Fraud

Legal Developments

Archdiocese Faces Fraud Suit for Using Donations to Defend, Settle Sex Abuse Claim

The church tried—and failed—to have the case dismissed under the ecclesiastical abstention doctrine.

Richard R. Hammar, Attorney, CPA
Bio

Summary : A Michigan appellate court ruled that the ecclesiastical abstention doctrine did not bar a lawsuit alleging a Catholic archdiocese committed fraud by redirecting donations raised for a specific ministry to instead be used to defend and settle a sex abuse claim.

Fraud suit rooted in call for donations

Several church members sued a Catholic archdiocese for fraud, claiming that it asked its parishioners to donate money to the Catholic Services Appeal (CSA) when in fact the donations were used for the defense and settlement of a sex abuse claim.

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The trial court ruled that the plaintiffs’ claims were barred by the ecclesiastical abstention doctrine, a judicially created legal doctrine based upon the First Amendment that bars civil courts from resolving disputes involving doctrine and polity.

WATCH: Church Law & Tax Editor and Attorney-at-Law Matt Branaugh explains why lawsuits like these are so important for church leaders involved in fundraising campaigns.

The plaintiffs appealed, arguing the ecclesiastical abstention doctrine is not applicable to the facts of this case because no questions of church doctrine or polity had to be examined to resolve their claims.

Allegations of fraud

The plaintiffs claimed the archdiocese committed fraud when it said CSA donations would be used for charitable ministries and were not and would not be used to settle claims “of any nature” against it. According to the plaintiffs, the archdiocese made a false representation because the CSA donations were used to investigate and respond to a sex abuse claim.

Did you know? A similar lawsuit, against the late Ravi Zacharias’ ministries, is moving through the courts in Georgia. In that case, donors claim the ministry’s use of designated offerings for unrelated purposes constitutes fraud.

The appellate court’s decision

The appellate court reversed the lower court’s decision, allowing the lawsuit to proceed.

The appellate court noted that the elements of fraud are:

(1) the defendant made a material representation; (2) the representation was false; (3) when the defendant made the representation, the defendant knew that it was false, or made it recklessly, without knowledge of its truth as a positive assertion; (4) the defendant made the representation with the intention that the plaintiff would act upon it; (5) the plaintiff acted in reliance upon it; and (6) the plaintiff suffered damage.

In weighing whether the ecclesiastical abstention doctrine prevented such a claim from proceeding against the archdiocese, the appellate court concluded:

… contrary to defendants’ arguments, resolution of … plaintiffs’ fraud claim would not impermissibly permit the trial court to second guess how the Archdiocese spends its money. (emphasis added) In order to adjudicate plaintiffs’ claim that the CSA donations were not and would not be used to settle claims against the Archdiocese, the trial court would only be required to decide whether the Archdiocese’s statement was true or false when made. Such an inquiry by the trial court would not involve delving into internal church policies or otherwise substituting its opinion in lieu of that of the authorized tribunals of the church in ecclesiastical matters. The inquiry would not relate to the propriety of how the donations were spent, but rather whether the Archdiocese lied about their purpose when it solicited them. This does not cross the line imposed by the First Amendment.

What this means for churches

A failure by a church to spend designated offerings for the donors’ designated purposes may subject a church to liability on the basis of fraud or misrepresentation.

In this case, the appellate court concluded that such a claim of fraud or misrepresentation could be subject to the civil courts’ jurisdiction without violating the archdiocese’s First Amendment rights.

Dux v. Bugarin, 2021 WL 6064359 (Mich. App. 2021).

Legal Developments

Court Affirms South Dakota Priest’s Embezzlement Conviction

Stolen loot used to buy Mont Blanc pens, a grand piano, and jewelry, among other lavish items.

Richard R. Hammar, Attorney, CPA
Bio

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 federal appeals court affirmed an almost eight-year prison sentence for a Catholic priest who embezzled $256,000 between 2012 and 2018 from three South Dakota churches.

He was caught only after one of the churches installed a hidden camera that recorded him stealing from a money bag.

Because the priest failed to report the embezzled money on his tax returns, he was also found guilty of filing a false tax return.

This North Carolina case shows embezzlement can take on many forms, including a pastor taking advantage of a fiduciary relationship to convert funds to his private benefit.

Lavish Purchases, False Tax Returns

The priest filed false tax returns for tax years 2013 through 2017 and used the stolen money to purchase for himself over a dozen gold-plated chalices, numerous bronze statues, a $10,000 diamond ring, a grand piano, Mont Blanc fountain pens, and other items.

The priest was charged with 50 counts of wire fraud, nine counts of money laundering, one count of interstate transportation of stolen money, and five counts of filing false tax returns. A jury found him guilty on all counts, and he was sentenced to nearly eight years in prison. In addition, he was ordered to pay $256,000 in restitution to be split equally between the three churches, plus an additional $46,000 in restitution to the IRS.

Churches of all sizes can benefit from Safeguarding Your Church’s Finances, an online training course on fraud prevention from Church Law & Tax.

Court: Stolen funds must be reported as income

The priest filed an appeal with a federal appeals court challenging his conviction. In particular, he argued that there was insufficient evidence to prove he filed false tax returns by failing to report his deposits of stolen cash offerings to the IRS.

The court disagreed.

A taxpayer files a false tax return when he “willfully [files] any return … which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter.” Stolen funds must be reported as income. Thus, the “intentional violation of a known legal duty” to report stolen income violates the statute. … “Intent may be inferred from conduct such as a consistent pattern of not reporting income or inconsistently reporting income.” Here, a reasonable jury could have found that the priest’s failure to report income was willful because he consistently failed to report his illegitimate income while successfully reporting his legitimate income.

The priest claimed that the IRS failed to prove his underreporting was willful because he did not know he had a legal duty to report illegally acquired cash. Moreover, he argued that because the stolen cash came from “a tax-exempt source” (that is, the church), there was even less reason to believe that he would have to pay taxes on the stolen donations.

Again, the court disagreed.

Here, there was sufficient evidence for a jury to infer that the priest knew about his tax duties. He personally filed his tax returns each year and a fellow priest testified that he was proud of his ability to handle his tax affairs. Further, the duty to report stolen income is well established in law. On this record, a reasonable jury could find that the priest was informed enough to know about his duty to report his income, including income from stolen cash.

What this means for churches

This case is relevant to church leaders for the following reasons:

1. Many church leaders consider embezzlement to be a problem that “couldn’t happen here.” Yet, it is this very attitude that contributes to poor or nonexistent internal controls over cash handling and payment of expenses that makes embezzlement a real threat.

2. How was the priest able to embezzle church funds? In most cases by entering churches late at night and removing bags containing church offerings. Had the church implemented the most basic internal controls, the priest could not have engaged in his numerous acts of embezzlement.

3. Church leaders may not be discharging their fiduciary duties when they fail to implement basic internal controls over cash handling and the payment of expenses. Such a failure can result in a host of negative consequences, including criminal liability to the embezzler.

4. The legal consequences of embezzlement can be severe. In this case, the priest was convicted of a felony and sentenced to a prison term of nearly eight years.

5. Be sure to consult with legal counsel about the application of state law to the use of video technology.

Note: (1) Some states limit or prohibit the use of hidden video cameras in the workplace. (2) The use of hidden cameras may constitute an invasion of privacy under state law. (3) Videos depicting a volunteer or employee embezzling church funds may be inadmissible in a criminal prosecution.

The law often lags behind technological innovation. As a result, it is important for church leaders to be aware of legal developments in their state and at the federal level that directly or potentially affect the use of surveillance technology.

United States v. Garbacz, 33 F.4th 459 (8th Cir. 2022).

Legal Developments

Update: RZIM, Inc. Liable for Unjust Enrichment, Fair Business Practices Violation

Georgia case opens door for donors to sue churches and ministries to recoup contributions.

Richard R. Hammar, Attorney, CPA
Bio

Editor’s Note: On March 3, 2023, a Georgia federal district court denied the plaintiffs the ability to bring their lawsuit against Ravi Zacharias International Ministries, Inc. as a class action. Instead, the plaintiffs can only bring individual claims. The court noted:

None of the donors were actually harmed by their contributions to RZIM, and it appears from the face of the [complaint] that only a very small amount of the money contributed to RZIM was actually used to facilitate or cover up the sexual misconduct of [Ravi] Zacharias. Therefore, a class-wide damages award (even if possible) of all contributions would be inequitable and implausible. …

Church Law & Tax will continue to monitor the case, including whether the class-action decision gets appealed.

Key point. Churches and other religious ministries may be liable on various grounds for using designated funds for undesignated purposes. Those grounds include unjust enrichment and violation of a state Fair Business Practices Act.

A federal court in Georgia ruled that it was not barred by the ecclesiastical abstention doctrine from resolving a lawsuit by donors to a religious ministry claiming fraud based on the ministry’s use of designated offerings for unrelated purposes.

Background

Ravi Zacharias, who died in May 2020, was a well-known Christian apologist and evangelical minister who founded the Ravi Zacharias International Ministries, Inc. (“RZIM”) in 1984. The organization’s stated “vision” is “to build a team with a fivefold thrust of evangelism, apologetics, spiritual disciplines, training, and humanitarian support.”

RZIM works toward this vision through conferences, lectures, and seminars held around the world; it also produces podcast and radio shows as well as online videos which featured Zacharias. For many years, these programs found a dedicated audience of millions.

Plaintiffs: RZIM “bilked hundreds of millions of dollars”

Among the ministry’s followers were two couples (the “Plaintiffs”) who considered Zacharias and RZIM to be “spiritually aligned with the Gospel of Jesus Christ and … completely dedicated to a mission of spreading the Gospel, teaching new apologists, and trying to help people through humanitarian efforts.”

While listening to RZIM’s programs, the Plaintiffs recall hearing Zacharias and other speakers solicit donations to RZIM. For example, on one occasion they heard the following message:

The vision of RZIM is built on five pillars made up of evangelism, apologetics, spiritual disciplines, training, and humanitarian support. A fundamental part of this mission is to train men and women to defend the power and coherence of the Gospel of Jesus Christ. Our hope is to empower you to engage in earnest conversations with those who have questions about the Christian faith. Your donations make it possible for us to continue to reach others with the gospel and we cannot do this work without your help.

The Plaintiffs heeded these calls and made donations of several thousand dollars. Both couples allege that they “reasonably relied on Zacharias’s and RZIM’s uniform messaging that they were dedicated to a mission of Christian apologetics and that contributions made by people like the [Plaintiffs] would be used to financially support that mission.” The Plaintiffs initiated a class action lawsuit on August 4, 2021, against RZIM.

They alleged that RZIM “bilked hundreds of millions of dollars from well-meaning contributors who believed RZIM and Zacharias to be faith-filled Christian leaders,” when in fact, Zacharias was “a prolific sexual predator who used his ministry and RZIM funds to perpetrate sexual and spiritual abuse against women.”

To that end, the proposed class included “all persons in the United States who made contributions of monetary value to Ravi Zacharias or the Ravi Zacharias International Ministry from 2004 through February 9, 2021.”

The Plaintiffs further claimed that RZIM’s failure to respond appropriately to reports of Zacharias’s sexual misconduct “furthered the public deception that Zacharias was a faith-filled, moral, and upstanding Christian leader … and allowed Zacharias to continue sexually abusing women under the cover of Christian ministry and permitted Zacharias’s ongoing, deceptive fundraising efforts for RZIM.”

The complaint asserted four claims on behalf of the Plaintiffs and the proposed class against RZIM:
  1. misrepresentation
  2. unjust enrichment
  3. violation of the Georgia Charitable Solicitations Act
  4. violation of the Georgia Fair Business Practices Act

RZIM asked the court to dismiss all claims against it.

RZIM argues the ecclesiastical abstention doctrine applies

RZIM argued that the Plaintiffs’ claims dealt with religious issues relating to pastoral conduct that were barred from consideration by the civil courts under the so-called ecclesiastical abstention doctrine.

The court responded:

As the Court reads the Complaint, the Plaintiffs’ claims rest on two general categories of misrepresentations by Zacharias and RZIM.

First, the Plaintiffs make “faith-based allegations”—namely that the Defendants “misrepresented that they were faith-filled Christians of upstanding moral character.”

These faith-based allegations include that “[Zacharias and RZIM] held themselves out to be pious followers of the Holy Gospel, maintaining a religious level of morality and following the teachings of Jesus Christ.

Zacharias explicitly presented himself as a devoted Christian who was living a Christian lifestyle in keeping with the Gospel of Jesus Christ and who was worthy of leading others in their Christian faith. …” Second, the Plaintiffs make “misuse-of-funds allegations”—namely, that “[Zacharias and RZIM] affirmatively misrepresented that funds contributed to RZIM were to support its purported mission of Christian evangelism, apologetic defense of Christianity, and humanitarian efforts, when such funds were in fact used to support and hide Zacharias’s sexual abuse.”

The Plaintiffs allege that “RZIM funds were funneled to women subjected to Zacharias’s sexual misconduct,” and that “Zacharias provided money to these survivors, gave them large tips following massages, and showered them with expensive gifts.”

For example, “Touch of Hope was a discretionary fund that RZIM earmarked as a humanitarian effort, but a significant portion of its wire payments were made to or for the benefit of four women who were, at some point, Zacharias’s massage therapists.”

All the while, Zacharias and RZIM allegedly solicited donations with the stated purpose to fund travel, training, humanitarian aid, and other expenses “to continue reaching those around the globe with the Gospel.”

The court concluded that it could not address the Plaintiffs’ “faith-based allegations” since doing so would ask the court

to examine the theology and customs of Christianity and Christian apologetics to determine whether Zacharias and RZIM fulfilled the religion’s (and the Plaintiffs’) moral standards. The Court would have to make inherently ecclesiastical determinations as part of this inquiry, such as what it means to be a “faith-filled, moral, and upstanding Christian leader” and whether Zacharias’s alleged sexual misconduct is “diametrically opposed to the teachings of Christianity.”

It is not the role of federal courts to answer these kinds of questions “because that would require defining the very core of what the religious body as a whole believes.” In doing so, a court risks “establishing” a religion by “putting the enforcement power of the state behind a particular religious faction.”

Court: misuse-of-funds allegations can be decided

On the other hand, the court concluded that the Plaintiffs’ misuse-of-funds allegations did not implicate these concerns:

Those allegations, and the claims associated with them, raise what amounts to a secular factual question: whether the Defendants solicited funds for one purpose (i.e., Christian evangelism) but instead used those funds for another purpose (i.e., to perpetrate and cover up sexual abuse).

That dispute “concerns the [actions of Zacharias and RZIM] not their beliefs,” and can be decided according to state statutes and common law principles.

Unjust enrichment

The Plaintiffs asserted a claim for unjust enrichment on the grounds that it would be inequitable for the Defendants to keep donations raised on false pretenses. The court agreed, noting that “a conclusion that one party has obtained benefits from another by fraud is one of the most recognizable sources of unjust enrichment.” The court added:

According to the Complaint [RZIM] “induced [Plaintiffs and Class Members] to fund its purported Christian apologetic evangelism, training, and humanitarian efforts,” but then “failed to use the funds for these purposes, diverting funds to massage parlors and as financial support to survivors of Zacharias’s sex abuse.”

The Plaintiffs allege that they would not have donated to [RZIM] had it “truthfully represented that it would … use those financial benefits for their own, wrongful purposes, including in the furtherance of, and to hide, Zacharias’s sexual misconduct.” Taken as true, these allegations … support that [RZIM] unfairly obtained financial benefits by misrepresenting their intended or ultimate use.

Georgia Charitable Solicitations Act

The Plaintiffs asserted that RZIM had violated the Georgia Charitable Solicitations Act. The Charitable Solicitations Act, which has been enacted in most states, creates a private cause of action against a “charitable organization” to recover damages resulting from a violation of the statute. The term “charitable organization” is defined to exclude a “religious organization”—or any entity which (A) “conducts regular worship services” or (B) “is qualified as a religious organization under Section 501(c)(3) of the Internal Revenue Code … that is not required to file IRS Form 990 . …”

The court concluded that:

RZIM “has satisfied the elements of a religious organization under the Act as it is exempt from federal income tax under Section 501(c)(3) and is not subject to the filing requirements of Form 990.”

Georgia Fair Business Practices Act

The Plaintiffs asserted a claim under the Fair Business Practices Act on the grounds that RZIM’s charitable solicitations were unfair and deceptive consumer practices. The statute permits “any person who suffers injury or damages … as a result of consumer acts or practices in violation of this part … [to] bring an action individually for damages and injunctive relief.”

The court rejected RZIM’s motion to dismiss this basis of liability.

RZIM: Plaintiffs lacked “standing” to sue

RZIM argued that the Plaintiffs lacked “standing” to sue in federal court. Article III of the US Constitution limits the jurisdiction of federal courts to “cases” and “controversies,” which is interpreted to mean that the plaintiff bringing a lawsuit in federal court must have suffered some form of tangible injury to be redressed. RZIM pointed to several decisions as support that “donating money to a charitable fund does not confer standing to challenge the administration of that fund … and that the Plaintiffs’ unrestricted charitable gifts to RZIM cannot constitute an injury for purposes of Article III standing.”

The court agreed that “at common law, a donor who has made a completed charitable contribution, whether as an absolute gift or in trust, had no standing to bring an action to enforce the terms of his or her gift or trust unless he or she had expressly reserved the right to do so.” The court noted:

The Plaintiffs asserted that they “sustained monetary and economic injuries” arising out of their donations to RZIM. The Plaintiffs donated several thousand dollars to RZIM. … Before making donations to RZIM, the Plaintiffs allege that they listened to radio programs, podcasts, and CDs featuring Zacharias; watched videos published by RZIM on YouTube; and read books by Zacharias and others within RZIM. The Plaintiffs recall hearing messages [that] solicited financial contributions to advance that work. The Plaintiffs also allege that they reasonably relied on Zacharias’s and RZIM’s uniform messaging … that contributions made by people like the [Plaintiffs] would be used to financially support that mission.” The Court concludes that these allegations satisfy Article III’s standing requirements. …

What this means for churches

Donors sometimes request a return of contributions made to their church. This may occur for several reasons, including:
  1. A donor has begun attending another church.
  2. Theological disagreement(s).
  3. A need for funds for health and other emergencies.
  4. A church fails to use designated funds for the specified purpose.

Church leaders often do not know how to respond to such requests. The federal court in this case ruled that donors were entitled to a return of their contributions on the basis of:
  • RZIM’s egregious misrepresentations regarding the use of donated funds,
  • the principle of unjust enrichment (“a conclusion that one party has obtained benefits from another by fraud is one of the most recognizable sources of unjust enrichment”),
  • a violation of the state Fair Business Practices Act

Note a few other important aspects of the court’s ruling:

First, the court allowed the case to proceed as a class action, meaning that the number of plaintiffs in the case would grow significantly to include all donors victimized by RZIM’s misrepresentations regarding the use of funds.

Second, the court concluded that the Plaintiffs had “standing” to sue in federal court. Standing is a requirement in any federal lawsuit, and generally means that the plaintiff bringing a lawsuit must suffer some form of tangible injury. While the court agreed that “at common law, a donor who has made a completed charitable contribution, whether as an absolute gift or in trust, had no standing to bring an action to enforce the terms of his or her gift or trust unless he or she had expressly reserved the right to do so,” it concluded that “RZIM’s uniform messaging … that contributions made by people like the [Plaintiffs] would be used to financially support that mission” satisfied the standing requirements.

Carrier v. Ravi Zacharias International Ministries, 2022WL1540206 (N.D. Ga, 2022)

Legal Developments

Priest Sentenced to Nearly Eight Years for Embezzlement

The federal court also ordered nearly $260,000 in restitution payments and $46,000 in back taxes.

Richard R. Hammar, Attorney, CPA
Bio

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.

More Insights and Guidance on Embezzlement

For the results of a Church Law & Tax survey on financial misconduct in the church, along with help for identifying and preventing it, go to this Recommended Reading page.

A federal district court in South Dakota sentenced a priest to nearly eight years in prison. The court also ordered the priest to pay nearly $260,000 in restitution to three churches and $46,000 in back taxes to the Internal Revenue Service (IRS), as a result of his embezzlement.

Background

A Catholic priest in South Dakota devised a scheme to steal cash collected from parishioners by secretly entering the areas in three parish churches where weekly donations were stored. The priest entered the church buildings late in the evening, removing and replacing special, tamper-proof bank bags, and making multiple same-day deposits totaling tens of thousands of dollars of stolen cash donations in a personal account.

Between 2012 and 2018, he stole nearly $260,000. The priest filed false tax returns for tax years 2013 through 2017 and used the stolen money to purchase for himself over a dozen gold-plated chalices, numerous bronze statues, a $10,000 diamond ring, a grand piano, expensive Mont Blanc fountain pens, and other items.

Caught on video

Leaders at one of the churches suspected something was not right with their finances and installed a hidden video camera where weekly collections were stored. In April of 2018, surveillance footage caught the priest “red-handed” stealing money from a locked money bag, according to the court. The church contacted federal authorities, who began a review of the finances of the three churches dating back seven and a half years.

Once the priest was made aware of the investigation, he drained his bank account of $40,000 and bought a one-way plane ticket to Poland. From that point forward, the three churches’ cash collections increased, returning to pre-investigation levels, according to investigators.

The priest was arrested by federal agents at Seattle-Tacoma International Airport in May of 2019, just before his flight was to depart.

The priest was charged with 50 counts of wire fraud, nine counts of money laundering, one count of interstate transportation of stolen money, and five counts of making and subscribing a false tax return. A jury found him guilty on all counts in March of 2020, and he was sentenced by a federal judge in November of 2020 to nearly eight years in prison.

In addition, he was ordered to pay nearly $260,000 in restitution to be split equally between the three churches, plus an additional $46,000 in restitution to the IRS.

What this means for churches

This case is relevant to church leaders for the following seven reasons:

  1. Many church leaders consider embezzlement to be a problem that “couldn’t happen here.” Yet, it is this very attitude that contributes to poor or nonexistent internal controls over cash handling and payment of expenses that makes embezzlement a real threat.
  2. How was the priest able to embezzle church funds? In most cases by entering churches late at night and removing bags containing church offerings. Again, if the most basic of internal controls had been implemented, the priest could not have engaged in his numerous acts of embezzlement.
  3. Church leaders may not be discharging their fiduciary duties when they fail to implement basic internal controls over cash handling and the payment of expenses. Such a failure can result in a host of negative consequences, including criminal liability to the embezzler.
  4. The legal consequences of embezzlement can be severe. In this case, the priest was convicted of a felony with a prison term of nearly eight years.
  5. The financial consequences are severe for a congregation and also for the perpetrator in the event he or she is caught and ordered to pay restitution. Additionally, congregations face the challenges of lost trust among their ranks when crimes like these have been committed against them by persons in positions of trust.
  6. The tax consequences of embezzlement for the perpetrator are often overlooked—and a church faces potential IRS penalties if it does not report stolen funds as taxable income for the perpetrator to the IRS. Here, the IRS was appropriately contacted, and the perpetrator was forced by the court to pay $46,000 in back taxes.
  7. Consult with legal counsel about the application of state law to the use of video technology. Note: (1) Some states limit or prohibit the use of hidden video cameras in the workplace; (2) the use of hidden cameras may constitute an invasion of privacy under state law; (3) videos depicting a volunteer or employee embezzling church funds may be inadmissible in a criminal prosecution. The law often lags behind technological innovation. As a result, it is important for church leaders to be aware of legal developments in their state and at the federal level that directly or potentially affect the use of surveillance technology.

    8. United States v. Garbacz, 2020 WL 6808850 (D.S.D. 2020).

Legal Developments

Pastor Guilty of Securities Fraud

Court sentenced pastor to nearly 25 years in prison for swindling his congregation, and others.

Richard R. Hammar, Attorney, CPA
Bio

Key point 9-04. Federal and state laws regulate the offer and sale of securities for the protection of the investing public. In general, an organization that issues securities must register the securities, and the persons who will be selling the securities, with state and federal agencies. In addition, federal and state laws contain a broad prohibition on fraudulent activities in the sale of securities. Churches are exempt from some of these requirements in some states. However, they remain subject to the prohibition of securities fraud in all 50 states, and under federal law.

A California appellate state court found a pastor guilty of securities fraud for swindling his congregation, among others, out of nearly $1 million dollars in an investment scam.

Family and church members invested nearly $1 million

A pastor taught finance classes to church members and came to know and advise many of them. He formed an investment company and began selling securities. Many of the investors were members of his church or family members.

Generally, he told potential investors their funds would be insured and not at risk. They would receive returns pursuant to a specific rate and schedule, some as high as 18 percent every 90 days. He informed them their principal would always be secure. Collectively, they invested nearly $1 million dollars in the pastor’s investment company. Much of the proceeds were used for personal expenses, transferred to other financial institutions, or withdrawn.

Eventually, the pastor informed many of his investors that their money was gone. For the most part, their investments were never returned.

The pastor was arrested and charged with 33 felonies, most of which were based on securities fraud. He was convicted by a jury of 27 felonies and sentenced to nearly 25 years in prison. He also was ordered to pay restitution to his victims.

A state appeals court affirmed the pastor’s sentence.

What this means for churches

“Securities” and “fraud” are defined broadly by state and federal securities laws. In many cases, church leaders are not even aware that they are engaging in fraudulent practices.

The fact is, however, that securities violations represent one of the most significant sources of church liability in terms of the size of verdicts. This is a risk that church leaders must take seriously.

Laws regulating the sale of securities have been enacted by the federal government and by all 50 states. Church securities always will be subject to some degree of regulation. The question in each case is how much.

For more information

See the “Federal and State Securities Law“ section in the Legal Library to understand how the Uniform Securities Act defines “a security” and what conditions are imposed by most security laws to help protect the public from fraudulent and deceptive practices.

This section of the Legal Library also lists activities that are prohibited by antifraud provisions, analyzes specific court cases related to churches, offers ways church leaders can protect church assets and the assets of church members from security scams, and more.

The federal government and most states exempt securities offered by any organization “organized and operated not for private profit but exclusively for a religious . . . purpose” from registration.

It is important to note, however, that some states do not exempt the securities of religious organizations from registration. Other states impose conditions on the exemption and many require that an application for exemption (or “notice” of exemption) be submitted and approved before a claim of exemption will be recognized. A few states require churches and religious denominations that “issue” their own securities to be registered as issuers or issuer-dealers.

All securities laws subject churches and other religious organizations to the antifraud requirements. Churches, therefore, must not assume that any securities that they may offer are automatically exempt from registration or regulation.

Churches that violate state securities laws face a variety of potential consequences under state and federal securities laws. These include investigations, hearings, subpoenas, injunctions, criminal actions, cancellation of sales, suits for monetary damages by aggrieved investors, monetary fines, and revocation of an exemption, or registration, of securities. The bottom line is that churches should not consider offering securities to investors as a way to increase revenue without first consulting with an experienced securities law attorney. 2020 Cal. App. Unpub. LEXIS 4273; 2020 WL 3790477.

Legal Developments

A Christian Ministry’s Fundraising Violated Federal Securities Laws

Churches should never assume they are automatically exempt from federal regulations when raising funds by selling securities.

Richard R. Hammar, Attorney, CPA
Bio

Key point 9-04. Federal and state laws regulate the offer and sale of securities for the protection of the investing public. In general, an organization that issues securities must register the securities, and the persons who will be selling the securities, with state and federal agencies. In addition, federal and state laws contain a broad prohibition on fraudulent activities in the sale of securities. Churches are exempt from some of these requirements in some states. However, they remain subject to the prohibition of securities fraud in all 50 states, and under federal law.

A federal court in Maine found that a promoter of Christian concerts had violated federal securities laws as a result of his offer and sale of unregistered securities and fraudulent statements made to prospective investors.

Ministry seeks investors to repay debt

A Christian ministry (the “defendant”) promoted, organized, and hosted Christian music concerts and festivals. In order to host a music concert or festival, the defendant paid certain expenses upfront, such as deposits for artists and venues, radio promotions, and other production-related costs. Its primary source of revenue was ticket sales, which included advance sales on its website as well as direct sales at the music venue.

As early as 2014, the defendant began borrowing money from companies that provide short-term cash advances to small businesses in need of immediate cash flow. It borrowed approximately $700,000 from more than one dozen cash-advance companies.

The defendant was unable to repay on schedule all of the debt incurred from cash advances. To raise needed funds, the defendant began offering investments in promissory notes. From January 2014 through October 2018, the defendant raised more than $3.1 million from 149 investors.

The defendant solicited promissory-note investors through a number of different in-person and electronic means, including email blasts to solicit investors, using the email addresses obtained through online ticket sales and through the entry of email addresses by those who visited the defendant’s website to indicate interest in becoming “financial partners.”

A typical mass solicitation email stated: “Become a financial partner with our summer festivals. Help us spread the message of Christ plus earn 20% on your investment. To learn more please e-mail [us].”

The defendant did not have any information about these individuals’ finances or level of sophistication in making investments at the time it sent these email blasts. Similarly, prior to accepting investor money and executing promissory notes, it did not ask investors about their finances or investment experience.

The defendant contacted potential investors who showed interest in learning more about the specific terms of the offered investment by email and phone. The defendant falsely represented that investor money would be used exclusively for costs associated with its music concerts and festivals.

Some promissory notes specified the particular concert or festival for which the investor’s funds would exclusively be used, while others were more general. The defendant never implemented any mechanism to track the use of investor funds to ensure that they were used exclusively for the stated purpose.

The defendant “guaranteed” the repayment of the promissory notes in monthly installments with a fixed annual return ranging from 10 percent to 25 percent. It told prospective investors that the promissory notes were “secured,” explicitly stating to some investors that repayment of principal plus interest was not dependent on the success of any concert or music festival. And it claimed that all prior investors had been paid back 100 percent of the money invested. However, by at least 2016, the defendant had failed to fully repay some investors and had failed to pay a single installment to others.

The defendant did not disclose to investors its deteriorating financial condition from declining ticket sales, its growing debt to other individual investors and commercial lenders, or that the only way it could repay potential investors was if the concerts and festivals were profitable. It obtained investor funds as a result of these misstatements and omissions.

The defendant did not register the promissory notes with the Securities and Exchange Commission (SEC).

The SEC claims the defendant committed fraud

The SEC sued the defendant claiming that it had committed fraud in the offer or sale of securities and sold unregistered securities in violation of the federal Securities Act. A federal court ruled summarily in favor of the SEC. The court permanently enjoined the defendant from the sale of securities and ordered it to pay damages of $1,800,000 in gains it realized from its fraudulent conduct.

A federal appeals court affirmed the SEC position. It noted that the federal Securities Act prohibits “fraud and other deceptive practices” in connection with the purchase and sale of securities.

To prove securities fraud, the SEC must demonstrate that a defendant: “(1) made a material misrepresentation or a material omission as to which it had a duty to speak . . . (2) with scienter (i.e., a conscious intent to defraud); (3) in connection with the purchase or sale of securities.”

The court concluded that the SEC’s evidence “suffices to establish that [the defendant] made material misstatements and omissions with scienter in connection with the purchase and sale of securities . . . in violation of . . . the Securities Act.” It noted:

First, the SEC demonstrates that [the defendant] solicited investors through multiple, repeated, brazen misrepresentations about the offered promissory notes, including the use to which [it] would put investors’ money, the guarantee of a profit of between 10 and 25 percent, the claim that the investments were “secured,” and the assertion that prior investors had been paid back in full . . . while simultaneously omitting to disclose its deteriorating financial condition, growing debt, and inability to fully repay investors. . . .

Second, the SEC establishes that the misrepresentations and omissions were material, that is, that there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. . . . In this case, as the SEC argues, a reasonable investor would want to know that (i) his or her investments were not “secured,” (ii) the promised return was not “guaranteed,” (iii) the defendant had implemented no mechanism to track investors’ funds to ensure they were used for the stated purposes and had used investor funds to pay personal expenses, (iv) the defendant’s financial condition had been deteriorating, and (v) the defendant did not in fact repay 100 percent of prior investors. . . .

[Third] the SEC demonstrates that the defendant acted with scienter. It made repeated false representations about the safety and security of the investments at issue, including that repayment was “guaranteed,” the investments were “secured,” and all prior investors had been paid back 100 percent, while using invested funds to repay high-interest debt and other personal expenses as well as to repay prior investors and failing to disclose the defendant’s deteriorating financial condition.

What this means for churches

Laws regulating the sale of securities have been enacted by the federal government and by all 50 states. The term security is defined very broadly by such laws to include many instruments utilized in church fundraising efforts, including bonds, notes, and trust agreements.

Securities laws were enacted to protect the public against fraudulent and deceptive practices in the sale of securities and to provide full and fair disclosure to prospective investors. To achieve these purposes, most securities laws impose the following conditions on the sale of securities:

  • registration of proposed securities with the federal or state government in advance of sale
  • filing of sales and advertising literature with the federal or state government
  • registration of agents and broker‑dealers who will be selling the securities
  • prohibition of fraudulent practices

Although the federal government and most states exempt securities offered by any organization “organized and operated not for private profit but exclusively for a religious . . . purpose” from registration, it is important to note that some states do not exempt the securities of religious organizations from registration. Other states impose conditions on the exemption. Many require that an application for exemption (or “notice” of exemption) be submitted and approved before a claim of exemption will be recognized. A few states require churches and religious denominations that “issue” their own securities to register as issuers or issuer-dealers. Further, all securities laws subject churches and other religious organizations to the antifraud requirements.

Churches therefore must not assume that any securities that they may offer are automatically exempt from registration or regulation. Put another way, all churches that offer or sell securities will be subject to state and federal securities laws—the only question is to what extent.

It is important to note that the antifraud provisions of federal and state securities laws are very broad, and some churches have violated them without knowing it. For example, the following activities have been deemed to be fraudulent:

  • making false or misleading statements about church securities
  • failing to disclose material risks associated with securities
  • manipulating the church’s financial records in order to facilitate the sale of securities
  • failing to establish a debt service or sinking fund reserve out of which church securities will be retired
  • making false predictions
  • recommending the sale of securities to investors without regard to their financial condition
  • inducing transactions that are excessive in view of an investor’s financial resources
  • borrowing money from an investor
  • commingling investors’ funds with the personal funds of another, such as a salesman
  • deliberately failing to follow an investor’s instructions
  • making unfounded guarantees
  • misrepresenting to investors the true status of their funds
  • representing that funds of investors are insured or “secure” when in fact they are not
  • representing that investments are as safe as if they had been made in a bank, when this is not the case
  • representing that securities have been approved of or recommended by the state securities commission or that the commission has passed in any way on the merits or qualifications of the securities or of any agent or salesman

Bottom line: Churches should never consider using securities to raise funds without the counsel of an experienced securities attorney. SEC v. Wall, 2020 U.S. Dist. LEXIS 56152 (D. Me. 2020).

Legal Developments

Pastor Guilty of Embezzling Funds from a Local PTA

Case demonstrates that ministers can face criminal liability for embezzlement.

Richard R. Hammar

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 a pastor who also served as an officer for a Parent Teachers Association (PTA) was guilty of embezzlement for using corporate funds for personal purposes.

An investigation of improper use of funds

A pastor of a local church (the “defendant”) served as president of an elementary school’s PTA from 2011 to 2013. As the defendant’s term concluded, allegations arose of improper use of PTA funds by the defendant. As a result, a CPA and the local county sheriff instituted an investigation into the receipts and expenditures of the PTA.

The investigation unearthed spending and disbursements by the defendant and other PTA officers that apparently exceeded standards authorized by the organization’s bylaws. The bylaws authorize the PTA to make expenditures “in furtherance of the general mission of the PTA.” According to the bylaws, financial records were to be audited monthly and annually.

The CPA reviewed the PTA’s account and found several problematic transactions, such as

  • transactions with no receipts,
  • unaccounted for gift cards and fundraising certificates,
  • checks for meals,
  • checks reimbursing defendant personally for gas and travel expenses, and
  • checks issued without the purpose indicated.

The pastor’s arrest and indictment

The defendant was arrested and charged with embezzlement. Following his arrest, he was administered his Miranda rights and consented to an interview with a detective. The defendant was informed that he would be held accountable, as the PTA president, for any improper expenditures made by any PTA board member, even if he did not personally request the expenditure. The detective also informed the defendant that if he was unable to account for the gift cards at issue, “that [would be] considered embezzlement.”

The defendant was subsequently indicted for two counts of embezzlement, one count for each year he was the PTA president. The state offered the following transactions as evidence tending to show defendant’s guilt:

  • golf shirts embroidered with the name of the church of which the defendant was the pastor, but billed to and paid for by the PTA;
  • PTA reimbursements to the defendant for gas used to attend a family funeral;
  • a digital camera purchased by the defendant with PTA funds;
  • numerous unaccounted for gift cards bought with PTA funds;
  • payments to PTA board members and their families;
  • reimbursements for food at PTA board meetings; and
  • renewal of the church’s Sam’s Club Warehouse membership with PTA funds.

The defendant did not offer any evidence in his defense and moved to dismiss the charges for insufficient evidence. The trial court convicted the defendant on both counts and sentenced him to two consecutive terms of 16–29 months, both of which were suspended for 36 months of supervised probation. The defendant appealed, claiming that the state failed to produce substantial evidence of fraudulent intent, or produce substantial evidence that defendant was the perpetrator of any crime.

State appeals court affirms conviction

A state appeals court affirmed the defendant’s conviction. It noted that

a person commits embezzlement when he: (1) with intent to defraud; (2) converts to his own use; (3) money or property belonging to another; in a situation where (4) the money or property initially came within his possession or control lawfully. . . . Embezzlement does not occur through a mere act of converting or appropriating property to one’s own use. Instead, the State must not only demonstrate appropriation, but it also must demonstrate that such act was done with a fraudulent purpose or corrupt intent.

The courts have found substantial evidence of fraudulent intent when a defendant “exceeded his authority by taking more coupons than was allowed from his employer without any authorization,” or through discrepancies in financial books, or when a corporate treasurer took funds to her own home every night.

The appeals court explained:

Defendant plausibly exceeded his authority as president of the PTA by using funds for purposes the jury could have found to be outside the scope of the PTA Bylaws [such as] church shirts, personal travel reimbursements, and procuring the $35 renewal of the church’s Sam’s Club Warehouse membership. In doing so, the “defendant not only exceeded his authority, but often did so without PTA approval through a vote. The evidence also tended to show defendant failed to hold PTA funds in reserve as required by the PTA Bylaws. Substantial evidence showed defendant had the power to control PTA spending, a power he employed to misapply or appropriate PTA funds for personal use.

What this means for churches

I have addressed several cases in which a pastor’s personal use of church funds led to severe consequences, including loss of a church’s tax-exempt status as a result of prohibited “inurement,” and exposure of a pastor and church board to crippling penalties for excess benefit transactions under section 4958 of the tax code. And while this case doesn’t deal specifically with embezzlement of church funds, it still demonstrates another significant consequence: pastors can face criminal liability for embezzlement. State Gillbert, 2019 WL 1040957 (N.C. App. 2019).

Legal Developments

Church Leader Caught in Embezzlement Scheme Goes to Prison

Lax internal controls can leave any congregation wide open to theft and scandal.

Richard R. Hammar



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.

An Illinois court sentenced a church trustee to two eight-year terms of imprisonment, and ordered him to pay $278,703 in restitution, for embezzling funds from his church.

A church trustee (the “defendant”) was given two credit cards by his secular employer to cover business expenses. He used them to obtain $278,703 in cash advances. He deposited the funds illegally obtained from his secular employer into a church bank account, which he then made withdrawals for personal use.

The defendant used the money for car payments, air travel, family vacations, rental cars, and his gym membership. He also used some of the money to pay for legal fees and restitution related to his criminal cases.

The defendant’s pastor submitted a letter in which he stated that the defendant and his family had attended the church for about ten years. According to his pastor, the defendant, who was a church trustee and youth ministry coordinator, had oversight of several checking accounts at the church.

After the pastor learned the defendant was involved in theft at the defendant’s employer, he discovered the defendant had been using the church bank account to launder the stolen funds.

The defendant was found guilty of two felonies and was sentenced to two eight-year terms of imprisonment, to be served concurrently.

At a sentencing hearing, the pastor of the defendant’s new church testified that the defendant, the defendant’s wife, and their two children had joined the church about a year and a half earlier. The pastor of the new church was aware of the defendant’s criminal conduct and had counseled the man in that regard.

According to the pastor of the defendant’s new church, the defendant was very involved in the church and was a “reformed, changed man.” The defendant’s wife was a music director at the church, and when the defendant was incarcerated, she and the children lived in converted office space at the church.

Prior to sentencing, the defendant made a formal statement (allocution) to the court in which he apologized for his conduct. He described himself as a broken man whose true character included integrity and honesty.

In imposing the sentence, the trial court considered both “aggravating” and “mitigating” factors.

The aggravating factors included a criminal history (the defendant had committed a similar offense in another church). The court also found that a lengthy sentence was necessary to deter others.

Mitigating factors included the absence of physical harm, and the fact that incarceration would cause extensive hardship to the defendant’s family. The court commented that the defendant had “a lot of good attributes” apart from his criminality.

What This Means For Churches

This case is relevant to church leaders for four reasons:

  1. Many church leaders consider embezzlement to be a problem that “couldn’t happen here.” Yet, it is this very attitude that contributes to poor or nonexistent internal controls over the handling of cash and the paying of expenses that makes embezzlement a real threat.
  2. The defendant was able to embezzle $278,703 of church funds because of the board’s failure to institute internal controls over church finances—enabling the trustee to treat the church checking account as his personal, unsupervised, slush fund. Had the church implemented basic internal controls, the defendant could not have engaged in embezzlement.
  3. Church leaders may not be fulfilling their fiduciary duties when they fail to implement basic internal controls over cash handling and the payment of expenses. Such a failure can result in legal and financial consequences to individual officers and directors, as well as criminal liability to the embezzler.
  4. The legal consequences of embezzlement can be severe.

    5. People v. Ser Voss, 2018 IL App (2d) 160138-U (Ill. Ap. 2018).

Legal Developments

Pastor Who Embezzled Ordered to Pay Restitution

Court ordered a pastor who embezzled a substantial amount of church funds to make restitution.

Richard R. Hammar, Attorney, CPA
Bio

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 New York court affirmed a trial court’s order directing a pastor who embezzled a substantial amount of church funds to make restitution over the pastor’s objection that the amount was excessive and not supported by the evidence.

A pastor (the “defendant”) pled guilty to embezzlement and was sentenced to six months in jail and five years of probation. He also was ordered to pay restitution in the amount of $256,488.The defendant appealed, claiming that the restitution award was not supported by the evidence. An appeals court rejected the appeal. The court noted:

[The woman] who became the financial secretary of the church upon defendant’s resignation, testified that defendant eliminated any financial oversight by church trustees during his 18-year tenure as pastor. Following defendant’s resignation as pastor [the financial secretary] attempted to reconcile the church’s finances and noticed numerous discrepancies. Because there were no receipts or other records with regard to the church finances during defendant’s tenure, an audit was undertaken with the assistance of an accounting firm, and a voluminous compilation of church checks and bank statements was compiled and analyzed for the period of 2010 through 2014.

In addition to a $40,000 commercial loan, the audit also disclosed cash withdrawals and checks payable to either defendant, his wife or cash with no notation or receipts to validate a legitimate church purpose. Further, numerous payments were made to various credit card and retail establishments which, according to testimony at the hearing, were for personal expenses that would not otherwise be authorized by the church.

The records reflect that other expenses paid through the church account included payments for various personal expenses, such as collection accounts and a vehicle for defendant’s wife, which were for the benefit of defendant and his wife and not for church purposes. . . . A state police investigator who assisted with the investigation of the church finances testified that defendant and defendant’s wife admitted to misappropriating approximately $70,000 for personal expenses.

The court concluded that the trial court “was free to credit the testimony and documentation presented by the state and that the loss incurred was established by a preponderance of the evidence.” The burden then shifted to defendant “to offer evidence contradicting the state’s calculations. . . . This defendant failed to do. Defendant’s contention that the total amount of restitution, while significant, is harsh and excessive is unpersuasive as the restitution award is limited to the monetary loss suffered by the church.”

What this means for churches

This case is relevant to church leaders for the following reasons:

  1. Many church leaders consider embezzlement to be a problem that “couldn’t happen here.” Yet, it is this very attitude that contributes to poor or nonexistent internal controls over cash handling and payment of expenses that makes embezzlement a real threat.
  2. Church leaders may not be discharging their fiduciary duties when they fail to implement basic internal controls over cash handling and the payment of expenses. Such a failure can result in a host of negative consequences, including criminal liability to the embezzler.
  3. The legal consequences of embezzlement can be severe. In this case, the defendant was convicted of a felony.

    4. People v Osborne, 77 N.Y.S.3d 774 (N.Y. App. 2018).

Legal Developments

Michigan Court Rules ‘Ecclesiastical Abstention’ Bars It from Resolving Church Dispute by Interpreting Polity

Key point 9-07. The First Amendment allows civil courts to resolve internal church disputes so

Richard R. Hammar, Attorney, CPA
Bio

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.

Legal Developments

Benevolence Funds and Money Laundering

A court affirmed a pastor’s conviction for grand theft and money laundering as a result of his use of a church benevolence fund to pay more than $100,000 in personal expenses.


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 Florida court affirmed a pastor's conviction for grand theft and money laundering as a result of his use of a church benevolence fund to pay more than $100,000 in personal expenses.

The pastor served as pastor of a local congregation from 1995 until 2009. The church received donations from various sources, and the donations were divided among four bank accounts: the mortgage account, the operating account, the scholarship account, and the benevolent account. Parishioners could designate which account their contributions should be deposited, and each account had a dedicated use. As to the benevolent account, the funds were to be used solely to help those in need in the community, and the church gave the pastor sole control over the use of that account. As to the other accounts, the pastor had no more than joint control; however, while the church required two signors on every check, the banks where the accounts were held did not.

Between 2007 and 2009, the pastor paid numerous personal bills with money from the benevolent account, so much so that it amounted to his essentially using the account as an extension of his personal checking account. To avoid detection of his use of the funds, he manipulated the benevolent and mortgage accounts so as to conceal many of the improper transactions. For example, he would write a check from the mortgage account and deposit that check into the benevolent account, which was kept at another bank. He then would write a check from the benevolent account to himself or to petty cash and then cash that check and "pocket" the proceeds by depositing them into his personal account at another bank. The evidence at trial showed that the pastor managed to pilfer approximately $115,204 in church funds over two years, and approximately $29,180 of that total resulted from the disguised transactions between the mortgage and benevolent accounts.

In 2009, after the church treasurer discovered certain irregularities in its books, the church contacted the police. The state then conducted its own forensic accounting investigation and charged the pastor with one count of scheme to defraud, one count of grand theft of $100,000 or more, and four counts of money laundering. The jury found the pastor guilty on all counts, and he was sentenced to a prison term of eight years. However, the trial court reduced the pastor's sentence on the ground that the church's need for restitution (which would not be possible if the pastor was serving an eight-year prison sentence) outweighed the need for his incarceration.

A state appeals court affirmed the pastor's conviction, and rejected the trial court's reduction in the pastor's sentence.

Money Laundering

Florida law defines money laundering as entering into a financial transaction knowing that the funds involved are the proceeds of unlawful activity and that the transaction is designed to conceal or disguise the nature of the proceeds of the specified unlawful activity. The court affirmed the jury's finding that the pastor had committed the crime of money laundering:

Here, the evidence presented at trial was sufficient to establish the required elements of both a specified unlawful activity and concealment. To prove that the pastor committed a specified unlawful activity, the state presented evidence that he repeatedly wrote checks to himself from the benevolent fund, a fund intended for the needy in the community, which he—with his Jaguar, salary, and church-funded travel account—clearly was not. With these improper and unauthorized acts, his theft was completed, thereby satisfying the "specified unlawful activity" element of the money laundering statute.

The court rejected the pastor's defense that his transfer of the church's funds cannot constitute money laundering because the funds themselves were not "the proceeds of some form of unlawful activity." Instead, they were lawful donations to the church. The court concluded:

The pastor misunderstands the focus of this charge … . He improperly and without authorization converted money intended to pay the church's mortgage by transferring it into an account holding funds intended to help the needy and then converted the funds again to satisfy his own personal needs. This evidence was sufficient to establish the "specified unlawful activity" element of the offense of money laundering.

As to the concealment element of its case, the court noted that the state presented evidence that the pastor

wrote checks from the mortgage account to the benevolent account and then wrote checks from the benevolent account to himself. He then cashed the checks and deposited the cash into his personal account. These multiple transactions involving three different banks served to disguise the original ownership of the money, thereby satisfying the concealment requirement under the money laundering statute … . And the fact that he directed all of the stolen funds through the benevolent account—the account over which he had sole discretion—served to further cloud detection.

Reduced Prison Sentence

The court acknowledged that state law lists several circumstances under which a downward departure of a prison sentence may be appropriate. For example, a court may reduce a sentence when "the need for payment of restitution to the victim outweighs the need for a prison sentence." But the court concluded that the pastor had failed to present evidence of the church's need for restitution. Instead, his evidence consisted of the testimony of several church members who asked the court to have mercy on the pastor, not because the church needed restitution, but because the church elders themselves had forgiven him and did not want him to face additional hardship. In addition, there was evidence that other pastors from the community indicated that they would help the church recover its stolen funds through fundraisers regardless of the pastor's fate.

What this means for churches

This case illustrates the risk of theft and money laundering that arise when churches use a benevolence fund that allows a pastor to unfettered discretion in the distribution of the fund. Such funds should never be used without adequate safeguards, including the following:

• the church gives a minister discretion to distribute the fund only for specified purposes (such as relief of the needy) that are consistent with the church's exempt purposes;

• the church prohibits (in a written policy) the minister from distributing any portion of the fund for himself or herself or any family member;

• all distributions from the fund must be approved by the church board, and validated by dual signatures; and

• the church or its governing board retains administrative control over the fund to ensure that all distributions further the church's exempt purposes.

Some pastors insist on secrecy in their distribution of discretionary account funds. They claim that they alone are aware of some needs, and need the flexibility to respond quickly without waiting for board approval. While these considerations are important, they are superseded by the need for transparency and accountability.

Discretionary funds create another risk—the recognition of taxable income to the pastor having sole, unfettered authority to distribute the funds as he or she sees fit. Pastors who have the authority to distribute discretionary or benevolence funds to anyone they wish may be deemed to have realized taxable income under the "constructive receipt" doctrine. This important doctrine is addressed fully in chapter 4 of Richard Hammar's annual Church & Clergy Tax Guide (ChurchLawAndTaxStore.com). Hardie v. State, 162 So.3d 297 (Fla. App. 2015).

Legal Developments

Embezzlement Without Internal Controls

Key point 7-21. Embezzlement refers to the wrongful conversion of funds that are lawfully in

Richard R. Hammar, Attorney, CPA
Bio

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 upheld the conviction of a woman who embezzled funds from the church and a school district office where she worked as a bookkeeper.

In 2008, a woman (the "defendant") began work as a secretary for a public school district. Her responsibilities included purchasing food and non-food items for school meetings, training sessions, and programs. Purchases were typically conducted with a school district credit card. The school district also reimbursed employees, such as the defendant, for purchases made using personal funds and for any mileage expenses incurred.

Also beginning in 2008, defendant worked as the bookkeeper for a church. As church bookkeeper, she was responsible for paying the church's bills, keeping all financial records, and providing the church with quarterly financial reports.

In 2010, after noticing irregularities in the church's finances, the pastor contacted the local sheriff's office. A police investigation and audit revealed that defendant had used the church's checking account to pay personal debts. Defendant subsequently apologized to the church and repaid the misappropriated funds.

The school district was notified of the police investigation into defendant's misappropriation of funds from the church. Shortly thereafter, defendant's supervisor discovered her name had been forged on reimbursement forms submitted by defendant to the school district. After a police investigation of purchases defendant made using the school district credit card, she was arrested for embezzlement of school funds.

In 2011, a grand jury indicted defendant on one count of embezzlement. A jury convicted her of embezzlement. The defendant appealed, claiming that the state failed to prove embezzlement. Specifically, defendant argued that the state failed to offer substantial evidence that defendant used the school system's property for a wrongful purpose.

A state statute defines the offense of embezzlement and requires the state to present proof of the following essential elements: (1) the defendant acted as an agent or fiduciary for his principal, (2) he received money or valuable property of his principal in the course of his employment and by virtue of his fiduciary relationship, and (3) he fraudulently or knowingly misapplied or converted to his own use such money or valuable property of his principal.

The court noted that the defendant had forged signatures in obtaining payment for several items, and this "presents sufficient evidence by which a jury could infer defendant's intent to commit embezzlement."

The defendant also claimed that the trial court improperly allowed the state to present evidence of her embezzlement of funds at the church. The court cited a state law that provides, in part: "Evidence of other crimes, wrongs, or acts is not admissible to prove the character of a person in order to show that he acted in conformity therewith. It may, however, be admissible for other purposes, such as proof of motive, opportunity, intent, preparation, plan, knowledge, identity, or absence of mistake, entrapment or accident."

The appeals court concluded that it was proper for the trial court to admit evidence of the defendant's embezzlement of church funds under this exception, to show motive, intent, and common plan or scheme. The court noted, "the misappropriation of church funds occurred about the same time as the embezzlement of school funds; defendant held a similar position of trust in each setting which allowed her access to funds—checking account for the church, credit cards for the school; and she abused that position of trust through the unauthorized use of funds and property. The only distinction is that defendant admitted to the misappropriation of the church funds and was allowed to repay the money."

What this means for churches

This case is relevant to church leaders for the following reasons:

1. Many church leaders consider embezzlement to be a problem that "couldn't happen here." Yet, it is this very attitude that contributes to poor or nonexistent internal controls over cash handling and payment of expenses that makes embezzlement a real threat.

2. How was the defendant able to embezzle church and school funds? In most cases, by forging signatures on checks. Had the church implemented the most basic internal controls, she could not have engaged in her acts of embezzlement. Here are two internal controls that would have worked:

3. Church leaders may not be discharging their fiduciary duties when they fail to implement basic internal controls over cash handling and the payment of expenses. Such a failure can result in a host of negative consequences, including criminal liability to the embezzler.

4. The legal consequences of embezzlement can be severe. In this case, the defendant was convicted of a felony. State v. Parker, 756 S.E.2d 122 (N.C. App. 2014).

Legal Developments

Use of Discretionary Funds for Personal Purposes

Misuse of church funds can lead to legal problems.

Richard R. Hammar, Attorney, CPA
Bio

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 Florida appeals court affirmed the conviction of a parish priest for embezzlement of church funds.

A Catholic priest was charged with grand theft of funds from his church based on his use of church funds for his own personal benefit, rather than for the benefit of the church. The evidence at trial included the following:

A diocesan official testified that priests draw both a salary and a car allowance. The funds to pay salaries and automobile allowances are derived from the general fund raised at each church. Although the diocese has no particular control over church accounts, the official stated that a priest's personal expenses would not be paid out of the parish's operating account since the priest receives a salary package.

The diocesan official also testified that the priest is allowed to make distributions from parish accounts, without permission of the bishop, as long as the distribution does not exceed $50,000 and the distribution is "for the good of the parish." However, priests were instructed to keep records of distributions, and these accounts devoted to charitable works were required to be reported to the diocese quarterly.

The chief financial officer for the diocese testified that the diocese promulgated explicit written procedures regarding how offerings were to be counted and deposited. The diocese, according to the CFO, monitored the finances of each parish to ensure that each priest was properly administering his duties. However, he conceded that some parishes would hold funds in unreported accounts to keep reported account balances low to avoid incurring larger fundraising goals during the diocese's annual fundraising appeal.

A forensic examiner testified for the prosecution that during the priest's tenure as pastor, there was a "cash shortfall" of roughly $372,343, and almost $487,000 in parish funds were misappropriated by the priest.

The defense presented the following exculpatory evidence:

A jury convicted the priest of the lesser offense of grand theft of property valued between $20,000 and $100,000. The priest appealed, claiming that the state's evidence was insufficient for a conviction. He insisted that the discretion accorded to priests foreclosed any inference that he took the property of another. The appeals court rejected the priest's arguments, and affirmed his conviction. It observed:

In this case, the state presented evidence from officials of the diocese that a parish priest is supposed to use parish money only for parish purposes. [Diocesan officials] testified that the priest's expenditures for [his former secretary and her son] and for vacations would not be valid parish purposes. Further, the forensic examiner testified that thousands of dollars in cash from the offertory were unaccounted for and that a significant amount of parish money was spent on items that [diocesan officials] testified were not parish related. Significantly, [these officials] testified that money collected from the offertory is collected from the parish members for parish purposes. There was also testimony from staff at the parish that fake deposit slips were used to cover up the fact that cash was taken from the offertory.

The state has introduced evidence inconsistent with the priest's claim of innocence. The case rises and falls on the intent of the priest when he used parish money and removed cash from the weekly offertory and whether it was for his personal benefit, not related to parish purposes. Ultimately, intent is a question of fact to be decided by the jury. We find that there was sufficient competent evidence of grand theft for the jury to find the priest guilty.

The court also rejected the priest's contention that the prosecution of this case led to an "excessive entanglement with religion" in violation of the First Amendment. It observed: "Purely secular disputes involving religious institutions and third parties do not create excessive entanglement of church and state when they involve neutral principles of law."

What this means for churches

Many churches have established discretionary funds that their pastor can use at his or her discretion, often with little, if any, oversight or accountability. This case illustrates that such arrangements can lead to the expenditure of church funds for personal purposes having little, if anything, to do with the furtherance of church purposes, and this, in turn, may lead to criminal liability. Guinan v. State, 65 So.3d 589 (Fla. App. 2011).

Legal Developments

Beware of Fundraising Schemes

A warning to trusting churches.

Richard R. Hammar, Attorney, CPA
Bio

A married couple, both asylum refugees from Kenya, engaged in a four-year fraud scheme that targeted several Midwest churches. The couple represented themselves as siblings and told their victims that they were homeless illegal immigrants suffering from serious medical conditions, including malaria and tuberculosis, and that they had significant legal bills attendant to their immigration status. During the four-year period covered by the indictment, the couple netted more than $1.1 million in proceeds, including $815,000 from one church. Though the couple said they needed the funds for legal and medical bills and tuition, they used the money to maintain two apartments and gambled away nearly $1 million.

The couple was apprehended, and pleaded guilty to mail fraud. The husband was sentenced to 39 months' imprisonment.

There is little chance that any of the churches will recover their contributions to this couple, since most of the funds they received were lost through gambling.

What this means for churches

This case should serve as a warning to church leaders to be wary of any appeals for donations from persons who are unfamiliar to you. Before responding to seemingly urgent appeals for funds, confirm the identity of the person seeking a donation as well as the legitimacy of the appeal. If in doubt, do not contribute. Remember, church leaders have a fiduciary duty to take reasonable steps to safeguard church assets, and this duty may be breached by responding to unsubstantiated appeals for funds. U.S. v. Bosire, 407 Fed.Appx. 951 (7th Cir. 2010).

Legal Developments

Adding Defendants to a Lawsuit

Be sure to name all potential defendants in the lawsuit; you may not be able to amend it.

Richard R. Hammar, Attorney, CPA
Bio

A Louisiana court ruled that a church could not sue its bank for negligence in allowing an employee to make unauthorized charges to the church's credit card since it failed to name the bank as a defendant in its original lawsuit.

A church filed a civil lawsuit against its former financial secretary, alleging that during the course of her three-year employment she used church funds for her personal use, mostly through the unauthorized use of church checks and credit cards. The church's lawsuit alleged that the financial secretary:

The lawsuit also named the financial secretary's husband as a defendant, alleging that the misappropriated funds benefitted both spouses and therefore he was responsible for reimbursement of damages as well. The church's lawsuit did not name any other defendants.

Neither the financial secretary nor her husband responded to the lawsuit, and so the trial court entered a default judgment against them in the amount of $384,000 plus interest and attorneys' fees.

On the same day that the court issued the default judgment, the church amended its lawsuit to include as defendants the church's credit card company and bank. The church asserted that the credit card company (Citigroup) was liable for its losses as it "negligently, improperly and without authority issued in the name of the church a credit card used by [the financial secretary] to charge personal items to the church which were solely for the use and benefit of herself and her family."

The church further alleged that the credit card company "failed to follow reasonable and safe business practices and procedures to ensure that the church had authorized the issuance of credit cards in its name used by the financial secretary to make these charges," and "breached its duty to protect the church from fraudulent use of its name and financial resources for the issuance of credit and payment of unauthorized and fraudulent charges."

The church also named its bank (Capital One) as a defendant, alleging that it was responsible for the financial secretary's acts. Specifically, it alleged that, due to its negligence and lack of care, the financial secretary "was able to draw unauthorized funds for payment for her, her husband and her family's sole benefit by forging signatures of other authorized persons, using the bank's internet banking features to avoid the requirement of two authorized signatures to draw on the church's accounts." The bank further asserted that the bank failed "to warn the church of obviously improper transactions which a reasonably prudent bank knew or should have known were fraudulent."

These two defendants asked the court to dismiss the church's claims against them on the ground that the original lawsuit failed to mention them as defendants, and that the default judgment was for all damages the church sustained. The trial court agreed and dismissed these claims. The church appealed.

A state appeals court affirmed the trial court's dismissal of all claims against the credit card company and bank. It stated the general rule as follows: "After obtaining a default judgment against an original defendant, a plaintiff cannot later amend the lawsuit to add another (sic) defendants." This makes sense, since a default judgment ordinarily grants the plaintiff the full measure of damages requested in the lawsuit, which presumably fully compensate the plaintiff for its injury or loss. To allow a plaintiff to sue additional defendants after a default judgment would potentially allow the plaintiff to collect multiple damages for the same injury.

What this means for churches

This case illustrates the importance of naming all potential defendants in a lawsuit. If only one defendant is named, and a default judgment is entered against the sole defendant because of a failure to respond to the lawsuit, the plaintiff may be precluded from amending the lawsuit to name additional defendants. 26 So.3d 917 (La. App. 2009).

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

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)

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