage and was rented. The church disagreed, claiming that the parsonage should remain exempt so long as it was rented temporarily while the church sought a permanent priest.

The Minnesota appeals court noted that there were two issues: "(1) whether the property qualifies for exemption on the basis that the rent proceeds are utilized for church purposes; and (2) whether the temporary rental of a parsonage pending arrival of a new pastor destroys the tax exemption." The court rejected the view that the parsonage could retain its exemption on the ground that the rental income was used for church purposes.

It quoted from a 1927 decision of the state supreme court: "When it ceased to be occupied or used as a residence for the pastor of the society and was rented to others for dwelling purposes it ceased to be a parsonage or to be used in any way for church or religious purposes. It then ceased to be `church property' just as a house of worship ceases to be such if it is abandoned for that purpose and rented and used for business purposes."

The court further concluded that the temporary rental of the parsonage in this case pending arrival of the new priest destroyed the tax exemption of the property. It again relied on the earlier decision of the state supreme court:

No hard and fast rule can properly be laid down to govern all cases. Generally speaking, it may be said that the rule governing exemption from taxation as to the real property of [charitable] institutions is that all property reasonably necessary for and primarily used and devoted to the proper purposes of the institution and so located with reference to the main buildings or activities of the institution so as to be reasonably suitable for such purposes is exempt from taxation.

A reasonable amount of property intended and reasonably necessary for such use in the near future, and suitably located, may also be exempt. [Accordingly] a lot and dwelling house rented to others and not used in any way for religious or church purposes, and not shown to be intended or necessary for such use in the future, are not exempt.

The court concluded that priests were not required to live in the parsonage (the temporary priest had not done so), and accordingly the parsonage was not "reasonable necessary" for church use. On the other hand, the court acknowledged that "if a requirement existed that the priest must live in the parsonage, and the property was rented for a few months during a transition period between one priest and another priest, the exemption would continue. However, that is not the case here." Trinity Episcopal Church v. County of Sherburne, 1991 WL 95745 (Minn. Tax 1991 unpublished).

Legal Developments

Disaffiliated Local Church Allowed to Retain Property

This decision was clearly erroneous.

Richard R. Hammar, Attorney, CPA

Bio

State: North Carolina
Categories: Church Property

In a clearly erroneous decision, a North Carolina appeals court ruled that title to a local Church of God congregation that disaffiliated from the denomination belonged to the local church rather than to denominational officials.

Following a 6-week tent revival in 1949, a small group of persons decided to establish a church. A building was constructed, and the new congregation began conducting services. In 1955, the congregation voted to affiliate with the Church of God denomination "for purposes of fellowship." In 1988, the Church of God denomination altered its policy statement regarding how its members should live their daily lives.

As a result of this change, the local church voted to disaffiliate from the denomination. In response to this action, the "state overseer" of the Church of God dismissed the local church's board of trustees and appointed a successor board consisting of denominational trustees. The successor trustees executed a deed conveying to themselves title to the church's property.

When local church members opposed this denominational control of their property, the denominational trustees asked a court to determine the lawful owner of the church property. The denominational bylaws specify that a local board of trustees shall hold title to local church property and that "all such property shall be used, managed, and controlled for the sole and exclusive use and benefit of the Church of God."

A trial court ruled in favor of the dissident congregation, and the denomination appealed. The appeals court began its opinion by noting: "As a general rule the parent body of a connectional church has the right to control the property of local affiliated churches, and, as a corollary, this right will be enforced in the civil courts.

However, a local church may have retained sufficient independence from the general church so that it reserved its right to withdraw at any time, and, presumably, take along with it whatever property it independently owned prior to and retained during its limited affiliation with the general church."

The court concluded that such was the case here. It based its ruling on the fact that "when the local church affiliated with the denominational church, the property was deeded to trustees of, or for, the local church, not to the denominational church or to trustees of, or for, the denominational church." Unfortunately, the appeals court decision is in error, and disregards a century of decision issued by the United States Supreme Court.

In fact, the Supreme Court has urged denominations and affiliated churches to avoid property litigation by adopting trust provisions in denominational bylaws (as the Church of God has done). In its most recent church property ruling (Jones v. Wolf, in 1979), the Court observed that the parties can ensure, if they so desire, that the faction loyal to the hierarchical church will retain the church property.

They can modify the deeds or the corporate charter to include a right of reversion or trust in favor of the general church. Alternatively, the constitution of the general church can be made to recite an express trust in favor of the denominational church. The burden involved in taking such steps will be minimal. And the civil courts will be bound to give effect to the result indicated by the parties, provided it is embodied in some legally cognizable form …. Through appropriate reversionary clauses and trust provisions, religious societies can specify what is to happen to church property in the event of a particular contingency, or what religious body will determine the ownership in the event of a schism or doctrinal controversy. In this manner, a religious organization can ensure that a dispute over the ownership of church property will be resolved in accord with the desires of the members.

In summary, the Church of God denomination adopted a bylaw provision specifying that all local church property "shall be used, managed, and controlled for the sole and exclusive use and benefit of the Church of God."

This language imposes a trust upon local church property that can be interpreted and applied without any resort to religious doctrine. Accordingly, as the Supreme Court observed in 1979, "the civil courts will be bound to give effect to the result indicated by the parties."

Indeed, in the 1979 case the Supreme Court upheld the legal validity of the following trust provision in the Methodist Book of Discipline: "[T]itle to all real property now owned or hereafter acquired by an unincorporated local church … shall be held by and/or conveyed to its duly elected trustees … and their successors in office … in trust, nevertheless, for the use and benefit of such local church and of The United Methodist Church. Every instrument of conveyance of real estate shall contain the appropriate trust clause as set forth in the Discipline …." Looney v. Community Bible Holiness Church, 405 S.E.2d 811 (N.C. App. 1991).

Legal Developments

Ownership of Church Parsonages

A Tennessee court addressed this matter in an interesting case.

Richard R. Hammar, Attorney, CPA

Bio

State: Tennessee
Categories: Church Property

Church Law and Tax 1992-07-01 Recent Developments

Church Property

Richard R. Hammar, J.D., LL.M., CPA

• A Tennessee court addressed the issue of ownership of a church parsonage in an interesting case. In 1953, a donor gave a home to a church. The deed contained the following language: “This land is given by us to the church for the purpose for the home for the Baptist pastor and no pastor shall occupy said place as a home unless he preaches `that you are saved by Grace through Faith in Jesus Christ and not by works.’ And in the event he refuses to preach such doctrine he will not be permitted to reside in said parsonage.” Many years later, the church purchased other property for the purpose of constructing a new parsonage, and it sought approval from a court to sell the existing parsonage and apply the proceeds to the construction of the new home. The original donor’s surviving family members challenged the church’s position, and claimed that they would own the property if the church ever attempted to sell it. A trial court disagreed with the family, and ruled that the church was the absolute and unconditional owner of the parsonage. Accordingly, the church could sell the original parsonage and apply the proceeds to the construction of the new building. The family appealed this decision. The family argued that the original deed was “conditional.” That is, the donor intended for the church to own the parsonage only so long as a Baptist pastor lived in the dwelling who preached “that you are saved by Grace through Faith in Jesus Christ and not by works.” The family maintained that this condition would be violated if the church ever sold the parsonage, and at such time the title would revert to them. The state appeals court rejected this position, and ruled in favor of the church. It stressed that the alleged “condition” in the deed was not a condition at all, but rather “merely words stating the purpose of the gift.” The court concluded that the creation of a conditional deed requires language that clearly calls for a reversion of the property to the donor in the event a specified condition is ever violated. The language in the this deed simply did not satisfy this requirement, the court concluded. Mitchell v. Jerrolds, 1991 WL 39587 (Tenn. App. 1991 unpublished).

Legal Developments

Disaffiliation and Congregational Splits

Which faction keeps the church building when a congregation splits?

Richard R. Hammar, Attorney, CPA

Bio

State: Texas
Categories: Church Property

Which faction in a local church is entitled to the church’s property following an attempted disaffiliation from a hierarchical denomination?

That was the issue before a Texas appeals court in an important ruling.

A church, a disgraced pastor, and a power struggle

In 1959, a Texas congregation affiliated with the United Pentecostal Church (UPC).

As a condition of affiliation, the church was required to adopt the UPC denominational articles of faith and constitution. The church also adopted recommended bylaws for local churches, and in 1970 incorporated under state nonprofit corporation law.

In 1982, the church elected a new minister. Seven years later, following allegations of immoral behavior, the minister resigned the pulpit.

Almost immediately, he had second thoughts.

Encouraged by his supporters, he launched a campaign to regain his former position. Among other things, he claimed that he never really had resigned since his resignation had never been formally “accepted” by the church.

Pastor tries an end-around on district heirarchy

The church’s bylaws specified various procedures for the selection of a new pastor following a resignation. Much of the authority previously vested in the local pastor transfers to the UPC district superintendent for the district in which the church is located.

The bylaws specified that the district superintendent must convene and preside over any church meeting at which a pastor is to be selected or any other business is to be transacted.

The district superintendent and the church board must recommend a candidate for pastor, who must receive a majority vote of the local members.

Because of the pending allegations of immoral conduct against the former minister, neither the district superintendent nor the church board would recommend that he resume his duties as pastor of the church.

Frustrated by the district superintendent’s refusal to call a meeting to reinstate him, and believing that a majority of the church members would back him, the former pastor began to hold services and meetings with the members.

This violated the constitution of the UPC which requires any resigning pastor to sever all connections with a former church.

Pastor turns to Texas nonprofit law

Unable to regain his former position under the church’s existing bylaws, the pastor announced his intention to hold a church business meeting at which the congregation would consider disaffiliating from the UPC denomination.

As authority for this action, the former pastor relied on a section in the Texas nonprofit corporation law permitting 10% of the members of a corporation to call a special meeting.

At the meeting, the members voted to remove the current board, install a new board, and reinstate the former pastor.

The district superintendent attended the meeting, and pronounced it invalid on the ground that it violated UPC and local church bylaws.

Specifically, the superintendent pointed out that these documents require that the superintendent preside over any church business meeting if a church is without a pastor, and further require that a minister must have the recommendation of the superintendent to be eligible for election as pastor.

UPC appeals to courts

A trial court agreed that all of the actions taken by the members during their meeting were invalid. It prohibited the former pastor from using the church’s property or its funds, and from interfering with church services or meetings. The former pastor appealed.

A state appeals court agreed with the trial court’s decision, and ruled in favor of the UPC. It began its opinion by noting that the church was a hierarchical church since it had (1) affiliated with the UPC; (2) adopted the UPC articles of faith and bylaws; (3) submitted to the authority of the UPC in certain matters of local government (including the selection of a new minister when a former minister resigns); and (4) relied on the authority of the UPC in ordaining and disciplining clergy.

The court then observed:

[Texas] courts have consistently followed the deference rule in deciding hierarchical church property disputes since the Texas Supreme Court adopted the rule …. The deference rule imputes to members ‘implied consent’ to the governing bylaws of their church. Persons who unite themselves to a hierarchical church organization do so with ‘implied consent’ that church bylaws will govern … .

There was no doubt, the court concluded, that the membership meeting at which the board was deposed and the former pastor reinstated violated UPC bylaws and accordingly such action were void under the “deference rule.”

The court also rejected the former pastor’s claim that church members have a legal right, under state nonprofit corporation law, to remove directors.

It observed:

We do not deny that [the church] has rights under the Texas Nonprofit Corporation Act, but we affirm the trial court’s determination that the church affiliated with a hierarchical church organization. In a conflict between the general procedures outlined in the Texas Nonprofit Corporation Act and the specific procedures contained in the church bylaws, we must defer to the church bylaws. The trial court properly found that the members could not invoke the Texas Nonprofit Corporation Act to remove the board … .

The court concluded that the trial court had acted properly in awarding possession of the church’s property to the current board:

Where a congregation of a hierarchical church has split, those members who renounce their allegiance to the church lose any rights in the property involved and remain loyal to the church. It is a simple question of identity.

What this means for churches

Consider the following:

The court gave a fairly liberal definition of the term hierarchical. This is important, given the court’s reliance on the “deference rule.”
The case illustrates that Texas follows the “deference rule” in resolving church property disputes. The deference rule “imputes to members ‘implied consent’ to the governing bylaws of their church. Persons who unite themselves to a hierarchical church organization do so with ‘implied consent’ that church bylaws will govern.” This approach tends to favor denominations in disputes over control of a dissident local church’s property.
The following observation in the court’s decision clearly favors denominations in disputes over control of local church property: “Where a congregation of a hierarchical church has split, those members who renounce their allegiance to the church lose any rights in the property involved and remain loyal to the church. It is a simple question of identity.”
The ruling illustrates that a church’s bylaws generally take priority over provisions in a state’s nonprofit corporation law.
The case illustrates that a minister’s resignation may be valid even if not “accepted” formally by the church. The court rejected the former pastor’s claim that his “resignation” was ineffective (since it had never been accepted by the church). It pointed out that the pastor had received the 30 days’ compensation that is paid to ministers who resign, and, that he had at no time (following his resignation) served as the church’s duly authorized minister. Green v. Westgate Apostolic Church, 808 S.W.2d 547 (Tex. App. 1991).

Legal Developments

Injuries Occurring on Church Premises During Use by Outside Groups

An Indiana court makes an important ruling.

Richard R. Hammar, Attorney, CPA

Bio

State: Indiana
Categories: Church Property, Personal Injuries on Church Property or During Church Activities

Church Law and Tax 1992-05-01 Recent Developments

Personal Injuries – On Church Property or During Church Activities

Richard R. Hammar, J.D., LL.M., CPA

• Can a church be legally responsible for an injury occurring on its premises while being used by an outside group? Yes, concluded an Indiana appeals court in an important ruling. Many churches permit outside organizations to utilize their facilities on a short-term basis. Common examples include scouting organizations, and aerobics and craft classes. In the Indiana case, a Catholic church permitted a local community group to use its facilities for an annual one-day celebration. The event was advertised in the church bulletin, and included a religious ceremony. After the ceremony, guests were ushered into another room for a reception where refreshments were served. While refreshments were being served, volunteers disassembled the tables and chairs in the room where the ceremony occurred. Although the guests were asked to proceed to the reception immediately following the ceremony, a few guests remained behind to socialize. As one of these guests proceeded to the reception area a few minutes later, she tripped and fell over some of the disassembled tables. She later sued the church. The church claimed that it was not responsible for the guest’s injuries since it had not retained any control over its facilities while they were being used by the community group for its celebration. The church also pointed out that the group was permitted to use the facilities without charge, that it was responsible for cleaning up the facilities following its activities, and that the church did not retain any control over the facilities during the celebration. A trial court refused to dismiss the lawsuit against the church, and the church appealed. The appeals court noted that “the church is correct in observing that control of the premises is the basis of premises liability.” However, the court concluded that there was ample evidence of control by the church. It observed:

Thus, the question becomes whether the church retained sufficient control over the festivities to justify imposing liability upon it for injuries to the invited guests. [The priest] testified … that if he chose to do so, he could have decided not to allow the [community group] to hold their function there; that there was a janitor on the premises to make sure the buildings were locked; that the [organization] was not in charge of securing the premises; that the church placed an announcement in the church bulletin regarding when and where the celebration was to take place; that the church conducted a religious ceremony as a part of the celebration; and that he would not say that the church relinquished control over the property. This testimony was enough to create an issue of fact as to whether the church retained control over the premises.

This case illustrates the legal risks that churches face when they allow outside groups to use their property. All too often, a church inadvertently “retains control” over its facilities even when they are being used by an outside group. And, with control comes responsibility. St. Casimer Church v. Frankiewics, 563 N.E.2d 1331 (Ind. App. 1990).

Property Tax Exemption and Rental of Church Facilities

Church facilities are tax exempt when rented to another nonprofit corporation, court rules.

Richard R. Hammar, Attorney, CPA

Bio

State: Illinois
Categories: Church Property

Church Law and Tax 1992-05-01 Recent Developments

Taxation – Church Property

Richard R. Hammar, J.D., LL.M., CPA

• Does a church-owned building lose its property tax exemption when it is rented to another charitable organization? No, concluded an Illinois appeals court. A Lutheran church owned a 3-story building that no longer was used for religious purposes. The church chose to rent the building rather than sell it, since it hoped to utilize the property for religious purposes in the future. Accordingly, it rented the building to a nonprofit dance school that conducted dance lessons and performances. The church received $14,400 in rent in 1986. A tax assessor claimed that the building was no entitled to an exemption from property taxation. A trial court rejected the assessor’s position, and the case was appealed. The appeals court acknowledged that the “burden of proving the right to an exemption is upon the person seeking it,” and that “in determining whether property is included within the scope of an exemption, all facts are to be construed and all debatable questions resolved in favor of taxation. Nevertheless, the court concluded that the building was entitled to exemption under a state law that exempted “all property of institutions of public charity … when such property is actually and exclusively used for such charitable and beneficent purposes, and not leased or otherwise used with a view to profit.” The court relied on a 6-factor test announced in an earlier decision by the Illinois Supreme Court for determining whether a particular property is entitled to a charitable exemption. The supreme court previously ruled that a property is entitled to exemption if the property owner can prove each of the following 6 factors:

(1) The benefits derived are for an indefinite number of persons; (2) the organization has no capital, capital stock, or shareholders, and does not profit from the enterprise; (3) funds are derived mainly from private and public charity, and are held in trust for the objects and purposes expressed in its charter; (4) charity is dispensed to all who need and apply for it; (5) no obstacles are placed in the way of those seeking the benefits; Nd (6) the primary use of the property is for the charitable purposes.

The tax assessor conceded that the first 3 factors were satisfied, but it claimed that the last 3 were not. The appeals court disagreed, noting that “a charitable institution does not lose its tax-exempt status merely because persons who are unable to pay for its services are required to do so, as long as the institution makes no profit and all the funds are used to further the organization’s charitable goals.” The court emphasized that the amounts charged by the dance studio for instruction “were substantially less than enough to cover regular, operating expenses.” It concluded: “Property satisfies the exclusive use requirement of the property tax exemption statutes if it is primarily used for the exempted purpose, even though it is also used for a secondary, or incidental purpose …. The test is ‘whether the primary purpose of the institution is charitable, or whether its primary purpose is the making of a profit and the devoting of these profits to charitable purposes.” Resurrection Lutheran Church v. Department of Revenue, 571 N.E.2d 989 (Ill. App. 1991).

Buried Treasure on Church Property

Who has a right to the treasure?

Richard R. Hammar, Attorney, CPA

Bio

State: Iowa
Categories: Church Property

Church Law and Tax 1992-05-01 Recent Developments

Church Property

Richard R. Hammar, J.D., LL.M., CPA

• Who owns buried treasure found on a church’s property—the church, or the heirs of former owners who put it there? That was the interesting question before the Supreme Court of Iowa. A family owned a parcel of ground (which included a home) for several generations. The property was purchased by a church in 1987. When the church later demolished the home, it discovered a substantial sum of paper money and coins buried in the ground in tin cans and glass jars. Several silver dollars and half-dollars were from the 19th century. Also included in the hoard were several ten and twenty dollar bills. The face amount of the coins and currency totaled nearly $25,000. Heirs of the previous owners of the property learned of the discovery, and claimed all of the money. They argued that, as heirs of the true owner of the money, their interest was superior to that of the church. The church asserted that it was the rightful owner of the money. A trial court rule in favor of the church, and the heirs appealed. The state supreme court began its opinion by noting:

The rights of finders of property vary according to the characterization of the property found …. The general rule is that the finder of lost property becomes the owner thereof against the whole world other than the true owner. Property is lost when the owner unintentionally and involuntarily parts with its possession and does not know where it is. Mislaid property is that which the owner has voluntarily placed somewhere and then forgets that it is there. The right of possession of mislaid property is in the owner of the premises upon which it is found, as against all persons other than the true owner …. Treasure trove is treated as lost and belongs to the finder as against all except the true owner. Treasure trove consists of coins or paper money which is concealed by the owner; it carries with it the thought of antiquity such that it has been hidden so long that the true owner is not discoverable. Abandoned property is that to which the owner has voluntarily relinquished all right, title, and interest with the intention of terminating his ownership. The finder who reduces abandoned property to possession acquires absolute title as against the former owner. The court concluded that money buried in the ground is treasure trove, and as such it is “the type of property to which the true owner retains ownership as against the finder or the owner of the property where it is found.” The court added that “if the original owner is deceased that person’s heirs … are entitled to lay claim to the property.” In conclusion, the supreme court ordered the church to pay the money over to the heirs. Ritz v. Selma United Methodist Church, 467 N.W.2d 266 (Iowa 1991).

Legal Developments

Denominational Bylaws and Local Church Property

Are denominational bylaws regarding district supervision legally valid?

Richard R. Hammar, Attorney, CPA

Bio

State: Missouri
Categories: Church Property

What is the legal effect of denominational bylaws giving a denomination the authority to assume control of a dissident congregation's property? That was the issue before a Missouri appeals court.

The board of deacons of a local Assemblies of God church voted to oust its pastor. The next day, the pastor contacted the Southern Missouri District of the Assemblies of God, and requested that the District intervene on the basis of "irreconcilable differences" between himself and the board.

The local church's bylaws contained a provision specifying that "[s]hould there arise irreconcilable differences between the pastor and members of the official church board, destroying unity and the successful ministry of the local assembly, the District executive presbytery … upon request from the pastor or a majority of the official board, shall investigate such differences and … may declare that the church be brought under District supervision until such strife ceases."

A week later, the church membership voted to dismiss the pastor. A District officer attended the membership meeting, and advised the congregation that its actions were in violation of the bylaws of both the church and District and accordingly were void. The District thereafter voted to place the church under District supervision "until strife ceases."

The District retained the pastor, and appointed a new board. A few months later the congregation voted overwhelmingly to disassociate the church from the Assemblies of God. When the District attempted to change the names of persons authorized to withdraw funds from the church's bank accounts, a lawsuit was filed to determine the legality of the District's actions.

A trial court ruled in favor of the church, concluding that the District had no authority to remove the board or change the signature cards at the bank. A state appeals court later reversed the trial court's action. The court provided the trial court with guidance regarding the question of "whether a local church, acting under Missouri's not-for-profit corporation act, can lawfully adopt a 'district supervision' bylaw which empowers the Southern Missouri District Council of the Assemblies of God to assume management of the secular affairs of the local church by temporarily replacing the duly elected directors of the local church when disputes arise among the local directors."

The appeals court noted the general rule that "the bylaws of a not-for-profit corporation may contain any provision for the regulation and management of the corporation which is not inconsistent with law or the corporation's articles of incorporation. A bylaw provision that is inconsistent with this state's law is void and must give way to the superior authority of the state. Likewise, any bylaw provision that conflicts with the articles of incorporation is void." However, the court concluded that the local church's bylaw provision authorizing District supervision "would not conflict with state law of the local church's articles of incorporation." The court observed:

In Missouri, the legislature has not prohibited temporary removal of directors of not-for-profit corporations during their term nor has the legislature established conditions or procedure for the removal of directors of not-for-profit corporations …. Here, it was left to the local church corporation, by enactment of bylaws, to establish the procedure for removal, reasons for removal, and criteria or events triggering temporary removal of directors. Removal od directors under the "District supervision" bylaw would not appear to violate [state law]. A bylaw provision which provides for two classes of directors, the first class being those elected for a given term, subject to temporary removal by the District Council when irreconcilable conflict arose, and a second class, those appointed by the District Council to serve temporarily during periods of irreconcilable conflict, would not conflict with [state not-for-profit corporation law].

The appeals court sent the case back to the trial court to determine the legal validity of the bylaw provision authorizing "District supervision." Any further developments will be reported in future issues of this newsletter. Boatmen's First National Bank v. Southern Missouri District Council of the Assemblies of God, 806 S.W.2d 706 (Mo. App. 1991).

Legal Developments

Adverse Possession and Church Property

Churches can lose a portion of their property to a neighbor.

Richard R. Hammar, Attorney, CPA

Bio

State: New York
Categories: Church Property

Churches can lose a portion of their property to a neighboring landowner as a result of "adverse possession."

A neighboring landowner claimed title to 2 portions of a church's property as a result of adverse possession. The first portion of land claimed by the neighbor was land up to a boundary line that was set back several feet onto the church's property.

For at least 11 years, the church and neighboring landowner considered this line to be their actual boundary line. The second portion of land claimed by the neighbor was a tract that he maintained for more than 11 years. A New York appellate court concluded that the church had lost its right to both portions of land.

With respect to the first portion (land lost by the incorrect boundary line), the court observed: "Testimony shows the practical location of the boundary line and acquiescence thereto by the respective property owners for at least 11 years. Practical location and acquiescence for the statutory period is conclusive as to the location of the boundary line."

With respect to the second portion of property (that had been maintained by the neighboring landowner), the court observed that for 14 years the neighboring landowner "cultivated and maintained the subject parcel, mowed it, planted a garden and trees on it, and erected a garage, swimming pool, storage shed and clothes line on it. We find that these facts established that [the neighbor] possessed the parcel hostilely and under claim of right, actually, openly and notoriously, exclusively and continuously for the statutory period."

What this means for churches

This case demonstrates the potential loss of property that may result from erroneous boundary lines and fences, and the maintenance and use of a portion of a church's property by a neighbor. Chavoustie v. Stone Street Baptist Church, 569 N.Y.S.2d 528 (A.D. 4 Dept. 1991).

Legal Developments

Property of Disaffiliated Churches

In some cases, a church’s property reverts to its former denomination when it secedes.

Richard R. Hammar, Attorney, CPA

Bio

State: California
Categories: Church Property

A California state appeals court ruled that title to the properties of a local church that voted to disaffiliate from a parent denomination belonged to the denomination rather than to the church.

The local church was the oldest Korean immigrant congregation in the Presbyterian Church (U.S.A.) ("PCUSA"). It had participated actively in the Presbyterian Church for more than 80 years. PCUSA had assisted the church in acquiring its first properties, and in obtaining financing for various projects. A schism developed in recent years within the church, primarily over the views and leadership of the church's pastor. Attempts by the PCUSA to resolve the problems failed. As a result of the schism, a group (numbering up to 30% of the church's membership) left the church and formed a "church in exile."

The pastor thereafter had the remaining congregation vote to disaffiliate from the PCUSA. Acting in accordance with the Presbyterian Book of Order, the PCUSA designated the exiled congregation as the "true church," and as the rightful owner of the church properties. A lawsuit was filed to determine the ownership of the church properties.

A trial court ruled that the dissident congregation that voted to disaffiliate from the PCUSA was the rightful owner of the church properties, and that the designation by the PCUSA of the "true church" was entitled to no consideration. The case was appealed to a state appeals court. The appeals court reversed the trial court's decision, and awarded the church properties to the "exiled" congregation designated by the PCUSA as the true church. The court based its decision on the following 3 considerations:

Mandatory deference by the civil courts to decisions of hierarchical denominations regarding the true identity of an affiliated church. The court emphasized that "on ecclesiastical issues, including matters of religious doctrine or polity, civil courts must defer to the highest judicatory of the hierarchical church hearing and addressing the matter." The court noted that "it has long been the law in California that the identification of a religious body as the true church is an ecclesiastical issue," and accordingly the civil courts must accept the decisions of hierarchical denominations that identify a particular faction as the true representatives of a local church.

"Neutral principles of law." The court concluded that the exiled congregation was entitled to the church properties under the neutral principles of law approach. Under this approach, a civil court reviews nondoctrinal language in deeds, charters, and bylaws (both of the local church and the parent denomination) and awards title based on general rules of property law. The court noted that the charter and bylaws of the local church specifically required adherence to the PCUSA and its Book of Order. The court continued: "At that moment [when the church voted to disaffiliate from the PCUSA] if not before, these members had renounced any further obligation to be subject to the doctrines or discipline of the PCUSA, and, in effect,renounced their membership in [the local church] since its articles of incorporation required adherence to the doctrines and disciplines of PCUSA as a condition of membership. Having abandoned their membership in [the local church], they lost all power and ability to determine its future status."

Express trust. Finally, the court concluded that the "exiled congregation" was the rightful owner of the church properties on the basis of an "express trust." The "express trust" approach to resolving church property disputes "relies on title deeds, articles of incorporation, canons and rules of the organizations concerned and statutes, to establish that a local church holds property under an express trust for the benefit of the general church membership as embodied in its regional and national organizations."

The court found that several considerations supported a finding that the local church's properties were subject to an express trust in favor of the faction loyal to the PCUSA. One consideration was the fact that title to a portion of the church's properties had been vested in the name of a Presbytery for more than 50 years. A second consideration was the fact that the PCUSA Book of Order (to which the local church pledged its allegiance in its charter and bylaws) contained several paragraphs subjecting local church properties to an express trust in favor of the PCUSA. These included the following:

All property held by or for a particular church … whether legal title is lodged in a corporation, a trustee or trustees, or an unincorporated association … is held in trust nevertheless for the use and benefit of the Presbyterian Church (U.S.A.). [G-8.0200]

Whenever property of, or held for, a particular church of the Presbyterian Church (U.S.A.) ceases to be used by that church as a particular church of the Presbyterian Church (U.S.A.) in accordance with this constitution, such property shall be held, used, applied, transferred, or sold as provided by the presbytery. [G-8.0300]

The relationship to the Presbyterian Church (U.S.A.) of a particular church can be severed only by constitutional action on the part of the presbytery …. If there is a schism within the membership of a particular church and the presbytery is unable to effect a reconciliation or a division into separate churches within the Presbyterian Church (U.S.A.), the presbytery shall determine if one of the factions is entitled to the property because of it is identified by the presbytery as the true church within the Presbyterian Church (U.S.A.). This determination does not depend upon which faction received the majority vote within the particular church at the time of the schism. [G-8.0600]

What this means for churches

This case is significant for several reasons, including the following:

It recognizes the principle that decisions of hierarchical denominations on matters of doctrine or policy are binding on the civil courts. Few courts have reached the conclusion that a denomination's act of identifying the faction within a local church that represents the "true church" is a matter of doctrine or polity that is beyond the authority of the civil courts to affect. However, such a conclusion seems perfectly reasonable, particularly in view of the provisions of the Book of Order quoted above.
The court reached the logical, but somewhat unique, conclusion that members who vote to disaffiliate from a parent denomination thereby lose their status as members of their church and have no legal authority to "determine the future status" of their former church. Such a conclusion assumes that the local church's charter or bylaws contains a provision binding members to the doctrine and practice of the denomination.
The decision sets forth "express trust" provisions in the Presbyterian Book of Order that effectively subjected all local church properties to a "trust" in favor of the PCUSA. These provisions can be a useful guide to other religious organizations interested in obtaining the same kind of protection. Korean United Presbyterian Church v. Presbytery of the Pacific, 281 Cal. Rptr. 396 (Cal. App. 2 Dist. 1991).