Court Affirms Pastor’s Conviction, Sentence for Embezzlement

Pastor wrongfully took more than $100,000 from widow over several years.

Bio

State: North Carolina
Categories: Fiduciary Duty

Key point 4-03. A gift to a church or minister may be challenged on the ground that the recipient unduly influenced the donor into making the gift. There are several factors the courts will consider in deciding whether or not undue influence occurred, including the age and mental health of the donor, and the presence of independent legal advice. Undue influence generally must be proven by “clear and convincing” evidence.

Key point 7-21. Embezzlement refers to the wrongful conversion of funds that are lawfully in one’s possession. Embezzlement is a common occurrence in churches because of weak internal controls.

A North Carolina court ruled that sufficient evidence supported a pastor’s conviction of embezzlement because the evidence showed that he was acting as the victim’s fiduciary when he gained access to her bank accounts and wrongfully converted $123,367 to his personal use.

Widowed victim “turned everything over” to the defendant

A pastor (the “defendant”) first met a woman (“victim 1”) and her husband (“victim 2”) in 1985. They became very close, eventually considering themselves family. Defendant called the victims “Mom” and “Dad,” and the victims referred to the defendant as their “son.”

On March 28, 2015, victim 2, also a pastor, unexpectedly died. The defendant delivered the eulogy at victim 2’s funeral.

Victim 1 struggled to return to her daily life. She testified that her husband’s death “almost took her out,” and she felt like she “couldn’t make it without him.” Her family was concerned about her because she was so “grief-stricken” and “distraught.”

After the funeral, victim 1 visited the defendant and his wife for a week in their home in North Carolina, against her family’s advice. Over the next few months, she periodically stayed with the defendant and his wife.

The defendant told victim 1 that “he was there to help” her.

Victim 1 thought the defendant was “a man of God” who “loved her” and was “going to take care of her.” She had little experience managing the household finances, as that had been her husband’s responsibility throughout their marriage.

Because she trusted the defendant and thought of him as family, victim 1 “just turned everything over” to the defendant after victim 2’s death, including the keys to her home and post office box.

On April 16, 2015, less than a month after her husband’s death, victim 1 added the defendant as joint holder on her credit union savings and money-market accounts.

She also redeemed over $146,000 in savings bonds and deposited that money into the joint money market account.

That same day, she also added the defendant as a joint holder on her bank accounts. In addition, at some point, the defendant linked his personal credit union accounts to victim 1’s accounts, with the effect that any overdrafts on the defendant’s personal account would be paid from the joint accounts funded with victim 1’s money.

On June 12, 2015, the defendant drove victim 1 to an attorney’s office and encouraged her to execute a power of attorney naming him as her attorney-in-fact. She also executed a will, naming the defendant to serve as her executor and leaving the majority of her estate to him.

On Sept. 4, 2015, funds were withdrawn from the joint bank accounts and used to fund two bank accounts at Wells Fargo Bank. Victim 1 and the defendant were named as joint holders of the new Wells Fargo accounts.

Victim 1 later testified that the signatures on the applications for the two Wells Fargo accounts did not look like her handwriting, that she did not give the defendant permission to open the Wells Fargo accounts, and that she “didn’t know what was going on” with the Wells Fargo accounts because the defendant “took over.”

Concerned that the defendant was committing financial crimes against victim 1, her brother contacted the local sheriff’s office, which transferred the case to the state’s bureau of investigation (SBI). On April 22, 2019, a grand jury returned indictments charging the defendant with four counts of exploitation of an older adult and one count of embezzlement of $100,000 or more.

On January 28, 2020, this case was called for trial.

At trial, the SBI agent testified that the defendant obtained $123,367 from the accounts that he held with victim 1.

The agent explained that, because the defendant linked his personal credit union checking account to victim 1’s jointly held accounts, the credit union transferred $21,350 from the joint money market account to the defendant’s personal checking account to cover his overdrafts between August 11, 2015, and May 11, 2016.

He also testified that the defendant used $102,017 of victim 1’s money from the jointly held credit union, Wells Fargo, and bank accounts for his benefit, including:

$15,000 for a down payment on a Ford truck titled to the defendant

$6,000 in contributions to his individual retirement account (IRA)

$4,850 for repairs to his Mercedes

$8,000 in payments on his credit card account

$25,250 in cash withdrawals

The defendant testified that the money in the joint accounts belonged to victim 1, stating, “it was her money—her accounts, her money. I was there to help her. It wasn’t about me.”

He maintained that he had “no idea” that the credit union was transferring money from the accounts that he held with victim 1 to cover overdrafts from his personal checking account, because he had not reviewed the credit union statements and instead “just stuck them in a drawer.”

Victim 1 testified that, although she “just turned everything over” to the defendant after her husband’s death, she never authorized the defendant to link his personal credit union checking account to any joint account to cover his overdrafts, and never gave the defendant permission to withdraw money from the joint accounts for his personal use.

She also stated that she never gave the defendant permission to use her money to purchase a new truck or to fix his Mercedes.

On January 31, 2020, the jury found the defendant guilty of all charges.

The trial court sentenced the defendant to 6 to 17 months in prison for 3 of the 4 counts of exploitation of an older adult and an additional 13 to 25 months for the 4th count, with the sentences to run consecutively.

The court also sentenced the defendant to 73 to 100 months for the embezzlement conviction, to run concurrently with the defendant’s other sentences.

In addition, the court ordered the defendant to pay $123,367 in restitution to victim 1.

The defendant appealed.

Appeals court affirms conviction and sentence

The appeals court affirmed the defendant’s conviction and sentence.

It noted that “to constitute embezzlement, the property in question initially must be acquired lawfully, pursuant to a trust relationship, and then wrongfully converted.” The court noted that a trust relationship indisputably existed between victim 1 and the defendant:

[A] fiduciary relationship may arise under a variety of circumstances; it exists in all cases where there has been a special confidence reposed in one who in equity and good conscience is bound to act in good faith and with due regard to the interests of the one reposing confidence. … Here, [the defendant] concedes that he acted as victim 1’sfiduciary after she executed the power of attorney naming the defendant as her attorney-in-fact.

Nevertheless, the evidence sufficiently established that a fiduciary relationship existed between the defendant and victim 1 prior to that point, when he came into possession of the funds in victim 1’s bank accounts.

The parties’ relationship was certainly one of special confidence and trust.

The defendant argued that he could not be guilty of embezzlement since there was insufficient evidence that he wrongfully converted victim1’s money to his own use.

In support of his position, the defendant noted that, as a joint holder of the accounts, he was a co-owner of the funds and could not be prosecuted for unlawful withdrawal and use of the funds.

The court disagreed:

The depositor is … deemed to be the owner of the funds. … In the instant case, it is undisputed that [victim 1], alone, funded the joint accounts. Indeed, the defendant testified that all of the money in the accounts was her money. Thus, [victim 1], as the depositor, was still deemed to be the owner of the funds. … Moreover, there was ample evidence that [victim 1] did not intend to make a gift to the defendant of $123,367, the total amount of funds that the defendant was eventually convicted of embezzling from her.

She testified that she did not give the defendant permission to use the funds for his personal expenses, nor did she gift him the money. We conclude that there was sufficient evidence that the funds taken were the property of [victim 1], and that she did not have the requisite donative intent to grant the defendant the money to withdraw and use for his personal benefit.

Thus, the defendant was not entitled to convert the money to his use without her permission.

What this means for churches

This case illustrates an important point.

Pastors are often asked to serve as a fiduciary for financially unsophisticated members because of their perceived trustworthiness. Pastors who take advantage of this relationship for their private benefit are exposing themselves to potential liability for breach of trust and embezzlement.

Another issue not addressed by the court in this case is the legal doctrine of undue influence. If the recipient of a gift unduly influences the donor into making the gift, the donor may have the gift canceled.

This rule applies both to direct gifts made during one’s lifetime and to gifts contained in documents (such as wills) which take effect at the donor’s death. Undue influence is more than persuasion or suggestion. It connotes total dominion and control over the mind of another.

Undue influence generally must be inferred from the circumstances surrounding a gift, since it seldom can be proven directly. Circumstances commonly considered in determining whether a donor was unduly influenced in the making of a gift include:

Whether the person or organization benefited by the gift was active in securing it.

The donor’s age, physical condition, and mental health.

Whether a confidential relationship existed between the donor and the recipient of the gift.

Whether the donor had independent advice.

In summary, pastors who take advantage of a fiduciary relationship to convert funds to their private benefit face both criminal liability for embezzlement and civil liability for undue influence.

State v. Steele, 868 S.E.2d 876 (N.C. App. 2022)

Legal Developments

Church Member Sues Pastor for Defamation

Pastor sued for making widespread allegations that a church member was homosexual.

Richard R. Hammar, Attorney, CPA

Bio

State: Florida
Categories: Defamation, Fiduciary Duty

Key point 4-02.1. Ministers may be liable for making defamatory statements if a civil court can resolve the dispute without any inquiry into church doctrine or polity.

Key point 4-04. Many states recognize "invasion of privacy" as a basis for liability. Invasion of privacy may consist of any one or more of the following: (1) public disclosure of private facts; (2) use of another person's name or likeness; (3) placing someone in a "false light" in the public eye; or (4) intruding upon another's seclusion.

Key point 10-13.1. A few courts have found churches and denominational agencies liable on the basis of a breach of a fiduciary duty for the sexual misconduct of a minister. In some cases, the church or agency is found to be vicariously liable for the minister's breach of a fiduciary duty, but in others the church or agency is found to have breached a fiduciary duty that it had with the victim.

A Florida court ruled that a church member could sue his pastor for defamation for publicly alleging that he was a homosexual.

A church member (the "plaintiff") and his pastor formed both a business and personal relationship outside the church. Later, the pastor sponsored the plaintiff to obtain a license to minister in the denomination with which the church was affiliated.

As their relationship developed, the plaintiff confided in the pastor that he had been called a homosexual as a teenager by an authority figure. This ultimately led to the plaintiff's installation of a religious internet filtration and accountability system on his personal computer that reports suspect internet usage, or attempted usage, to third parties. The pastor served as the plaintiff's "accountability partner" under the system, and one report prompted the pastor to ask the plaintiff if he was "gay." The plaintiff denied that he was a homosexual. At some point thereafter, the relationship between the two men deteriorated.

The plaintiff alleged that on several occasions the pastor falsely accused him of being a homosexual and asserted that his upcoming marriage was a sham designed to conceal his homosexuality. These allegations were disseminated to members of the church, including the father of the plaintiff's fiancé. Later, the pastor urged the plaintiff to call off his upcoming marriage and move out of state, which he did. After the move, when the plaintiff attempted to transfer his pastor's license from Florida to Michigan, the pastor falsely reported to church officials that he was a homosexual. He also called the plaintiff's new pastor to repeat the same accusation.

The plaintiff sued the pastor for defamation, breach of fiduciary duty, and emotional distress. The trial court dismissed all claims against the pastor on the ground that they were barred by the so-called "church autonomy" doctrine, which generally bars the civil courts from interfering in internal church disputes involving doctrine or polity. The plaintiff appealed.

Defamation

A state appeals court began its opinion by defining the church autonomy doctrine:

The church autonomy doctrine stems from the First Amendment to the United States Constitution which provides, "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof." The doctrine, known also as the "religious autonomy principle," and the "ecclesiastical abstention doctrine" … gives a special, protected status to religious disputes by shielding them from intervention by the courts. The doctrine prevents courts from resolving internal church disputes that would require adjudication of questions of religious doctrine ….

Two distinct viewpoints have evolved with respect to the doctrine in the context of such claims. Some state and federal courts have taken an expansive view of the protections afforded by the doctrine and refuse to adjudicate most tort claims against religious institutions, finding such claims barred because the conduct giving rise to the claim is inextricably entangled with church polity and administration. Most courts, however, have adopted a narrower view of the doctrine and hold that the rights guaranteed by the First Amendment are not violated if the tort claims can be resolved through the application of "neutral principles" of tort law, particularly where there is no allegation that the conduct in question was part of a sincerely held religious belief or practice.

The court noted that the Florida Supreme Court had adopted the "neutral principles" approach, and it concluded that the neutral principles approach did not require a dismissal of the plaintiff's defamation and fiduciary duty claims. It concluded:

His defamation claims were based on a series of statements made by the pastor, who expressly or implicitly inferred that he was a homosexual and asserted that his upcoming marriage was a sham to hide his homosexuality. These statements were made during a meeting in the pastor's office, to which the pastor called the plaintiff and three others; in a sermon two weeks after the meeting; when the plaintiff sought to have his ministerial license transferred from Florida to Michigan; and when the pastor called the plaintiff's pastor in Michigan. The First Amendment does not grant the pastor carte blanche to defame church members and ex-members. If untrue, the statement that a person is a homosexual has long been recognized as potentially defamatory outside the context of any religious doctrine or practice. This claim can be adjudicated without implicating the First Amendment and was improperly dismissed on the basis of the church autonomy doctrine.

Breach of Fiduciary Duty

The court also ruled that the trial court erred in dismissing the plaintiff's breach of fiduciary duty claim:

As to the plaintiff's claim for breach of fiduciary duty—based on allegations that the pastor had a fiduciary duty to him because of the pastor/church member relationship and the internet filtration and accountability program—the First Amendment does not necessarily bar such claims.

Emotional Distress

The court affirmed the trial court's dismissal of the plaintiff's emotional distress claim, noting that the pastor's conduct over an almost two-year period repeatedly telling various people that the plaintiff was a homosexual and of immoral character, and attempting to terminate his relationship with his fiancé, "while deplorable, did not rise to the level of outrageousness required" to prove emotional distress.

Invasion of Privacy

Invasion of privacy includes public disclosure of private facts about another in a manner that a reasonable person would find outrageous. In rejecting this claim the court observed: "The plaintiff's allegations did not establish enough publicity to make the pastor's conduct actionable for public disclosure of private facts. The publicity given to private facts must be to the public at large or to so many persons that the matter must be regarded as substantially certain to become public knowledge." 91 So.3d 887 (Fla. App. 2012).

Legal Developments

Fiduciary Duty and Legal Liability

Breach of fiduciary duty is difficult to prove in court.

Richard R. Hammar, Attorney, CPA

Bio

State: New York
Categories: Denominations - Legal Liability, Fiduciary Duty

Church Law & Tax Report

Fiduciary Duty and Legal Liability

Breach of fiduciary duty is difficult to prove in court.

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

Key Point. Under some circumstances ministers may owe a fiduciary duty to members of their congregation, and they may be liable for breaching this duty. Most cases of fiduciary duty involve sexual misconduct, but this basis of liability is not limited to such cases.

Key Point. Intentional infliction of emotional distress is a theory of liability that involves extreme and outrageous conduct. Plaintiffs rarely establish this theory of liability because of the difficulty of proving that a defendant’s actions were outrageous.

A New York court ruled that a pastor who allegedly disseminated information about a member’s criminal record to both staff and congregants did not breach any fiduciary duty or commit intentional infliction of emotional distress. A woman (the “plaintiff”) was an active member of her church. Because of her background in psychiatry, the church’s senior pastor sought advice from her on both church and personal matters, and it was during these private conversations that the plaintiff claims she shared information concerning her personal life, and her strategies for dealing with her own personal challenges. She characterized the pastor as her “friend, confidant, as well as [her] pastor and spiritual counselor.”

Plaintiff was charged with a property crime, and during the two-year course of her criminal proceeding, the pastor counseled her and attended court with her in his capacity as friend and pastor. The plaintiff was convicted of the crime. A few years later, she began alleging mismanagement of church funds by the pastor, and it was at this time that copies of her conviction record began circulating among the church staff and congregation in what the plaintiff claimed was a deliberate attempt to humiliate her and intimidate her from further criticism of the pastor’s management of the church. She sued the pastor, claiming that he was responsible for intentionally disseminating the information. The lawsuit claimed that the pastor’s disclosures amounted to a breach of a fiduciary duty, and caused her emotional distress.

Breach of fiduciary duty claim

The plaintiff claimed that the pastor breached a fiduciary duty that he owed to her by intentionally disseminating information about her criminal conviction that he learned in his role as her pastor and counselor. The court reached the following conclusions regarding this claim:

The clergy-penitent privilege statute does not create a fiduciary duty on the part of pastors toward their congregants.
Exposing clergy to personal liability as a result of the breach of a fiduciary duty “would likely require the interpretation of religious doctrine, thereby creating troubling constitutional implications under the First Amendment.”
The scope of a pastor’s fiduciary duty must be narrow in order to avoid constitutional problems under the First Amendment: “Allegations that give rise to only a general clergy-congregant relationship that includes aspects of counseling do not generally impose a fiduciary obligation upon a cleric.” Rather, the minister must assume “control and dominance” over the congregant who was “uniquely vulnerable and incapable of self-protection regarding the matter at issue.”

The court concluded that even if the pastor had disseminated information about her criminal conviction to the church staff and congregation, this fell far short of demonstrating that she “became uniquely vulnerable and incapable of self protection as a result of her relationship with him.” The court further noted that the criminal record allegedly disseminated by the pastor was a matter of public record. As a result, the court dismissed this theory of liability.

Emotional distress

The court noted that liability for the intentional infliction of emotional distress requires a demonstration that a defendant’s conduct was (1) extreme and outrageous, (2) intended to cause severe emotional distress, (3) resulted in severe emotional distress. As such, “success turns on whether the conduct complained of is extreme, amounting to more than mere threats or annoyances, and ultimately, so outrageous in character, and so extreme in degree, as to go beyond all possible bounds of decency, and to be regarded as atrocious and utterly intolerable in a civilized community.”

The court added that “the threshold of outrageousness is so difficult to attain, that of the intentional infliction of emotional distress claims considered by the [state’s highest court] every one has failed because the alleged conduct was not sufficiently outrageous.”

The court concluded that the pastor’s conduct in disseminating information concerning the plaintiff’s criminal conviction fell far short of this standard: “By far, the most problematic obstacle is the simple fact that the document distributed here, plaintiff’s criminal record, is a public document. The distribution of this record while perhaps embarrassing, on its own carries no constitutional right to privacy …. One’s criminal history is arguably not a private personal matter at all, since arrest and conviction records are matters of public record.”

The court also noted that the pastor’s involvement in the dissemination of the plaintiff’s criminal record had never been conclusively proven. Plaintiff testified that she did not know who had obtained her criminal record, or who had distributed the copies.

Application. This case illustrates the difficulty of proving breach of fiduciary duty, or intentional infliction of emotional distress, by a pastor. These theories of liability are even harder to establish when they involve the dissemination of matters of public record such as a criminal conviction. 863 N.Y.S.2d 874 (N.Y. Sup. 2008).

This Recent Development first appeared in Church Law & Tax Report, July/August 2009.

Legal Developments

Breach of Fiduciary Duty

Several courts have refused to hold churches and denominational agencies liable on the basis of a breach of a fiduciary duty for the sexual misconduct of a minister.

Richard R. Hammar, Attorney, CPA

Bio

State: Colorado
Categories: Denominations - Legal Liability, Fiduciary Duty, Sexual Misconduct by Clergy, Lay Employees, and Volunteers

Church Law & Tax Report

Breach of Fiduciary Duty

Several courts have refused to hold churches and denominational agencies liable on the basis of a breach of a fiduciary duty for the sexual misconduct of a minister.

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

Key point 10-13.2. Several courts have refused to hold churches and denominational agencies liable on the basis of a breach of a fiduciary duty for the sexual misconduct of a minister. In some cases, this result is based on First Amendment considerations.

* A Connecticut court ruled that a priest and archdiocese were not liable on the basis of a breach of a fiduciary duty for the priest’s sexual relationship with an adult woman since no fiduciary duty arose under the circumstances. A 40-year-old woman (the “plaintiff”) with a long history of psychiatric and emotional problems sought out the “advice, counsel and friendship” of a priest. At the time, the priest was serving as an associate priest at a local church and was also an employee of the archdiocese. The plaintiff did not engage in formal counseling with the priest; rather, their relationship involved mainly recreational activities such as home visits, lunch and dinner dates, shopping trips, walks on the beach and trips to see movies. According to the plaintiff, the priest provided her emotional, spiritual and friendly support and that her “whole relationship” with him was one of counseling. At some point during their association, the priest became aware of her emotional problems and, nevertheless, engaged in a sexual relationship with her. The plaintiff alleged that she eventually ended the sexual aspect of their relationship after which the priest terminated all involvement with her.

The plaintiff sued the priest claiming that a fiduciary duty arose by virtue of the priest-parishioner relationship, and the priest breached this duty when, despite knowledge of her emotional problems, he engaged in “a close physical and intimate relationship” with her. The plaintiff also sued the archdiocese, claiming that it breached its duty to supervise the priest. Specifically, the plaintiff alleged that the archdiocese “knew or should have known that the priest had engaged in inappropriate behavior with the plaintiff” and, as a result, the archdiocese was liable for the priest’s breach of a fiduciary duty. A trial court dismissed the claims against the priest and archdiocese, and the plaintiff appealed.

Breach of a fiduciary duty

The appeals court defined a fiduciary or confidential relationship as “a relationship that is characterized by a unique degree of trust and confidence between the parties, one of whom has superior knowledge, skill or expertise and is under a duty to represent the interests of the other. The superior position of the fiduciary or dominant party affords him great opportunity for abuse of the confidence reposed in him.” The court acknowledged that “various state and federal courts” have concluded that a clergy-parishioner relationship may constitute a fiduciary relationship, but in each of those cases “something more than a general clergy-parishioner relationship was present.” For example, “the existence of a formal pastoral counseling relationship between a clergy member and a parishioner has been deemed significant in determining whether a fiduciary relationship was created. The court summarized the following precedent:

Colorado. (1) Court found that a fiduciary relationship existed between a clergyman and plaintiff, in part, because the clergyman had served as counselor to plaintiff. Moses v. Diocese of Colorado, 863 P.2d 310 (Colo. 1993). (2) A fiduciary duty was created when a priest undertook to counsel plaintiffs. Destefano v. Grabrian, 763 P.2d 275 (Colo. 1988).
Federal district court in Iowa. Court dismissed plaintiff’s breach of fiduciary duty claim because plaintiff simply alleged clergy-parishioner relationship, not counseling relationship. Doe v. Hartz, 52 F. Supp.2d 1027 (N.D. Iowa 1999).
New Jersey. The New Jersey Supreme Court concluded that a breach of fiduciary duty claim arising out of the sexual relationship between a clergyman and a parishioner who was seeking marital counseling was permissible under New Jersey law. In so doing, the court placed considerable weight on the fact that the plaintiff was engaged in a specific pastoral counseling relationship with the clergyman. According to that court, “trust and confidence are vital to the counseling relationship between parishioner and pastor. By accepting a parishioner for counseling, a pastor also accepts the responsibility of a fiduciary.” The court explained that “establishing a fiduciary duty essentially requires proof that a parishioner trusted and sought counseling from the pastor.” F.G. v. MacDonell, 696 A.2d 697 (1997).
Federal appeals court. A federal appeals court permitted a breach of fiduciary duty claim to proceed against a clergyman because the fiduciary duty allegedly arose out of a counseling relationship, not simply a clergy-parishioner relationship. Sanders v. Casa View Baptist Church, 134 F.3d 331 (5th Cir. 1998).

The court concluded that “something more” than the general clergy-parishioner relationship must be present to establish a fiduciary relationship, and it declined the plaintiff’s invitation to establish a fiduciary relationship “between all clergy and their congregants.” The court concluded that the plaintiff’s relationship with the priest in this case was not fiduciary in nature because it “was not characterized by the unique degree of trust and confidence required of a fiduciary relationship.” In particular, the court noted that the plaintiff had not alleged a formal pastoral counseling relationship between herself and the priest. Rather, she claimed that her “whole association” with the priest was one of “counseling.” The court disagreed:

The plaintiff’s interactions with the priest were largely social. She did not meet him for specific counseling appointments, but, rather, the two went on lunch and dinner dates, shopping trips, walks on the beach and trips to see movies. Also, the plaintiff has admitted that many of the conversations she considered counseling took place immediately after mass with other congregants present and that the counseling primarily involved discussions about their relationship …. While the priest may have counseled the plaintiff from time to time, as a priest may for any parishioner, he was not her counselor. Moreover … the plaintiff was well over the age of majority throughout the time of their consensual interactions. While we do not condone the defendant’s behavior, we conclude that no fiduciary relationship existed between him and the plaintiff; consequently, no fiduciary duty was breached.

Archdiocese

The court also dismissed the plaintiff’s negligent supervision claim against the archdiocese on the ground that there can be no negligent supervision if an employee does not engage in wrongful behavior. Since the priest had not breached a fiduciary duty, the archdiocese could not be liable on the basis of negligent supervision for his actions.

Application. This case is important because it is one of the most extensive discussions of the liability of ministers and churches for acts of sexual misconduct on the basis of a breach of a fiduciary duty. The court refused to find that a priest who was not involved in a counseling relationship with a church member has a fiduciary duty toward that person, and therefore the priest could not be liable on the basis of a breach of such a duty for any inappropriate sexual conduct. There may be other bases of liability, but not this one. Further, since the priest was not liable, the archdiocese could not be liable since its liability (whether on the basis of negligent hiring or supervision, or breach of a fiduciary duty) required that the priest’s acts be wrongful. Ahern v. Kappalumakkel, 903 A.2d 266 (Conn. App. 2006).

Legal Developments

Sexual Misconduct by Clergy

A court refused to recognize “breach of a fiduciary duty” as a basis for liability by clergy who engaged in a sexual relationship with a counselee.

Richard R. Hammar, Attorney, CPA

Bio

State: Michigan
Categories: Counseling, Fiduciary Duty, Sexual Misconduct by Clergy, Lay Employees, and Volunteers

Key point 10-13.2. Several courts have refused to hold churches and denominational agencies liable on the basis of a breach of a fiduciary duty for the sexual misconduct of a minister. In some cases, this result is based on first amendment considerations.

A Michigan court refused to recognize "breach of a fiduciary duty" as a basis for liability by clergy who engage in a sexual relationship with a counselee.

A male pastor visited a female church member (the "plaintiff") in her home prior to an upcoming surgery. In the months and years that followed, the pastor assumed the role of a pastoral counselor and attempted to help the woman with several personal difficulties she faced.

At some point in the counseling relationship the pastor and plaintiff engaged in a sexual relationship, which was not in any way related to or condoned under church doctrine. Plaintiff claimed that the counseling relationship continued and that the pastor used counseling in order to eventually initiate a sexual relationship with her. She also claimed that prior to initiating a sexual relationship, the pastor engaged in an inappropriate course of conduct such as appearing at her home and school, giving her personal greeting cards and inspirational messages, and discussing inappropriate subjects, including "his perceived sexual inadequacies and private parts."

The plaintiff alleged that the pastor began making sexual advances toward her and when she protested, he misled her with his "distorted views of Christian morality," which confused her because of his "superior" status as pastor of her church. She claimed that the pastor became involved in her life to the extent that his financial and emotional assistance to her was in exchange for sexual relations. Moreover, according to the plaintiff, the Synod, District, and local church had a responsibility to either prevent the pastor from abusing his ministerial role or to intervene and end the relationship in order to protect her. Plaintiff asserted that the Synod, District, and local church all were aware of the relationship and should have ended the pastor's behavior.

The pastor insisted that his relationship with the plaintiff was entirely consensual. According to him, while he initially offered counseling services to the plaintiff, their relationship developed into a friendship and eventually into a sexual relationship. He claimed that while he continued to discuss plaintiff's personal difficulties and continued to attempt to assist her with her problems during their sexual relationship, his assistance was as an individual and friend rather than as a counselor.

The relationship between the pastor and plaintiff continued for five years, at which time the pastor resigned his position and moved away. The sexual relationship ended at about that time. The plaintiff later sued the pastor for breach of fiduciary duty and emotional distress. She sued her church for negligent supervision, and retention, and two denominational agencies for vicarious liability and negligent hiring, supervision, and retention. While the lawsuit was pending, the church and denominational agencies asked the court to dismiss them from the case.

The trial court rejected the agencies' request, noting that questions remained regarding the "adequacy of the system for dealing with abuse allegations" within the denomination. The local church also asked the court to dismiss it from the case. The court agreed to dismiss the negligent hiring claim against the church, since the church had no reason to anticipate the pastor's actions when it hired him. However, the court refused to dismiss the plaintiff's negligent supervision and retention claims against the church. It found that the church may well have had a duty to further investigate the situation once a member of the board of elders raised concerns about rumors of a relationship between the pastor and plaintiff at a board of elders meeting. The plaintiff, church, and denominational agencies all appealed.

The basis of liability in this case

In this situation, liabilty was claimed against the pastor, the church, and two denominational agencies by the plaintiff. The following looks at the various liabilities reviewed in the case.

The pastor's liability for breaching a fiduciary duty

The plaintiff insisted that the pastor was liable on the basis of his breach of a fiduciary duty for the emotional and psychological injuries she suffered as a result of her sexual relationship with him. She noted that the pastor initiated and pursued a relationship with her that was at first non-sexual by doing things such as visiting her at home, in the hospital, and at school. She also alleged that the pastor began making sexual advances to her, "exposing his private parts" to her, and fondling her, all of which resulted in a sexual relationship between them. She claimed that during their sexual relationship, the pastor promised to marry her and encouraged her to divorce her husband.

The pastor insisted that in reality the plaintiff was claiming that he was liable for "seduction," a basis of liability that the Michigan legislature abolished many years before. The court defined seduction as "the act of persuading or inducing a woman of previously chaste character to depart from the path of virtue by the use of any species of acts, persuasions, or wiles which are calculated to have, and do have, that effect, and resulting in her ultimately submitting her person to the sexual embraces of the person accused."

The court conceded that the plaintiff had made allegations that seemed to be more than seduction. For example, when she initially protested the pastor's sexual advances, he misled her "with his own distorted views of Christian morality, in a way that confused and intimidated [her] given [his] superior status as pastor of her church." Moreover, she alleged that "in the guise of offering Christian guidance and counseling [the pastor] began to wrongfully manipulate [her] thought process and decision making in ways that were personally gratifying to him, yet terribly self-destructive and damaging" to her.

The court concluded that these allegations that the pastor misused his superior position as her pastor and counselor in order to achieve a sexual relationship with her suggested that clergy malpractice, rather than seduction, was the basis of her lawsuit. The court observed:

Illustrative of this conclusion is plaintiff's allegation that [the pastor] owed a duty to her … to practice his religious calling in a reasonable, legal and appropriate manner, and to refrain from any acts or omissions that would violate his ministerial trust, and to function in a legal and moral fashion as appropriate to the role of pastor. Michigan does not recognize a claim for clergy malpractice. In fact, the claim of clergy malpractice has been universally rejected by courts in the United States.

The court further rejected the plaintiff's request that it recognize her claim as one for breach of a fiduciary duty rather than clergy malpractice. It explained its reluctance to make such a distinction by referring to the conclusion of another court:

[I]n order for the plaintiff's cause of action to meet constitutional muster, the jury would have to be able to determine that a fiduciary relationship existed and premise this finding on neutral facts. The insurmountable difficulty facing plaintiff, this court holds, lies in the fact that it is impossible to show the existence of a fiduciary relationship without resort to religious facts. In order to consider the validity of [the] plaintiff's claims of dependency and vulnerability, the jury would have to weigh and evaluate … the legitimacy of [the] plaintiff's beliefs, the tenets of the faith insofar as they reflect upon a priest's ability to act as God's emissary and the nature of the healing powers of the church. To instruct a jury on such matters is to venture into forbidden ecclesiastical terrain. On the other hand, if we try to salvage [the] plaintiff's claim by stripping her narrative of all religious nuance, what is left makes out a cause of action in seduction-a tort no longer recognized in New York-but not in breach of a fiduciary duty.

The pastor's liability for emotional distress

The court noted that in order to state a claim for intentional infliction of emotional distress, a plaintiff must show "(1) extreme and outrageous conduct, (2) intent or recklessness, (3) causation, and (4) severe emotional distress. Liability for such a claim has been found only where the conduct complained of has been so outrageous in character, and so extreme in degree, as to go beyond all possible bounds of decency and to be regarded as atrocious and utterly intolerable in a civilized community. It has been said that the case is generally one in which the recitation of facts to an average member of the community would arouse resentment against the actor, and lead the average member of the community to exclaim 'Outrageous!'"

The court concluded that the plaintiff's allegations failed this standard: "Stripped of religious overtones, plaintiff essentially alleges that a person pursued her, an adult woman, gained her trust, and eventually engaged in a consensual sexual relationship with her, albeit that her consent was given when she was in a vulnerable position. This type of activity does not rise to the level of conduct necessary to satisfy [this] standard … and could not be reasonably regarded as extreme and outrageous."

Liability of the church and denominational agencies

Since the plaintiff failed to establish that the pastor committed any conduct for which relief was available in a court of law, the appeals court ruled that her claims against the church and denominational agencies also had to be dismissed.

What this means for churches

This case demonstrates the difficulty that counselees face in suing clergy on the basis of "breach of fiduciary duty" for inappropriate sexual contacts. Very few courts have recognized this basis of liability. And, as the court pointed out, counselees ordinarily cannot sue clergy for "seduction" or clergy malpractice. Other bases of liability exist, but they were not pursued by the plaintiff in this case. The case also illustrates another important point-churches and denominational agencies cannot be liable for the misconduct of a minister unless the minister is found liable. Teadt v. St. John's Evangelical Church, 1999 WL 731383 (Mich. App. 1999).

Legal Developments

Fiduciary Duties of Pension Plans

Do pension plans have a duty to warn of the tax consequences of withdrawing funds?

Richard R. Hammar, Attorney, CPA

Bio

State: Michigan
Categories: Fiduciary Duty, Retirement Plans

Church Law and Tax 1994-05-01 Recent Developments

Retirement Plans

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

• Key point: Pension plans should carefully review the representations and assurances set forth in their plan documents and informational brochures, since they may be legally accountable to employees if such representations are not honored.

• Do pension plans have a fiduciary duty to warn participants of the tax consequences of a decision to withdraw their funds? That was the question addressed by a federal court in Michigan. An employee received a lump sum distribution from his pension plan in the amount of nearly $120,000 and promptly rolled it over into an individual retirement account (IRA). By investing in an IRA within 60 days of the distribution, the employee avoided income taxes on the funds. However, the employee later removed the funds from his IRA and used them to buy real estate, assuming that he would still not need to pay income taxes on the funds since they had been properly rolled over into his IRA. The employee was wrong in assuming that the funds did not become taxable when he withdrew them from his IRA to buy real estate. The IRS determined that he owed taxes of $33,000 on the transaction. The employee sued his pension fund, claiming that it had breached a “fiduciary duty” to him by not warning him of the tax consequences of withdrawing his funds from the IRA. A federal court rejected the employee’s position and dismissed the lawsuit. The court acknowledged that federal law requires some types of pension plans to inform employees of the tax treatment of distributions they request from their retirement account. However, the court pointed out that the pension plan in this case had provided the employee with a brochure at the time he received the lump sum distribution of his account. The brochure explained that lump sum distributions are taxable unless they are rolled over into an IRA (or other eligible plan) within 60 days. The employee admitted that he received this brochure, but complained that the pension fund did not inform him that once the lump sum distribution was invested in an IRA it could not be removed to buy real estate without becoming taxable. The court disagreed, noting that federal law “does not require that a plan administrator inform a distribution recipient of every possible investment option and tax consequence.” It added that the employee’s tax liability “arose not from the fact that he did not know that he must invest in an IRA within two months of receiving the distribution, but rather because he did not know the consequences of thereafter removing that money from the IRA and investing it in real estate.” The court cautioned that a pension plan may be liable for failing to provide information promised in its promotional or informational literature. However, there were no promises in the pension plan or in any of its promotional materials to provide participants with “information regarding the tax consequences of the various types of distributions.” The lesson of this case is clear—church and denominational pension plans should carefully review the assurances they make in their plan documents and informational brochures, and be certain that they are honoring such assurances. One final point—the court in this case rejected the employee’s argument that he was not bound by the pension plan’s informational brochure because he had not read it. The court observed that the pension plan did “not have a duty to ensure that beneficiaries actually read the material and act upon it. It appears [that the employee] simply did not take the time to read over the material because he was eager to receive the money …. {his] assertion that he did not have ample time to read the material is irrelevant.” Bouteiller v. Vulcan Iron Works, Inc., 94-1 USTC 50,157 (S.D. Mich. 1994).

© Copyright 1994, 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. c0394

Legal Developments

Officers, Directors, and Trustees

Church Law and Tax 1989-01-01 Recent Developments Officers, Directors, and Trustees Richard R. Hammar, J.D.,

Richard R. Hammar, Attorney, CPA

Bio

State: Texas
Categories: Church Property, Criminal Liability, Fiduciary Duty, Officers, Directors, and Trustees

Church Law and Tax 1989-01-01 Recent Developments

Officers, Directors, and Trustees

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

• A Texas appeals court decision addressed the issue of a church trustee’s alleged criminal liability for misapplication of church funds. Here are the facts. In 1973, a donor conveyed a tract of land to a church by delivering to three church trustees a deed to the property. A sanctuary was constructed on the property. By 1978, church attendance had declined significantly and weekly services had been cancelled. The three trustees discussed selling the property, and agreed that the property and building were “not theirs personally” but rather “were the Lord’s and they should be the work of the Lord’s.” However, no action was taken. In 1981, one of the trustees sold the property for $100,000 to a third party by signing his own name and forging one of the other trustee’s signatures on a deed. The trustee placed the sales proceeds in a church account, and within two months spent almost the entire balance on personal purchases. He was prosecuted for violating a Texas law prohibiting trustees from knowingly “misapplying” property held in a “fiduciary” capacity. A jury convicted the trustee of misapplication of funds and felony theft, but the appeals court overturned the convictions. The court reasoned that the trustee could not be guilty of either misapplication of funds or theft since “at the time of the misapplication the church had ceased all of its regular functions of work and worship for approximately three years … and was not in existence as a matter of law.” Since the church did not exist, the trustee could not be convicted for misapplication or theft of its assets. A dissenting judge denounced the court’s handling of the case, noting that under Texas law (1) a trustee has “a solid duty of loyalty and fidelity,” and “must make a strict accounting of the properties of the trust”; (2) a trustee cannot by himself sell any property held in trust for his own benefit; and (3) the attorney general must be notified if trust property is distributed contrary to the purposes of a trust. The dissenter also challenged the court’s conclusion that the church had ceased to exist, since the trustee’s own actions “prove the contrary.” Specifically, the trustee executed the forged deed in the name of the church, deposited the proceeds in a church account, and paid for all of his personal purchases with church checks. Another important consideration missed by both the majority and the dissenter is the fact that section 501(c)(3) of the Internal Revenue Code requires that the assets of churches and other exempt organizations be distributed upon dissolution (i.e., termination) to another organization exempt from federal income taxation under section 501(c)(3) of the Code. Section 501(c)(3) specifies that a church’s charter must contain a dissolution clause that satisfies this requirement. Had the church in the Texas case complied with this requirement, the unfortunate and unjust result may well have been avoided. Martinez v. State, 753 S.W.2d 165 (Tex. App. 1988).

© Copyright 1989, 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: m56 m21 c0189

Legal Developments

Church Official Could Not Bring Securities Fraud Action Against Brokerage Firm as an Individual

In 1984, church property that had been used by a Christian Methodist Episcopal (CME) Church

Richard R. Hammar, Attorney, CPA

Bio

State: Alaska
Categories: Fiduciary Duty, Fraud

In 1984, church property that had been used by a Christian Methodist Episcopal (CME) Church in Alaska was sold for $1,400,000. The funds were invested with a major securities brokerage firm while the church located a new church facility. The funds were invested with the brokerage firm allegedly on the basis of its oral representations that the funds would earn a return of "not less than 15%" without any loss of principal.

The brokerage firm initially invested the funds in stocks, bonds, and treasury bills. After the church official who invested the funds expressed dissatisfaction with the account's performance, an options account was established. The account was closed several months later when it became clear that it was losing money. As a result of the funds' poor performance (it allegedly lost nearly $200,000), the church official responsible for the investment was "demoted" by the church.

This official thereafter filed suit against the brokerage firm, alleging that the firm had been guilty of securities fraud as a result of its false representations regarding investment performance and its failure to give adequate warning regarding the risks associated with options arrangements.

The court acknowledged that the church could bring a securities fraud action against the brokerage firm, but concluded that the church official responsible for the investment of the funds church official who invested the funds bring the action individually. And, since the church had decided not to pursue the case against the brokerage firm, the church officer's personal claim against the firm had to be dismissed.

The church officer, concluded the court, "acted solely as an agent of the church, and it is well settled that an agent has no action in tort because another has tortiously harmed the principal." Linsey v. E.F. Hutton & Co., Inc., 675 F. Supp. 1 (D.D.C. 1987)