Priest Claimed Defamatory and False Statements Led to His Dismissal

But a court ruled the ministerial exemption barred it from resolving the priest’s claim.

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State: Pennsylvania
Categories: Clergy - Discipline and Removal, Ministerial Exception

Key point 8-10.01. The civil courts have consistently ruled that the First Amendment prevents the civil courts from applying employment laws to the relationship between a church and a minister.

A Pennsylvania court ruled that it was barred by the “ministerial exception” from resolving a priest’s claim that members of his church “interfered with” his employment contract by sharing negative information about him with diocesan officials for the purpose of having him permanently removed.

Background

A Catholic priest was appointed by contract by his diocese to be the priest and administrator for a church in Scranton, Pennsylvania. Prior to this assignment, the priest alleged that a lay employee (“Defendant 1”) and two lay members of the church (“Defendant 2” and “Defendant 3”) exerted influence over the parish’s finances.

After assuming his duties as a priest and administrator for the church, the priest claimed that, while looking through a file cabinet, he found hundreds of dollars in cash that was hidden and unaccounted for. Since the cabinet was under the control of Defendant 1, he confronted her, but she did not have a sufficient explanation.

The priest claimed the defendants had previously demonstrated dismay at decisions he made due to their lack of ability to exert control they once had in the parish.

He further claimed that the defendants made defamatory and false statements to members of the parish with the intention of causing the separation of the priest from his contractual agreement with the Diocese of Scranton.

Specifically, he stated that Defendant 1 made untrue complaints to the local police department alleging harassment, which were discovered to be unfounded by the department. He said Defendant 1 also made similar remarks about harassment to church members as well as individuals in the diocese, all for the purpose of causing separation of the priest from his contract with the diocese.

Defendant 2 allegedly made defamatory and false statements, both orally and in writing, to the local bishop with the intention of removing the priest. It was also asserted that Defendant 2 forwarded emails to the priest’s superiors stating that the priest had made “outright lies to his congregation” and “spends the Diocese’s money like a drunken sailor.”

Defendant 2 reportedly forwarded an additional email to the diocese claiming that the priest “spent an exorbitant amount of money on light fixtures, that were never as expensive as claimed and never even purchased.”

The priest claimed that Defendant 3 made defamatory and false statements, both orally and in writing, to the bishop with the intention of removing the priest from the church.

Applying the “rule of deference”

The priest sued the three defendants, claiming they interfered with his contractual relationship with the diocese, which resulted in the decision of the bishop to terminate his employment with the diocese.

The defendants argued that the Establishment and Free Exercise Clauses of the First Amendment to the United States Constitution prohibit judicial interference with the employment decisions of religious institutions. A trial court agreed with the defendants and dismissed the lawsuit.

The priest appealed, claiming that the trial court erred in concluding that the constitution prohibited judicial interference with his lawsuit. The priest claimed that the defendants’ campaign of defamatory and false statements caused monetary damages through the termination of his contract and in “keeping him from obtaining other similar positions in the . . . Diocese.”

The appeals court concluded that American courts have developed a “rule of deference” to religious tribunals in matters of doctrine and faith:

[W]henever 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. Kedroff v. St. Nicholas Cathedral of Russian Orthodox Church in N. Am., 344 U.S. 94 (1952) (quoting Watson v. Jones, 80 U.S. 679 (1871)).

The appeals court noted that this “rule of deference” arose out of disputes over church property, but its application has expanded to other kinds of church disputes including those “involving the choice of church leadership.” The court elaborated this point by quoting a 1985 Supreme Court decision:

All disputes among members of a congregation, however, are not doctrinal disputes. Some are simply disputes as to the meaning of agreements on wills, trusts, contracts, and property ownership. These disputes are questions of civil law and are not predicated on any religious doctrine. While it is true that parties may agree to settle their disputes according to their own agreed fashion, the question of what they agreed to, or whether they agreed at all, are not doctrinal and can be solved without intruding into the sacred precincts.

The appeals court stated:

We must decide whether the same is true of [the priest’s] interference [with contract claim]—can we analyze the propriety of [the defendants’] communications without intruding into the sacred precincts?

Applying the ministerial exception

The appeals court then evaluated how the priest’s claims compared with a prior decision made by the Pennsylvania Supreme Court. In that specific case, the Pennsylvania Supreme Court noted:

[C]ases involving the choice of clerical leadership . . . is a special class of cases that involves the employment relationship between a religious institution and its ministerial employees in which the courts understandably are particularly reluctant to encroach on the institution’s decision-making process in selecting such employees. . . . This application of the deference rule has come to be known as the “ministerial exception” to a civil court’s ability to exercise jurisdiction over a matter related to the employment or retention of a cleric.

The appeals court then continued:

Under the “ministerial exception,” the Free Exercise Clause of the First Amendment of the United States Constitution prohibits courts from exercising . . . jurisdiction in cases where the court’s involvement would encroach on decisions made by religious institutions concerning employment of ministers. Rooted in the First Amendment’s guarantee of religious freedom, the ministerial exception precludes courts from considering claims involving the employment relationship between a religious institution and its ministerial employees, based on the institution’s constitutional right to be free from judicial interference in the selection of those employees.

The appeals court further noted:

The ministerial exception applies to persons whose “primary duties include teaching, spreading the faith, church governance, supervision of a religious order, or supervision of participation in religious ritual and worship.” . . . The question, then, is whether the [defendants’] statements are actionable regardless of [the priest’s] status as a minister.”

According to the priest:

[The defendants] were influential members of the parish community whose communications were made with the intention of prompting the bishop to terminate [the priest’s] employment and had the desired effect. He also notes that [the defendants] were not members of the church hierarchy, that their statements did not occur during a church meeting or in furtherance of an official church proceeding relating to [the priest’s] continued employment, and that the statements did not relate to [the priest’s] pastoral care. . . . “[T]he defamatory statements of lay persons against a priest are not religious controversies and, as such, should be dealt with through civil law.” . . . [The priest] claims [the defendants’] statements were made in retaliation to [the priest’s] discovery of possible malfeasance on [the defendants’] part; that he brought this action in response to [the defendants’] concerted campaign to discredit him; and that the association of [the parties] with the same religious organization is merely incidental to this lawsuit. . . . Thus, [the priest] argues that this case can and should be decided under neutral principles of law and that the trial court erred in dismissing his complaint pursuant to the ministerial exception.

The appeals court disagreed with the priest’s arguments.

It concluded that there was “no doubt” that the priest believed that the defendants’ communications to the bishop and various parishioners led to his “undeserved and unjust termination from his post as priest” of the church. The appellate court pointed to the United States Supreme Court’s unanimous 2012 ruling, in which the Court found the ministerial exception applies to cases involving the termination of a cleric—regardless of whether the termination was for a religious reason. Hosanna-Tabor Evangelical Lutheran Church and School v. E.E.O.C., 132 S.Ct. 694 (2012).

“Thus, the fact that [the defendants’] allegedly defamatory statements concern secular matters—[the priest’s] misuse of parish funds, dishonesty toward parishioners, and an alleged incident of harassment—does not avoid the applicability of the ministerial exception,” the appellate court said.

The appellate court concluded:

[The priest’s] complaint is very specific—he alleges that [the defendants] through their communications with the local bishop and others, sought and successfully procured [his] removal from ministry. Our holding is correspondingly narrow—[the priest’s] allegations are inextricably intertwined with his removal from ministry, and therefore the trial court properly [dismissed his lawsuit.]

What this means for churches

Consider the following points.

1. Liability for intentional interference

According to the legal principle of “interference with contract,” a former employer may be liable if it intentionally interferes with an existing employment relationship.

To illustrate, assume that Church A dismisses a lay employee (“Jill”) because of embezzlement, and Jill is later hired by Church B as its bookkeeper. The pastor of Church A discovers that Jill is now working for Church B and calls the pastor of Church B to warn him that Church B has hired an embezzler.

Case Study from Alaska Supreme Court
For a pertinent court case on interference with contract with implications for churches, church leaders, and church employees and former employees, see the case study on a ruling by the Alaska Supreme Court in the “Reference Letters” section of the Legal Library.

Based on this unsolicited communication, Jill is dismissed by Church B. She later sues Church A and its pastor for interference with contract. To prove interference with contract, Jill must demonstrate the existence of a contract (an employment relationship), and some intentional act by her former church or pastor that interfered with that contract. Consider the holding from the Alaska Supreme Court regarding interference with contract (see sidebar).

2. Interference requires malicious intent

Interference with contract requires malicious intent. The defendant must have willfully and intentionally engaged in conduct that interfered with another’s employment contract.

3. Interference during the preemployment stage

Some courts have extended the principle of interference with contract to the preemployment stage, referring to this as “interference with prospective contractual relations.”

This requires proof of the following elements: (1) a “reasonable probability” that the plaintiff would have entered into the prospective relationship or contract; (2) a wrongful act by the defendant that prevented the relationship from occurring; (3) the defendant did such act with a conscious desire to prevent the relationship from occurring, or knew that the interference was certain or substantially certain to occur as a result of the defendant’s conduct; and (4) the plaintiff suffered actual harm or damage as a result of the defendant’s interference.

4. The ministerial exception may bar rulings on interference-with-contract claims

Case Study from a Louisiana Court For an example of a case suggesting that the ministerial exemption may prevent a court from resolving an interference-with-contract claim, see the case study on a ruling by a Louisiana court in the “Reference Letters” section of the Legal Library.

Some courts, like the appellate court in this Legal Development, have ruled that the ministerial exception prevents them from resolving interference-with-contract claims involving clergy. Consider the outcome reached by a Louisiana court illustrating this point (see sidebar).

5. Seek legal counsel

Pastors should not interfere with a former employee’s employment relationship with another employer without first seeking legal counsel.

Tracy v. O’Bell, 268 A.3d 405 (Pa. App. 2021)

Legal Developments

A Fired Pastor’s Defamation Suit Is Dismissed

Appeals court said the lawsuit was barred due to the “ecclesiastical abstention doctrine.”

Richard R. Hammar, Attorney, CPA

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State: Tennessee
Categories: Clergy - Discipline and Removal, Defamation

Key point 2-04.01. Most courts have concluded that they are barred by the First Amendment guarantees of religious freedom and nonestablishment of religion from resolving challenges by dismissed clergy to the legal validity of their dismissals.

A Tennessee appeals court ruled that a dismissed pastor’s defamation lawsuit against his former church was barred by the “ecclesiastical abstention doctrine.”

Background

A church’s board of elders called an emergency meeting to address inappropriate Facebook communications the pastor had with a female member of the congregation.

At this meeting the pastor’s resignation was requested. The pastor refused to tender his resignation, and thereafter he received a termination letter from the church that he refused to honor. As a result, a second termination letter was delivered to him. The pastor continued to defy the elders’ efforts to remove him from his position.

Pastor: church’s action not protected by the ecclesiastical abstention doctrine

The pastor sued his church, claiming it defamed him based on the following statements:

Communications made by church elders to a sound booth operator at the church, among others, about an improper relationship between the pastor and the sound booth operator.

Email and correspondence from the church’s administrative assistant informing the congregation of the pastor’s termination. The church’s elders had authorized sending the email to the church’s email distribution list.

The pastor insisted that any communications concerning his alleged inappropriate relationship with the sound booth operator had no connection to any ecclesiastical action or decision and, therefore, were not protected by the ecclesiastical abstention doctrine.

He also claimed that sending emails to the church’s email distribution list informing the congregation of the pastor’s termination did not trigger the ecclesiastical abstention doctrine, and therefore he could maintain his defamation lawsuit against the church.

The defamation claim was dismissed by the trial court on the basis of the ecclesiastical abstention doctrine. The pastor appealed this ruling to a state appeals court.

Appeals court: the trial court “was not in error”

The appeals court noted:

The ecclesiastical abstention doctrine, also commonly known as the church autonomy doctrine, precludes civil courts in this country from adjudicating “questions of discipline, or of faith, or ecclesiastical rule, custom, or law” or church polity, or the internal governance of religious organizations. . . .

The concern undergirding the ecclesiastical abstention bar is that “[i]f secular courts were to become embroiled in ecclesiastical controversies within a religious body, those courts would be allowed, or required, to substitute their judgment for that of church governing bodies on issues of doctrine, belief, or practice.”

Regarding defamation claims specifically, the court noted that “‘[a] number of courts have held that defamation claims arising out of minister employment or discipline disputes are outside the subject matter jurisdiction of the courts because all matters touching the relationship between pastor and church are of ecclesiastical concern and not subject to court review.’”

The court further noted:

“[T]he protection afforded by the First Amendment to church disciplinary proceedings applies to statements made after the church’s decision if the statements or actions are merely implementation of, still part of, inextricably related to, or a consequence of the decision.” . . . [F]or instance, “[a] church’s communication of the fact and reason for excommunication are protected from judicial inquiry and review . . . is as much within the rights protected by ecclesiastical abstention as is the church’s right to take such actions, even though it may carry some kind of negative implication about the expelled member.”

The court conceded that while “the bar posed by the ecclesiastical abstention doctrine is no doubt generally weakened with respect to statements made outside church membership, the ultimate issue is still whether the alleged defamations arise from or are inextricably linked to the protected religious decision.”

In rejecting the pastor’s defamation claims, the court concluded:

In the final calculus, “[c]onduct that is inextricably tied to the disciplinary process of a religious organization is subject to the First Amendment’s protection just as the disciplinary decision itself.” . . . Indeed, reviewing all of the asserted defamations in this case, they are, in our view, “too close to the peculiarly religious aspects of the transactions to be segregated and treated separately—as simple civil wrongs. . . . We, therefore, conclude that the trial court’s reliance on the ecclesiastical abstention doctrine was not in error. Accordingly, we affirm its summary dismissal of the pastor’s [defamation] claims.

What this means for churches

This case illustrates an important point. The ecclesiastical abstention doctrine precludes civil courts from adjudicating challenges by dismissed clergy over the legality of their dismissal, but it also bars the resolution of ancillary claims, such as defamation, breach of contract, and emotional distress, that result from the dismissal. Maize v. Friendship Church, 2020 WL 6130918 (Tenn. App. 2020)

Legal Developments

Court Barred from Settling Sexual Harassment Claim

First Amendment prevents the civil courts from applying employment laws to the relationship between a church and a minister.

Richard R. Hammar, Attorney, CPA

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State: Federal
Categories: Clergy - Discipline and Removal, Sexual Harassment

Update. The decision made in this case from 2019 was affirmed by Seventh Circuit in 2021, ending the plaintiff’s legal challenge.

Key point 8-10.01. The civil courts have consistently ruled that the First Amendment prevents the civil courts from applying employment laws to the relationship between a church and a minister.

Key point 8-12.05. Sexual harassment is a form of sex discrimination prohibited by Title VII of the Civil Rights Act of 1964. It consists of both “quid pro quo” harassment and “hostile environment” harassment. Religious organizations that are subject to Title VII are covered by this prohibition. An employer is automatically liable for supervisory employees’ acts of harassment, but a defense is available to claims of hostile environment harassment if the employer adopted a written harassment policy and an alleged victim fails to pursue remedies available under the policy. In some cases, an employer may be liable for acts of sexual harassment committed by nonsupervisory employees, and even nonemployees.

A federal appeals court ruled that the ministerial exception barred a church organist’s sexual harassment claim against his employing church for its creation of an offensive working environment through unwelcome verbal conduct of a sexual nature.

An adult male (the “plaintiff”) served for two years as “Music Director, Choir Director and Organist” for the Archdiocese of Chicago and a local parish (the “church defendants”). His immediate supervisor was the parish priest. The priest knew that the plaintiff was gay and that he was engaged to another man. During the plaintiff’s two years of employment, the priest allegedly made remarks critical of the plaintiff’s sexual orientation.

In 2013, the priest asked the plaintiff when he planned to marry his partner, and the plaintiff responded that the wedding would be sometime in 2014. The plaintiff claimed that the abusive and harassing behavior became increasingly hostile as the wedding date approached. The marriage took place in September 2014. Four days after the wedding, the priest asked the plaintiff to resign because of the marriage. When the plaintiff refused to resign, the priest fired him and said, “Your union is against the teachings of the Catholic church.”

The plaintiff sued the priest, church, and the Archdiocese of Chicago, alleging employment discrimination based on sexual orientation and marital status in violation of Title VII of the Civil Rights Act of 1964, and disability discrimination in violation of the Americans with Disabilities Act. On the disability discrimination claim, the plaintiff alleged that he was frequently harassed because of his diabetes and a metabolic syndrome. For example, the plaintiff alleged that the priest repeatedly complained about the cost of keeping the plaintiff on the parish’s health and dental insurance plans because of his weight and diabetes.

The trial court dismissed the lawsuit on the grounds that the discrimination and wrongful-termination claims were barred by the First Amendment’s “ministerial exception” which generally bars the civil courts from resolving employment disputes between churches and clergy. The plaintiff appealed, modifying his claims to challenge the “hostile work environment” rather than the firing itself.

The appeals court’s ruling

Title VII of the Civil Rights Act of 1964 prohibits employers with at least 15 employees from discriminating against any employee or applicant “with respect to compensation, terms, conditions or privileges of employment, because of such individual’s sex.” Sexual harassment is a form of sex discrimination prohibited by Title VII. The courts have identified two types of sexual harassment—”quid pro quo” and hostile environment. “Quid pro quo” harassment refers to conditioning employment opportunities on submission to a sexual or social relationship, while “hostile environment” harassment refers to the creation of an intimidating, hostile, or offensive working environment through unwelcome verbal or physical conduct of a sexual nature. In general, an employer is liable for a supervisory employee’s hostile environment sexual harassment.

In this case, the court noted, the plaintiff conceded that he was a “minister” for purposes of the ministerial exception, but claimed that the church defendants had nonetheless violated Title VII by creating a “hostile environment.” The question before the court was whether the ministerial exception applied to sexual harassment claims based on a hostile environment. The court noted that only a few courts have addressed whether hostile work environment claims brought by a minister are barred by the ministerial exception, and the courts have reached opposite conclusions. The court concluded:

[The plaintiff’s] hostile-environment claims based on his sex, sexual orientation, and marital status pose [a risk] of impermissible entanglement with religion. First, his status as a minister weighs in favor of more protection of the church defendants under the First Amendment. Remember that the church defendants have absolute say in who will be its ministers. The Archdiocese might very well assert that it has a heightened interest in opposing same-sex marriage amongst those who fulfill ministerial roles. Either the Court would have to accept that proposition as true (thus intensifying the intrusion in regulating how the opposition is conveyed to the Church’s ministers) or the parties would have to engage in intrusive discovery on the sincerity of that belief. Indeed, even if the proposition would be accepted as true, the Church itself would have a litigation interest in proving to the jury why there is a heightened interest in opposing same-sex marriage amongst its ministers. That would put the Church in a position of having to affirmatively introduce evidence of its religious justification, so the litigation’s intrusion would not be just a matter of responding to the plaintiff’s discovery requests. The Church might even wish to offer the views of its congregants on this issue, especially if the plaintiff offered evidence from congregants that they would not be offended by a gay music director.

But the appeals court allowed the disability discrimination claim to proceed:

Here, the Archdiocese offers no religious explanation for the alleged disability discrimination. The Archdiocese justifies the comments as “reflecting the pastor’s subjective views and evaluation of plaintiff’s fitness for his position as a minister. But this is not a religious justification based on any Church doctrine or belief, . . . at least as proffered so far by the defense. So the disability claim does not pose the same dangers to religious entanglement as the sexual orientation and marital-status claims. Nothing in discovery should impose on religious doctrine on this claim. Rather, the inquiry will make secular judgments on the nature and severity of the harassment (and whether it even happened), as well as what, if anything, the Archdiocese did to prevent or correct it. The [First Amendment] does not bar the plaintiff from pursuing the hostile-environment claims based on disability.

What this means for churches

This case is helpful because it provides a broad interpretation of the ministerial exception, extending it not only to discrimination claims by dismissed ministers claiming discrimination based on sexual orientation, but also to “hostile environment” sexual harassment claims, whether or not a minister is dismissed. Demkovich v. St. Andrew the Apostle Parish, 2018 U.S. Dist. LEXIS 168584 (N.D. Ill. 2018).

Legal Developments

Pastor’s Breach of Contract Lawsuit Against Board Members Dismissed by Court

The court concluded that church board members are not personally liable for breach of contract, since “whenever a corporation makes a contract, it is the contract of the legal entity … and not the contract of the individual members.”

Richard R. Hammar, Attorney, CPA

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State: Pennsylvania
Categories: Breach of Contract, Clergy - Discipline and Removal, Officers, Directors, and Trustees

Key point 4-06. Clergy who sign legal documents in their own name with no indication that they are signing in a representative capacity on behalf of their church may be personally liable on the document.

Key point 6-07.02. Church board members may be personally liable for contracts they sign if they do so without authorization, or if they fail to indicate that they are signing as a representative of the church.

Key point 6-08. State and federal laws provide limited immunity to uncompensated officers and directors of churches and other charities. This means that they cannot be personally liable for their ordinary negligence. However, such laws contain some exceptions. For example, officers and directors may be personally liable for their gross negligence or their willful or wanton misconduct.

A federal district court in Pennsylvania dismissed a lawsuit by a pastor against individual members of a board of deacons claiming that his termination constituted a breach of contract.

A church hired a pastor (the "plaintiff") in 2012. The church and plaintiff executed a contract specifying a 20-year term of employment expiring in 2032. The contract stated various terms and conditions governing termination of the pastor's employment, including that either party could terminate the agreement with or without cause but with certain contractual consequences. The contract further provides that "the rights of termination set forth in this contract are in addition to any other rights of termination allowed to either party by law." The plaintiff claimed that termination of his employment as pastor was without cause as defined in the contract, and on this basis sued the church and each member of the board of deacons (the "defendants") for breach of the employment contract in a federal district court. He sought $2.6 million in damages.

The defendants asked the court for a "judgment on the pleadings," meaning that the law was so overwhelmingly in their favor that the court should rule based solely on the pleadings. The court addressed each of the plaintiff's claims in evaluating the defendants' motion.

Deacons' personal liability

The board of deacons were named individually and personally as defendants in the plaintiff's lawsuit. The deacons asked the court to dismiss them from the case on the following grounds: (1) They could not be sued for breach of a contract to which they were not parties; (2) they did not have authority as deacons of the church to hire or fire church employees, and therefore, they could not be held liable for actions for which they had no authority; and (3) as volunteers in a nonprofit organization they were "immune" from liability under state nonprofit corporation law as uncompensated charitable volunteers.

(1) The deacons were not parties to the contract

The court agreed that the existence of a contract between the pastor and the individual deacons was required under Pennsylvania law for the pastor to pursue his breach-of-contract claim against them: It is axiomatic that only a party to a contract can be sued for its breach … . Moreover, as a general matter, when a corporation enters into a contract, the corporation alone is liable … . Whenever a corporation makes a contract, it is the contract of the legal entity—of the artificial being created by the charter—and not the contract of the individual members. Liability of the corporate officer for breach of contract only extends where, as opposed to here, the officer makes the promise in his individual capacity … . Notably, only one of the [deacons] was a signatory to the contract, having signed as stated thereon as Chairman of the Deacon Board. Regardless, the contract itself attached … clearly indicates that it is an agreement between the pastor and church as the contracting parties … . Nowhere in the document does the language reasonably suggest that [individual deacons were] assuming personal liability for the contract.

(2) Board of deacons' lack of authority to hire and fire employees

The individual deacons argued that they did not have authority as deacons to hire or fire church employees, and therefore cannot be held liable for actions for which they had no authority. They also claimed that under the church bylaws, the church, by a two-thirds vote of the congregation, could remove a pastor from his tenure.

The plaintiff insisted that the bylaws make the board of deacons responsible for providing input regarding church administrative matters.

The court concluded that both parties argue these matters for naught. These arguments do not have any relevance to the individual defendants' liability for breach of contract. That the contract, charter and bylaws spell out the structure of the church and certain procedures to be followed regarding termination of the pastor does not establish any liability of the individual defendants for breach of the contract between the pastor and the church.

(3) Charitable immunity for nonprofit volunteers

The individual deacons argued that even if they could be sued for the pastor's termination, they are immune from liability under the state nonprofit corporation statute, which provides:

(a) General rule. Except as provided otherwise in this section, no person who serves without compensation, other than reimbursement for actual expenses, as an officer, director or trustee of any nonprofit organization under section 501(c)(3) of the Internal Revenue Code … shall be liable for any civil damages as a result of any acts or omissions relating solely to the performance of his duties as an officer, director or trustee, unless the conduct of the person falls substantially below the standards generally practiced and accepted in like circumstances by similar persons performing the same or similar duties, and unless it is shown that the person did an act or omitted doing of an act which the person was under a recognized duty to another to do, knowing or having reason to know that the act or omission created a substantial risk of actual harm to the person or property of another. It shall be insufficient to impose liability to establish only that the conduct of the person fell below ordinary standards of care.

The court noted that this provision only applies to liability for "torts" (i.e., personal injuries) and not to breach-of-contract claims like the one presented in this case.

The court's conclusion

The court agreed with the position of the deacons, and dismissed the plaintiff's claims against them.

What this means for churches

This case is relevant to church leaders for these reasons:

Liability for breach of contract. The court concluded that church board members are not personally liable for breach of contract, since "whenever a corporation makes a contract, it is the contract of the legal entity … and not the contract of the individual members. Liability of the corporate officer for breach of contract only extends where, as opposed to here, the officer makes the promise in his individual capacity." Even the fact that the chairman of the deacon board signed the contract did not make him personally liable if the contract "clearly indicates that it is an agreement between the pastor and church as the contracting parties." The court stressed that "nowhere in the document does the language reasonably suggest that [individual deacons were] assuming personal liability for the contract."
Church board members may be personally liable on contracts that they sign in two ways. First, they may be liable on a contract they sign without authority to do so. Second, board members may be personally liable on contracts they are authorized to sign but which they sign in their own name without any reference to the church or to their representational capacity. To prevent this inadvertent assumption of liability, board members who are authorized to sign contracts (as well as any other legal document) should be careful to indicate the church's name on the document and clearly indicate that they are signing in a representative capacity (i.e., agent, director, trustee, or officer).

To summarize, clergy and church board members should refrain from signing contracts unless they are certain that (1) the contract has been properly authorized; (2) they are authorized to sign on behalf of the church; (3) the church is clearly identified in the contract as the party to the agreement; and (4) the minister signs in a "representative capacity" (for example, as "authorized agent" or "president").
Charitable immunity. Most states have enacted laws limiting the liability of officers and directors of nonprofit corporations. In many states, these "immunity" laws protect church volunteers. Most of these laws only immunize uncompensated directors and officers (or volunteers) from legal liability for their ordinary negligence committed within the scope of their duties. These statutes generally provide no protection for "willful and wanton" conduct or "gross negligence."

Many courts have agreed with this court, and have limited state charitable immunity laws to personal injuries, and not breach-of-contract claims. Lee v. Sixth Mount Zion Church, 2016 WL 2344529 (W.D. Pa. 2016).

Legal Developments

Court Willing to Resolve Pastor’s Lawsuit Against Church for Compensation Dispute

Court ruled that it was not barred by the “ministerial exception” and “ecclesiastical abstention doctrine” from resolving a claim by a pastor that his church had failed to pay him the salary and benefits to which they had contractually agreed.

Richard R. Hammar, Attorney, CPA

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State: North Carolina
Categories: Clergy - Discipline and Removal, Compensation and Benefits

Key point 2-04.2. Some courts are willing to resolve disputes over the termination of clergy if they can do so without any inquiry into religious doctrine.

A North Carolina court ruled that it was not barred by the "ministerial exception" and "ecclesiastical abstention doctrine" from resolving a claim by a pastor that his church had failed to pay him the salary and benefits to which they had contractually agreed.

A pastor (the "plaintiff") was employed by a church in 1975 on a part-time basis. He also worked for a secular employer. In order to be eligible for retirement at his secular employer, the plaintiff was required to continue working until 2013. However, in 2001, the plaintiff resigned his secular job and entered into a contract with the church titled "Agreement of Full Time Pastorship." This contract consisted of several provisions, including the following:

The Pastor shall serve the church for an indefinite period since there is no scriptural support of tenure.

If the Pastor should become disabled to carry on his work, he shall be paid his full salary until the disability insurance begins to be paid (which is provided by the church) and relieves the church of its responsibility to Pastor.

Whereas, at any time the church shall become dissatisfied with the services of Pastor and ask for his resignation, the congregation at that time shall take a vote and be governed by the majority of voting members eligible (members in good standing with church). At that time the church shall pay the Pastor the total package in advance or his services shall continue until such time the church shall meet this requirement.

The plaintiff claimed that he was guaranteed under the contract "salary continuation upon his disability" and "salary, housing, utilities, social security, and medical insurance through 2013" in consideration of resigning from his secular job and losing his retirement and other benefits to which he would have been entitled had he continued his employment.

After 10 years of serving as head pastor of the church, the plaintiff contracted kidney disease, was hospitalized, and underwent surgery. As a result, he was no longer able to serve as the pastor of the church. In addition, because the long-term disability insurance policy mentioned in the employment agreement lapsed prior to the plaintiff's disability, he was without any disability coverage. The plaintiff claimed that the church ceased all payment of his salary and benefits.

The plaintiff sued the church and its board of deacons (the "church defendants") in 2013. The church defendants filed a motion asking the court to dismiss the case on the ground that it lacked jurisdiction to resolve an internal church dispute. The trial court agreed with the defendants and dismissed the case. The plaintiff appealed.

The at-will employment doctrine

On appeal, the church defendants argued that, in the absence of an employment contract providing for a specified term of employment, the plaintiff was an "at will employee" and could not sue for breach of contract.

The state wage and hour law

The court agreed that employees hired for indefinite periods are deemed to be "at will employees" whose employment can be terminated by the employee or employer at any time, with or without cause. But it noted that the at-will employment doctrine "does not preclude an at-will employee from suing for breach of contract with respect to benefits or compensation to which the parties contractually agreed." Because the plaintiff "is not challenging the basis for his dismissal, but only seeks to recover money and benefits owed under the employment contract he alleges he entered into with defendants, the at-will doctrine is inapplicable."

The plaintiff also alleged a claim under the state Wage and Hour Act, which provides: "Every employer shall pay every employee all wages and tips accruing to the employee on the regular payday. Pay periods may be daily, weekly, bi-weekly, semi-monthly, or monthly." Further, "any employer who violates the Act … shall be liable to the employee … in the amount of their unpaid compensation."

The court noted that the plaintiff's allegations that the contractually promised "salary" constituted wages as defined in the Wage and Hour Act, along with his allegation that the church defendants wrongfully failed to pay that salary, "sufficiently alleged a claim under the North Carolina Wage and Hour Act." The court noted that "once the employee has earned the wages and benefits under [the Act] the employer may not rescind them."

The ministerial exception doctrine

The defendants' main argument in support of their motion to dismiss the plaintiff's lawsuit was that the civil courts are barred by the "ministerial exception" and "ecclesiastical abstention" doctrine from resolving internal church disputes. The court noted that the defendants, in citing the ministerial exception and ecclesiastical abstention doctrine, "address almost exclusively the doctrine's applicability to wrongful discharge claims." However, the court noted, the plaintiff's lawsuit was not challenging the termination of his employment, but "the non-payment of contractually agreed upon compensation and benefits." Therefore, the court concluded, neither doctrine applied to the plaintiff's claims.

In affirmatively recognizing the ministerial exception, a unanimous United States Supreme Court observed in a 2012 case:

[The courts] have uniformly recognized the existence of a "ministerial exception," grounded in the First Amendment, that precludes application of [employment discrimination] legislation to claims concerning the employment relationship between a religious institution and its ministers … . By imposing an unwanted minister, the state infringes the Free Exercise Clause, which protects a religious group's right to shape its own faith and mission through its appointments. According the state the power to determine which individuals will minister to the faithful also violates the Establishment Clause, which prohibits government involvement in such ecclesiastical decisions. Hosanna-Tabor Evangelical Lutheran Church & School v. E.E.O.C., 132 S.Ct. 694 (2012).

At the conclusion of the Hosanna-Tabor ruling, the Supreme Court limited its holding to the narrow circumstance of "employment discrimination suits brought on behalf of a minister, challenging her church's decision to fire her" and specifically "expressed no view on whether the exception bars … actions by employees alleging breach of contract."

Contractual transactions, and the resulting obligations, are assumed voluntarily. Underneath everything, churches are organizations. And, like any other organization, a church is always free to burden its activities voluntarily through contracts, and such contracts are fully enforceable in civil court. Surely, a church can contract with its own pastors just as it can with outside parties. Enforcement of a promise, willingly made and supported by consideration, in no way constitutes a state-imposed limit upon a church's free exercise rights.The church defendants vigorously argued that "it is the decision of a church to hire or fire its pastor that is protected from judicial scrutiny" by the ministerial exception. But the court retorted that "defendants cite no authority and provide no argument why the ministerial exception, as articulated in Hosanna-Tabor, should apply to claims based on nonpayment of compensation and benefits." The court quoted with approval from a 2014 ruling by the Kentucky Supreme Court:

We are not presented with a situation where the government is inappropriately meddling in the selection of who will minister to the congregation. Limits on a religious institution's ability to choose—or the criteria for choosing—who will minister to its faithful are not being foisted on the religious institution … . This is a situation in which a religious institution has voluntarily circumscribed its own conduct, arguably in the form of a contractual agreement, and now that agreement, if found to exist, may be enforced according to its own terms. That cannot breach church autonomy. Arguably, instead, this exemplifies religious autonomy because religious institutions are free to set forth policies that align with their respective mission. Kirby v. Lexington Theological Seminary, 426 S.W.3d 597 (Ky. 2014).

Accordingly, "because plaintiff's complaint does not challenge the church's decision to terminate his employment, but instead seeks to enforce a contractual obligation regarding his compensation and benefits, we hold that the ministerial exception does not apply and is not a basis for dismissal of plaintiff's claims."

The ecclesiastical abstention doctrine

The "ecclesiastical abstention doctrine," which has been recognized by state and federal courts, "is a jurisdictional bar to courts adjudicating ecclesiastical matters of a church." The courts "have no jurisdiction over and no concern with purely ecclesiastical questions and controversies." The Supreme Court "has interpreted [the First Amendment's prohibition of any establishment of religion] to mean that the civil courts cannot decide disputes involving religious organizations where the religious organizations would be deprived of interpreting and determining their own laws and doctrine."

However, the court again noted that "while the courts can under no circumstance referee ecclesiastical disputes," they "do have jurisdiction, as to civil, contract and property rights which are involved in, or arise from, a church controversy." It continued:

The question of liability for the salary of a minister or pastor is governed by the principles which prevail in the law of contracts, and it is generally held that a valid contract for the payment of such a salary will be enforced … . However, the controversy must be resolved pursuant to neutral principles of law … .

Defendants seem to argue, without citing any pertinent authority, that the First Amendment of the United States Constitution immunizes, without exception, a religious institution from liability arising out of a contract between the religious institution and its ministerial employees. This unsupported assertion cannot be reconciled with [prior cases] … . A holding that a religious body must be held free from any responsibility for wholly predictable and foreseeable injurious consequences of personnel decisions, although such decisions incorporate no theological or dogmatic tenets, would go beyond First Amendment protection and cloak such bodies with an exclusive immunity greater than that required for the preservation of the principles constitutionally safeguarded … .

Although defendants cite numerous decisions holding that civil courts cannot interject themselves into ecclesiastical disputes, they again focus their argument on the bar against courts determining the propriety of a church's decision to dismiss a plaintiff from his position as pastor—an issue not present in this case … .

Accordingly, because a court can decide plaintiff's contract-based claims applying "neutral principles of law," without entangling the court in an ecclesiastical dispute or interpretation, we hold that the ecclesiastical abstention doctrine does not require dismissal of plaintiff's complaint. We, therefore, hold plaintiff has sufficiently stated claims for relief and, therefore, reverse the trial court's order dismissing plaintiff's complaint.

What this means for churches

The court concluded that while the ministerial exception bars discrimination claims by current or dismissed ministers, it does not bar breach-of-contract claims that can be resolved without recourse to church doctrine. While some other courts have disagreed with the conclusion, there is sufficient support for it that it is imperative for church leaders to obtain legal review of employment agreements and handbooks and other contractual documents to ensure that they will not give rise to breach-of-contract claims that the civil courts may be able to adjudicate. Through careful drafting, this risk can be significantly reduced, if not eliminated. Bigelow v. Baptist Church, 786 S.E.2d 358 (N.C. App. 2016).

Legal Developments

‘Ministerial Exception’ Prevents Court from Resolving Dismissed Minister’s Wrongful Termination Lawsuit

The court concluded if the application of the ministerial exception is obvious from the face of a civil lawsuit, then a pre-discovery motion to dismiss is appropriate.

Richard R. Hammar, Attorney, CPA

Bio

State: Maryland
Categories: Clergy - Discipline and Removal

Key point 2-04.1. Most courts have concluded that they are barred by the First Amendment guarantees of religious freedom and nonestablishment of religion from resolving challenges by dismissed clergy to the legal validity of their dismissals.

A Maryland court ruled that it was barred by the "ministerial exception" from resolving a wrongful termination lawsuit that a dismissed minister filed against his former church.

A pastor (the "plaintiff") was hired as pastor of a Methodist church in 2009. His pastoral position was subject to a yearly employment contract, which was renewed in 2010, 2011, and 2012. At the end of 2012, the plaintiff's employment was terminated by the regional conference of the Methodist Church because it had "lost faith" in his spiritual leadership.

The plaintiff thereafter sued his church and Conference alleging wrongful termination based on his refusal to commit certain unlawful acts in connection with the administration of funds from a trust of which the church was a beneficiary. A year and a half before the plaintiff's termination, the church was informed that it was going to receive a bequest from a trust in the amount of $1,225,000. The trust provided that one half of the bequest was to be used for the general operation and maintenance of the church, while the other half was to be used for the upkeep of the church's cemetery.

The plaintiff, who before becoming pastor had worked as a financial manager at IBM for nearly 25 years and as the treasurer and chief financial officer of another Methodist Conference, was chosen by the church to administer the bequest. According to his lawsuit, the plaintiff quickly discovered that the church sold its cemetery in 2009 and no longer maintained a cemetery fund. He "determined that it would be a breach of trust—as well as fraud and tax evasion—for the church to accept the portion of the bequest relating to the upkeep of the cemetery." As a result, he advised the church's board of trustees to notify the bank that was serving as trustee that it no longer owned the cemetery and to ask the bank for guidance. But despite this advice, the vice chairman of the board of trustees instructed the plaintiff to request the full amount of the bequest from the bank and to deposit it into the church's general operating account. The plaintiff refused to follow these instructions and, in August of 2012, took his concerns about accepting the portion of the bequest that was meant for the cemetery fund to a Conference officer who informed him that his pastoral employment at the church was being terminated.

The trial judge dismissed the lawsuit on the ground that the plaintiff's claims "are fundamentally connected to issues of church doctrine and governance and would require court review of the church's motives for the discharge which is precluded by the ministerial exception." The plaintiff appealed. While he conceded that the ministerial exception bars secular courts from hearing disputes over church doctrine, he insisted that courts are not precluded from resolving employment disputes and contract claims like his that are purely secular and not rooted in religious beliefs. "The circuit court erred," he claimed, "because it opined that the immunity provided by the ministerial exception is absolute."

The plaintiff also noted that the trial judge had dismissed the case without allowing any "discovery" (interrogatories, depositions, and so on), and he asserted that claims like his should not be dismissed unless the court first permits a factual record to be developed through discovery and then determines, based on that record, that the claims would substantially entangle the courts in religious doctrine.

The church and Conference (the "church defendants") argued that the trial judge correctly applied the ministerial exception and thus did not err in dismissing the case. Quoting the United States Supreme Court's decision in Hosanna-Tabor Evangelical Lutheran Church and School v. E.E.O.C., 132 S.Ct. 694 (2012), the church defendants asserted that the First Amendment's guarantee of religious freedom "prevents the government from interfering with the freedom of religious groups to select their own ministers." This principle is known as the "ministerial exception." The church defendants acknowledged that the Supreme Court's holding in Hosanna-Tabor was limited to precluding ministers from bringing claims of employment discrimination against their religious employers. However, they pointed out that other courts have extended the application of the ministerial exception to also preclude claims of wrongful discharge like the plaintiff's. The church defendants cited cases from numerous other jurisdictions, both state and federal, that have applied the ministerial exception to wrongful discharge claims. In sum, the church defendants argued that the plaintiff's claims would have required the court to engage in an impermissible inquiry into the church's doctrine and self-governance by in effect deciding whether or not the plaintiff was actually terminated for the stated reason that the church had "lost faith" in his spiritual leadership.

The church defendants further claimed that the trial judge had been correct in not permitting "pre-dismissal discovery." They contended that the lawsuit was sufficient on its face to demonstrate that the claims were precluded by the ministerial exception.

Application of the ministerial exception

The appeals court began its opinion by noting:

Two elements must be present for the ministerial exception to preclude a secular court from obtaining subject matter jurisdiction over a claim brought by an employee against his religious institution employer: First, the employee making the claim must qualify as a "minister"; and second, the claim must be the type of claim which would substantially entangle the court in the church's doctrinal decision-making and internal self-governance.

The court concluded that the plaintiff met the first element, and, with regard to the second element, "it is also clear that … wrongful discharge claims like the plaintiff's are precluded by the ministerial exception. Therefore, we shall hold that the circuit court did not err in granting the church defendants' motion to dismiss."

The court conceded that the Supreme Court has not addressed whether the ministerial exception applies to wrongful discharge claims as well as employment discrimination claims, but it noted that many other state and federal courts have said that it does and the court chose to follow those decisions.

The court concluded:

The [trial] court could not have heard the plaintiff's wrongful discharge claim without having to make a determination as to whether he was terminated in retaliation for refusing to obey the vice chairman's instruction regarding the portion of the bequest that was meant for the cemetery fund, or because the church had "lost faith" in his spiritual leadership. Such a determination is of the precise type that the ministerial exception precludes secular courts from making.

The court also rejected the plaintiff's argument that the trial court's "pre-discovery" dismissal of his claims was improper. It noted that other courts had affirmed pre-discovery dismissals of claims barred by the ministerial exception in cases where it was clear based on the face of the complaint that an inquiry into religious matters would have been necessary. It concluded that

we are currently presented with such a case, one in which the church has said all along that its decision to terminate the plaintiff's employment was motivated entirely by reasons of faith. Therefore, discovery was not necessary for the trial court to properly determine that the plaintiff's claim was barred by the ministerial exception, and, as such, we hold that the court did not err in granting the [church defendants'] motion to dismiss.

What this means for churches

This case is important for two reasons.

First, it illustrates the view of most courts that the ministerial exception bars the civil courts not only from resolving employment discrimination claims involving clergy and religious employers, but also wrongful termination claims not involving allegations of discrimination.

Second, the court rejected the plaintiff's argument that "pre-discovery" motions to dismiss are improper and that the courts always should allow clergy to pursue evidence by means of depositions, interrogatories, and other discovery techniques before ruling on a motion to dismiss. The court concluded if the application of the ministerial exception is obvious from the face of a civil lawsuit, then a pre-discovery motion to dismiss is appropriate. This is an important point, since it means that employment disputes between churches and clergy may be dismissed soon after a lawsuit is filed without the necessity of pursuing expensive and time-consuming discovery. 2016 WL 1065884 (Md. App. 2016).

Legal Developments

In Pastor and Deacons Conflict, Court Says Intervention Barred by First Amendment

Church Law and Tax Report In Pastor and Deacons Conflict, Court Says Intervention Barred by

State: Ohio
Categories: Clergy - Discipline and Removal

Church Law and Tax Report

In Pastor and Deacons Conflict, Court Says Intervention Barred by First Amendment

Key point 2-04.1. Most courts have concluded that they are barred by the First Amendment guarantees of religious freedom and nonestablishment of religion from resolving challenges by dismissed clergy to the legal validity of their dismissals.

An Ohio court ruled that it was barred by the First Amendment guaranty of religious freedom from resolving an internal church dispute involving the validity of a pastor’s removal by the church’s board of deacons. For many years, a church was governed by its articles of incorporation and a document titled “Preamble,” which apparently served as a set of bylaws. Notably, the Preamble states that the government of the church “is vested in the body of believers who compose it. It is subject to the control of no other ecclesiastical body.” Further, the Preamble establishes several offices within the church, including, among others, a pastor, deacons, and trustees. Under the Preamble, the deacons are the “helpers, counselors and assistants to the pastor.” Likewise, the trustees are charged with carrying out the “directions of the pastor and the church that have been voted and adopted by the majority membership.” Amendments to the Preamble were provided for within the document, which permitted amendments, additions, or repeal of the Preamble by a vote of “at least two-thirds of the members present at the annual business meeting.”

The church hired a pastor in 1990, at which time the church’s business and financial affairs were managed by the trustees. According to the Preamble, the trustees were responsible for holding title to the church’s property in trust. In addition, the Preamble states that the function of the trustees was to “affix their signatures to legal documents involving the sale, mortgage, purchase, or rental of property, or other legal documents where the signature of trustees is required.” However, the Preamble is careful to note that the trustees “have no power to buy, sell, mortgage, lease or transfer any property without a specific vote of the Church authorizing each action.”

Over time, the trustees stopped meeting, eventually disbanding in 1998. Thereafter, the deacons began managing the business and financial affairs of the church under the pastor’s supervision.

In 2000, the Board of Deacons approved the purchase of a Volvo for the pastor’s personal use. Three years later, the pastor, acting on behalf of the church, purchased a $58,000 Mercedes-Benz E Class for his personal use. He did not inform the Board of Deacons of his intent to purchase the Mercedes-Benz, nor did he obtain the Board’s consent prior to completing the purchase. Likewise, in 2005, he obligated the church to pay for a $48,000 Lexus GS 300 that he purchased without the knowledge and consent of the Board of Deacons.

Meanwhile, in 2004, the church obtained a credit card for the pastor and certain members of the Board of Deacons to use for church business. The use of the church credit card appears to have continued without incident for many years. However, in 2009, the Board of Deacons was notified that the pastor used the church’s credit card to purchase $4,000 in furniture for his son. Although he asserted that his use of the credit card was justified, he eventually reimbursed the church for the cost of the furniture out of his own funds.

In addition to his alleged misuse of the church’s credit card, the pastor also transferred the title to the 2000 Volvo and 2003 Mercedes-Benz to himself. He allegedly failed to seek the Board of Deacons’ permission to transfer the vehicles.

In June 2010, the Board of Deacons formed a task force charged with developing an employee handbook and other governance documents. Additionally, the Board began working toward the adoption of a code of regulations to govern the church. Six months later, the Board approved a code of regulations and submitted it to the task force. At its annual congregational meeting, the congregation conditionally adopted the code of regulations and the employee handbook with the stipulation that the congregation would be permitted to review the documents and raise any concerns or questions at the next annual meeting.

Under the code of regulations, the Board of Deacons was granted broad powers over the administration of the church. Specifically, the board was empowered to “direct all Church business and affairs and control its property.” Concerning the oversight of the pastor, the code of regulations provides:

The Deacons, acting as a Board shall have powers:

(a) To fix, define and limit the powers and duties of all officers, and to fix the salaries of all officers and employees;

(b) To appoint, remove or suspend, with or without cause, any officer, agent or employee of the Church as they deem advisable, and to determine their duties and fix their compensation.

The code of regulations describes the role, responsibilities, and authority of the pastor of the church as follows:

1. Pastor. The Board of Deacons, acting for the Church, shall employ a pastor to direct and be responsible for the spiritual affairs of the Church, in accordance with the terms and conditions of employment set forth in the Employee Policy Manual.

2. Authority of Pastor. The pastor shall have the authority to handle his immediate staff within the budget approved by the Finance Committee. The pastor shall have no authority or responsibility over any other program operated under aegis of the Church or in conjunction with the Church.

Following the provisional adoption of the code of regulations, and in light of the pastor’s noncompliance with the Board of Deacons’ requests for information, the Board decided to terminate his employment. Thereafter, the Board drafted a letter of termination, which was hand-delivered to the pastor at his personal residence.

Two days after receiving the letter of termination, the pastor sent a response letter to the Board of Deacons, refusing to acknowledge the Board’s authority to terminate his employment in light of his understanding that the congregation had appointed him as the “leader of the Church in all areas.” On the following Sunday, the pastor appeared before the church and proceeded to the pulpit, where he called for a meeting of church members to discuss his termination. At that meeting, the pastor asked to be declared the leader of the church by its members and to have the code of regulations promulgated by the Board of Deacons dissolved. Having apparently received the consent of the members present at the meeting, the pastor proceeded to exercise his authority as leader of the church by dismissing the members of the Board of Deacons from their positions.

The ousted Board filed a lawsuit seeking the following relief: (1) a judgment declaring that the code of regulations was validly enacted and that the Board of Deacons established thereunder had the authority to manage the church and its finances; (2) a judgment declaring that the pastor’s employment was properly terminated by the Board of Deacons; (3) a finding that the pastor was liable for trespassing as a result of his continued performance of church duties without the consent of the Board following the termination of his employment; (4) a determination that the pastor was liable for conversion for refusing to return the church’s automobiles, namely the 2000 Volvo, 2003 Mercedes-Benz, and 2006 Lexus; (5) a judgment that the pastor misappropriated church funds by, among other things, using the church credit card for personal use, transferring ownership of the automobiles, and using church funds to pay off the outstanding loans on the vehicles; and (6) an accounting of all transactions made by the pastor using church monies.

The pastor asked the court to dismiss the lawsuit on the ground that the issues regarding “the authority of a Deacon Board to terminate a Pastor” were ecclesiastical issues barred by the First Amendment to the United States Constitution under the ecclesiastical abstention doctrine. The trial court granted the pastor’s request to dismiss the case, and the Board members appealed.

An appeals court noted that “generally, the question of who will preach from the pulpit of a church is an ecclesiastical question” that cannot be resolved by the civil courts. The Board members conceded that a determination of who should speak from the pulpit was ecclesiastical in nature, but they insisted that they were merely asking the court to enforce their decision to terminate the pastor’s employment pursuant to the code of regulations. In other words, they were merely requesting the court’s involvement to enforce church action that had already occurred, not to direct the church’s actions going forward.

The court disagreed with the Board members’ characterization of the dispute as purely secular:

[The Board members] characterize this case as one involving only the secular determination of the validity of certain actions previously taken concerning the removal of the pastor. We disagree. Although seemingly secular, we find that the issues in this case concerning the adoption of internal governance documents, the resolution of conflicts in competing governance documents, and the enforcement of action taken to remove a pastor, fall within the ambit of the ecclesiastical abstention doctrine as they essentially relate to who should preach from the pulpit. We conclude that the trial court properly refrained from deciding which governance documents should control the church and whether the pastor was properly terminated. To hold otherwise would lead to trial courts impermissibly interfering with a congregation’s autonomy by instructing the church on matters of internal governance. Put simply, the issues present in this case must be resolved by the church, through its congregation.

What This Means For Churches:

Two aspects to this case are noteworthy.

First, the case illustrates the application of the ecclesiastical abstention doctrine to internal church disputes. The court rebuffed the Board members’ attempt to characterize this dispute as secular rather than ecclesiastical in nature, since the core issue was “who would preach from the pulpit.”

Second, an issue that the court did not address are the tax consequences of the pastor’s use of church funds for personal benefit. Section 4948 of the tax code gives the Internal Revenue Service authority to impose an excise tax against a “disqualified person,” and in some cases against church board members individually, if excessive compensation is paid to the disqualified person. Most senior pastors will meet the definition of a disqualified person. These taxes are substantial: up to 225 percent of the amount of compensation the IRS determines to be in excess of reasonable compensation.

Further, the IRS deems any taxable fringe benefit provided to an officer or director of a tax-exempt charity (including a church), or a relative of such a person, to be an automatic excess benefit that may trigger intermediate sanctions, regardless of the amount of the benefit, unless the benefit was timely reported as taxable income by either the recipient or the employer.

As a result, governing boards or other bodies that determine clergy compensation should be prepared to document any amount that may be viewed by the IRS as excessive. This includes salary, fringe benefits, and special-occasion gifts. If in doubt, the opinion of a tax attorney should be obtained. And taxable fringe benefits, such as personal use of a church vehicle or church credit card, will constitute “automatic excess benefits” regardless of amount, if not reported as taxable income. Again, the penalty can be severe, and implicates the board members who authorized the excess benefit as well as the recipient. 56 N.E.3d 245 (Ohio App. 2015).

Key point 9-07. The First Amendment allows civil courts to resolve internal church disputes so long as they can do so without interpreting doctrine or polity.

A Michigan court ruled that the "ecclesiastical abstention doctrine" prevented it from resolving claims arising from a pastor's embezzlement of a large sum of church funds that would involve inquiries into church doctrine or polity.

A church's board of deacons became aware that the pastor of their church had engaged in numerous financial irregularities. When confronted, the pastor admitted that on numerous occasions he gave himself raises, used church credit cards for nonchurch purposes, and paid himself monetary honorariums, all without the board's approval or authorization.

The board hired a CPA firm to examine the church finances. During a Sunday morning worship service, the board informed the congregation of the status of the investigation of both the pastor and the church finances. Following this disclosure, the congregation began to split into factions that either supported or opposed the pastor's continuing employment.

The CPA firm eventually released a preliminary report demonstrating that between 2008 and 2010, more than $237,000 had been removed from the church's bank accounts through questionable transactions. The majority of these transactions were for the benefit of the pastor, his wife, and a former church secretary. Shortly after the release of the report, the board of deacons voted to suspend the pastor with pay. A month later, the local prosecutor's office authorized an arrest warrant for the pastor on one count of embezzlement. The pastor later pleaded nolo contendere (or "no contest") to a charge of embezzling more than $50,000 but less than $100,000 and was ordered to pay restitution.

Some church members continued to support the pastor, and did not believe terminating his services was an appropriate response. This faction elected a new board of deacons, although the existing board continued to function, with each board asserting that the other was invalid.

The church filed a lawsuit in civil court against the pastor and his supporters, seeking monetary damages for the pastor's misappropriation of church funds. The pastor and his supporters filed a counterclaim asserting breach of contract and interference with his employment contract. Alternatively, they insisted that the "ecclesiastical abstention doctrine" deprived the court of the authority to resolve the dispute. This doctrine, which is rooted in the First Amendment guaranty of religious freedom, generally bars the civil courts from resolving internal church disputes over doctrinal or governance issues. The trial court agreed with the pastor and his supporters, and dismissed the lawsuit. The church appealed. A state appeals court began its opinion by noting:

It is well settled that courts, both federal and state, are severely circumscribed by the First and Fourteenth Amendments to the United States Constitution … in the resolution of disputes between a church and its members … . Such jurisdiction is limited to property rights which can be resolved by application of civil law. Whenever the court must stray into questions of religious doctrine or ecclesiastical polity the court loses jurisdiction. Religious doctrine refers to ritual, liturgy of worship and tenets of the faith. Polity refers to organization and form of government of the church. Under the ecclesiastical abstention doctrine … civil courts may not redetermine the correctness of an interpretation of canonical text or some decision relating to government of the religious polity.

The court concluded: "Because determining whether the board of trustees had the authority to suspend and eventually terminate the pastor would require determinations of religious polity, the civil courts do not have jurisdiction. Additionally, the counterclaims brought by the pastor involve the provision of his services as pastor to the church, which is the essence of the church's constitutionally protected function, and any claimed contract for such services likely involves its ecclesiastical policies, outside the purview of civil law."

But the court concluded that the church's demand for monetary damages based on the pastor's misappropriation of church funds could be resolved by the civil courts:

The pleadings for money damages seem to imply conversion as the underlying tort by which the church requests money damages. A claim of conversion against an individual facially does not cause the court to stray into questions of religious doctrine or ecclesiastical polity, which is where the court would lose jurisdiction. Because the claim likely does not require the trial court to determine the issue on the basis of religious doctrine or ecclesiastical polity, the claim is likely not barred by the ecclesiastical abstention doctrine.

What this means for churches

This case is instructive for the following reasons. First, it demonstrates the polarizing effect of criminal activity by church leaders. The fact that the pastor stole a large amount of money from the church, and was criminally charged with one count of embezzlement, did not deter a sizable faction from opposing his ouster.

Second, the pastor's misappropriation of church assets was facilitated by the church's weak internal controls. Internal controls are procedures that are designed to minimize the risk of wrongful use of an organization's assets and funds. Basic internal controls would have prevented the pastor from giving himself unauthorized salary increases and using church credit cards for personal expenses.

Third, it is noteworthy that the church employed a CPA firm to review its finances when it became obvious that irregularities existed. This often is an excellent idea. It is important to have a good idea of how much a church employee embezzled before deciding what to do about it. Typically, embezzlers admit to only a small fraction of what they actually took. See the sidebar, beginning on page 22, that addresses 10 items to consider when confronted with a case of embezzlement. Baptist Church v. Pearson, 872 N.W.2d 16 (Mich. App, 2015).

Ten Steps to Consider When Embezzlement Is Suspected

Many churches have experienced one or more incidents of embezzlement. In some cases, the amounts are substantial. Church leaders often do not know how to respond to such incidents. Here are ten steps that can help.

1. Embezzled funds constitute taxable income to the embezzler. The embezzler has a legal duty to report the full amount of the embezzled funds as taxable income on his or tax return, whether or not the employer reports the embezzled funds as taxable income on the employee's W-2 or 1099. If funds were embezzled in prior years, then the employee will need to file amended tax returns for each of those years to report the illegal income since embezzlement occurs in the year the funds are misappropriated.

IRS Publication 525 states: "Illegal income, such as stolen or embezzled funds, must be included in your income on line 21 of Form 1040, or on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) if from your self-employment activity."

2. Federal law does not require employers to report embezzled funds on an employee's W-2, or on a Form 1099. This makes sense, since in most cases an employer will not know how much was stolen. How can an employer report an amount that is undetermined? Embezzlers are not of much help, since even when they confess to their acts they typically admit to stealing far less than they actually took. This means that any attempt by an employer to report embezzled funds on an employee's W-2 or 1099 will almost always represent an understatement of what was taken.

3. In rare cases, an employer may be able to determine the actual amount of embezzled funds as well as the perpetrator's identity. In such a case, the full amount may be added to the employee's W-2, or it can be reported on a Form 1099 as miscellaneous income. But remember, do not use this option unless you are certain that you know the amount that was stolen as well as the thief's identity.

4. In most cases, employers do not know the actual amount of embezzled funds. The embezzler's "confession" is unreliable, if not worthless. Reporting inaccurate estimates on a W-2 or 1099 will be misleading. Also, if you report allegedly embezzled funds on an employee's W-2 or 1099 without proof of guilt, this may expose the church to liability on the basis of several grounds. One of these is section 7434 of the tax code, which imposes a penalty of the greater of $5,000 or actual damages plus attorney's fees on employers that willfully file a fraudulent Form 1099.

5. Employers that cannot determine the actual amount of funds that an employee embezzled, or the employee's identity, will not be penalized by the IRS for failing to file a W-2 or 1099 that reports an estimate of the amount stolen.

Employers that are certain of the identity of the embezzler, and the amount stolen, may be subject to a penalty under section 6721 of the tax code for failure to report the amount on the employee's W-2 or 1099. This penalty is $50, or up to the greater of $100 or 10 percent of the unreported amount in the case of an intentional disregard of the filing requirement. For employers that are certain how much was stolen, and who intentionally fail to report it, this penalty can be substantial. To illustrate, let's say that church leaders know, with certainty, that a particular employee embezzled $100,000, but they choose to forgive the person and not report the stolen funds as taxable income. Since this represents an intentional disregard of the filing requirement, the church is subject to a penalty of up to 10 percent of the unreported amount, or $10,000. But note that there is no penalty if the failure to report is due to reasonable cause, such as uncertainty as to how much was embezzled, or the identity of the embezzler.

6. If the full amount of the embezzlement is not known with certainty, then church leaders have the option of filing a Form 3949-A ("Information Referral") with the IRS. Form 3949-A is a form that allows employers to report suspected illegal activity, including embezzlement, to the IRS. The IRS will launch an investigation based on the information provided on the Form 3949-A. If the employee in fact has embezzled funds and not reported them as taxable income, the IRS may assess criminal sanctions for failure to report taxable income.

In many cases, filing Form 3949-A with the IRS is a church's best option when embezzlement is suspected.

7. In some cases, employees who embezzle funds will agree to pay them back, when confronted, if the church agrees not to report the embezzlement to the police or the IRS. Does this convert the embezzled funds into a loan, thereby relieving the employee and the church of any obligation to report the funds as taxable income in the year the embezzlement occurred? The answer is no.

Most people who embezzle funds insist that they intended to pay the money back and were simply "borrowing" the funds temporarily. An intent to pay back embezzled funds is not a defense to the crime of embezzlement. Most church employees who embezzle funds plan on repaying the church fully before anyone suspects what has happened. One can only imagine how many such schemes actually work without anyone knowing about it. The courts are not persuaded by the claims of embezzlers that they intended to fully pay back the funds they misappropriated. The crime is complete when the embezzler misappropriates the church's funds to his or her own personal use. As one court has noted:

The act of embezzlement is complete the moment the official converts the money to his own use even though he then has the intent to restore it. Few embezzlements are committed except with the full belief upon the part of the guilty person that he can and will restore the property before the day of accounting occurs. There is where the danger lies and the statute prohibiting embezzlement is passed in order to protect the public against such venturesome enterprises by people who have money in their control.

In short, it does not matter that someone intended to pay back embezzled funds. This intent in no way justifies or excuses the crime. The crime is complete when the funds are converted to one's own use—whether or not there was an intent to pay them back.

8. There is yet another problem with attempting to recharacterize embezzled funds as a loan. If the church enters into a loan agreement with the embezzler, this may require congregational approval. Many church bylaws require congregational authorization of any indebtedness, and this would include any attempt to reclassify embezzled funds as a loan. Of course, this would have the collateral consequence of apprising the congregation of what has happened.

9. Embezzlement almost always occurs because of weak internal controls. Internal controls are procedures that reduce the risk of misappropriation in the handling of cash and other assets. One of the big advantages of having a CPA firm audit your church's financial statements and procedures annually is that the CPAs will look for weaknesses in your internal controls, thereby substantially reducing the risk of embezzlement. In short, an audit promotes an environment of accountability in which opportunities for embezzlement (and therefore the risk of embezzlement) are reduced. And, the CPAs who conduct the audit will provide the church leadership with a "management letter" that points out weaknesses and inefficiencies in the church's accounting and financial procedures. This information can be invaluable to church leaders. Yes, the cost of an audit can be substantial, but many consider it a reasonable investment to promote financial integrity. Also note:

Only a certified public accountant (CPA) can "audit" a church's financial statements and records. In most states it is unlawful for anyone other than a licensed CPA to use the term "audit" in examining an entity's financial statements and records and issuing an opinion as to their compliance with generally accepted accounting principles.
In some cases, churches are required to have an audit. Here are three common ways that this occurs: (1) A church's bylaws or other governing document requires an annual audit. (2) Churches that issue securities as part of a fundraising program must have audited financial statements that are included in the "prospectus" or offering circular that is provided to investors and potential investors. (3) In some cases, a bank may require that a church have an audit in order to qualify for a loan.
Churches can control the cost of an audit by obtaining competitive bids. Also, by staying with the same CPA firm, most churches will realize a savings in the second and succeeding years since the CPA will not have to spend time becoming familiar with the church's financial and accounting procedures.

10. Cases of embezzlement raise a number of complex legal and tax issues. Our recommendation is that you retain an attorney to assist you in responding to these issues.

Background

Applying the “rule of deference”

Applying the ministerial exception

What this means for churches

1. Liability for intentional interference

2. Interference requires malicious intent

3. Interference during the preemployment stage

4. The ministerial exception may bar rulings on interference-with-contract claims

5. Seek legal counsel

Background

Pastor: church’s action not protected by the ecclesiastical abstention doctrine

Appeals court: the trial court “was not in error”

What this means for churches

The appeals court’s ruling

What this means for churches

What this means for churches

What this means for churches

What this means for churches

In Pastor and Deacons Conflict, Court Says Intervention Barred by First Amendment

What This Means For Churches:

Lutheran Minister’s Wrongful Termination Suit Dismissed Due to ‘Ministerial Exception’

What This Means For Churches:

What this means for churches

Ten Steps to Consider When Embezzlement Is Suspected

Indiana Court Rules First Amendment Prevents It from Resolving Pastor’s Compensation Lawsuit

What This Means For Churches:

Mississippi Supreme Court Rules First Amendment Bars Resolving Pastor’s Dismissal Suit

What This Means For Churches:

Ministerial Exception Prevents Courts from Making Defamation Charges

Defamation

What This Means For Churches:

Pastor Sues Church for Discrimination and Defamation

Sexual Abuse and Church Responsibility

Risks of Pastoral Counseling Services