Indiana

Legal Developments

Wills and Estates

An Indiana court addressed the important question of whether a designated gift to charity is legally enforceable.

Richard R. Hammar, Attorney, CPA
Bio

• Key point 6-07.05. Church board members may be personally liable for diverting designated funds or trust funds to some other purpose.
Church Officers,Directors, and Trustees

* An Indiana court addressed the important question of whether a designated gift to charity is legally enforceable, and under the facts presented, concluded that a designated gift was not enforceable by an heir of the original donor. In 1950, a woman executed a last will and testament that bequeathed $250,000 to a hospital for the construction of a chapel. Following the donor's death, a chapel was constructed. It contained a plaque noting it was a memorial to the donor. In 2003, the hospital decided that it would be necessary to expand its facilities, and that such expansion would require demolition of the chapel. In 2004, the hospital took steps to dismantle the chapel, including removing the stained glass windows. A descendant of the donor asked a court to block the demolition of the chapel. A trial court issued an order permanently enjoining the hospital from destroying the chapel, and ordering it to restore the chapel to its original condition. The hospital appealed.

The appeals court began its opinion by making a distinction between 'an absolute gift and one in trust to a charitable institution. In the former, the property becomes an asset of the corporation to be used in such manner as the corporation deemed best, while in the latter, the property is held by the corporation, not as its own, but in the capacity as a trustee.' The court noted that the question of whether the language of a will or other document 'was intended to create a charitable trust, binding on the recipient, has been litigated in a number of cases.' In answering this question, a court must 'examine carefully all the clauses of the instrument and the situation of the parties in order to decide whether the phrases used were intended to be binding upon the charity … or whether it was to be an absolute owner with only moral obligations by reason of the suggestions or requests from the donor as to the use of the property given.'

The court stressed that 'the mere statement in a will of the purpose for which the property is to be used does not create a trust.' On the other hand, 'as a general proposition charitable trusts are favored by the law.'

Did the donor in this case intend to make an outright gift to the hospital, subject to its full discretion and control? Or did she intend to create a perpetual charitable trust that was beyond the power of the hospital to change? The court concluded that there was no question that the donor intended to make a charitable gift of some kind to the hospital. The court referred to three prior cases:

Case 1. A gift to the Bible Institute Colportage Association of Chicago 'to be used in the publication and dissemination of evangelical Christian literature in harmony with its Articles of Incorporation' created a charitable trust that was for the benefit of those who might receive the literature and was binding on the Association's successor as trustee of the bequeathed assets. One of the court's judges filed a concurring opinion in which he noted that the court's decision seemed to conflict with the established rule that a mere statement in a will of an intended purpose for a gift to charity does not convert the gift into a charitable trust. Bible Institute Colportage Association v. St. Joseph Bank & Trust Co., 75 N.E.2d 666 (Ind. App. 1947).

Case 2. A donor's will bequeathed assets to the Methodist Church 'to the Northwestern Branch of the Women's Foreign Missionary Society to be used for China, India and Africa.' A court concluded that this was 'a gift absolute without restrictions as to use' and did not create a charitable trust. Stockton v. Northwestern Branch of Women's Foreign Missionary Society of the Methodist Episcopal Church, 133 N.E.2d 877 (Ind. App. 1956).

Case 3. A donor's will bequeathed his house to his church 'to be used as a parsonage.' An Ohio court concluded that this language did not transfer the home in trust to the church for charitable purposes, and the church received unrestricted title to the property and could sell it rather than using it as a parsonage. First Presbyterian Church v. Tarr, 26 N.E.2d 597 (Ohio 1939).

The court concluded that the first case mentioned above was not controlling, since the donor in that case 'had bequeathed funds that had not been used for their stated purpose and funds remained for that use, and could continue being used in that way indefinitely or until the funds ran out.' In the case before it, however, the donor's purpose (funding a chapel) 'was met when the chapel was constructed and a plaque memorializing the donor was placed there.' Further, 'the general rule is that the mere statement of the purpose for a charitable gift does not transform it into a charitable trust.' Beyond that, the donor's will 'says nothing as to how long the memorial had to exist in order for it to be valid, or what would happen should [the hospital] no longer want the chapel before the end of its useful life.' In further support of its conclusion that the donor had not created a perpetual charitable trust, the court noted that the donor's will had been drafted by an experienced attorney who knew how to create a perpetual trust if this had been the donor's desire.

The donor's heir claimed that whenever a designated gift is made to a charity, the charity holds the property subject to a 'condition subsequent,' meaning that the gift is revoked if the charity uses the property for some other purpose. Once again, the court disagreed: 'Although no definite or particular form of expression is absolutely essential to the creation of a condition subsequent, it must be manifest from the terms of the will that the gift was made on condition and the absence of the words usually used for such purpose is significant. Conditions subsequent are not favored in law and always receive a strict construction. A condition subsequent will not be implied from a mere declaration in the deed that the gift is made for a special purpose.' The court quoted from a leading treatise on the law of trusts: 'The clear majority rule is that nothing short of express provisions for forfeiture and either a reverter, a gift over or a right to retake the property in the donor or his heirs would enable a donor to effectively impose a condition subsequent.' The court noted that the donor's will in this case 'contained nothing to indicate the required duration of the [chapel] ….The will also contains no reverter language to indicate what should happen to the chapel, or the funds used to build it, if the hospital no longer wanted the chapel on its premises ….When the language of an instrument does not clearly indicate the grantor's intention that the property is to revert to him in the event it is diverted from the declared use, the instrument does not operate as a restraint upon alienation of the property, but merely expresses the grantor's confidence that the grantee will use the property so far as may be reasonable and practicable to effect the purpose of the grant.'

The court concluded by noting that the donor's gift in fact had been used to construct a chapel that had been used continuously for nearly 50 years, and that 'although charitable gifts should be encouraged so far as possible, charities themselves should not be bound to one particular use of bequeathed property for multiple generations unless they are on clear notice that such is a requirement of the bequest.'


Application . This case is important for the following reasons:

1. The case represents one of the most extended discussions by any court of the enforceability of designated gifts to charity.

2. The court agreed that donors can donate funds or property to charity for a specific purpose, and obligate the charity to use the donated funds or property for the specified purpose perpetually. However, such a result will not be implied or inferred, and 'the mere statement in a will of the purpose for which the property is to be used does not create a trust.'

3. Wills and trusts containing designated gifts to charity that are drafted by an experienced attorney will be construed strictly against any 'charitable trust' obligating the charity to use the gift for the specified purpose perpetually. Such a trust must be clearly expressed in the will or trust or it will be assumed that no such trust was intended.

4. The court's reference to prior cases addressing the same issue is helpful.

5. A designated gift that does not specify the duration of the required use is more likely to be construed as an outright gift to the charity rather than a charitable trust.

6. 'Conditions subsequent' are not favored in law and always receive a strict construction. A condition subsequent 'will not be implied from a mere declaration in the [deed or will] that the gift is made for a special purpose.' St. Mary's Medical Center v. McCarthy, 829 N.E.2d 1068 (Ind. App. 2005).

Copyright © 1994 – 2006 Christianity Today International.All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, A publication of Christianity Today International, 465 Gundersen Drive, Carol Stream, IL 60188.

Legal Developments

Retirement Plans

An Indiana court ruled that a provision in a church’s bylaws requiring the church to make retirement payments to two former pastors took precedence over conflicting provisions.

Richard R. Hammar, Attorney, CPA
Bio

Key point 6-02.2. Churches are subject to the provisions of their governing documents, which generally include a charter and a constitution or bylaws (in some cases both). A charter is the state-approved articles of incorporation of an incorporated church. Most rules of internal church administration are contained in a constitution or bylaws. Specific and temporary matters often are addressed in resolutions. If a conflict develops among these documents, the order of priority generally is as follows-charter, constitution, bylaws, and resolutions.
Corporations

An Indiana court ruled that a provision in a church's bylaws requiring the church to make retirement payments to two former pastors took precedence over conflicting provisions in individual contracts the church and pastors had executed.

Pastor Paul founded a church in 1956. In 1970, his son (Pastor Nick) joined the pastoral staff as co-pastor. In 1988 Pastor Paul retired as pastor and became "bishop" of the church, and Pastor Nick was appointed senior pastor. In 2000, the church began to experience considerable turmoil over rumors that Pastor Nick was having an inappropriate relationship with a female employee of the church. Allegedly, Pastor Nick and the female employee had met alone, which was contrary to a church policy prohibiting a pastor from meeting alone with a member of the opposite sex. In addition, at one meeting that took place at a local restaurant both Pastor Nick and the female employee consumed alcohol, which also violated church policy.

Pastor Nick denied that the relationship was sexual, but he did admit that his "emotional involvement" in the relationship was "unhealthy." In the summer of 2000 Pastor Nick made a public statement to the congregation that he had "compromised some principles," that he was sorry, and that he was working with a prayer group of men in the church to increase his accountability. This statement did little to soothe the turmoil in the church. Pastor Nick and his wife were divorced in 2001, and he resigned as pastor later that year. His father, Pastor Paul, also separated from the church in 2001. A dispute soon arose over the amount of pension payments that the church owed to both pastors.

The church executed "pension contracts" with its pastors. In a 1976 contract, the church agreed to pay Pastor Paul, following his retirement, the salary he was receiving at the time of his retirement until his death. However, the contract stipulated that no retirement benefits would be paid if Pastor Paul "accepted a similar position with any other church within a thirty-mile radius." Another pension contract executed in 1991 pertained to Pastor Nick. It provided: "Should Pastor Nick complete 25 years of service with the church, and thereafter leave the employment of the church for any reason after the date of the execution of this agreement, at the later of age sixty-five or his retirement from the church and for and during his natural life thereafter, he shall receive yearly, as deferred compensation, 75% of the average of his last three years annual salary." Pastor Paul received retirement benefits pursuant to the 1976 agreement beginning with his retirement in 1988.

In 1992, the church bylaws were amended in the following two ways: (1) Pastor Paul would receive retirement benefits equal to his full salary at the time of retirement, for the remainder of his life, without regard to whether he started another church. (2) Pastor Nick's retirement benefits began upon his retirement, after 20 years of service. He was not required to be at least sixty-five years of age, as his 1991 pension contract specified.

When the pastors announced their separation from the church in 2001, they also announced that they were starting a new church nearby. The entire church office staff, half the congregation, and half the board, followed the pastors to the new church. This left the church in a financial crisis, which prompted it to discontinue Pastor Paul's retirement payments, and to make no retirement payments to Pastor Nick. Both pastors sued the church for breach of contract.

The church argued that its obligation to pay retirement benefits was based entirely on the individual pension contracts that it executed with the pastors, and not on the church bylaws. It claimed that it was not required to pay Pastor Paul any retirement benefits since the 1976 pension contract provided that no benefits were owed if he started a new church within a thirty-mile radius (which he had done). It claimed that it was not obligated to pay Pastor Nick any retirement benefits since his 1991 pension contract clearly stated that no benefits would be paid until he was sixty-five years of age. The pastors insisted that the church's legal duty to make retirement payments was based on the church bylaws, as modified in 1992, rather than on the individual pension contracts. And, since the bylaws did not contain any references to starting a new church, or age sixty-five, the church was obligated to make retirement payments to them.

A trial court ruled in favor of the pastors on the basis of the amendments to the church bylaws in 1992, and the church appealed. The appeals court focused on two issues-the legal effect of the church bylaws, and the religious nature of the dispute.

Legal effect of church bylaws

The church insisted that the pastors' legal right to retirement benefits was based solely on their individual pension contracts rather than on conflicting provisions in the church bylaws. The pastors claimed that the church bylaws defined their right to retirement benefits. The appeals court agreed that if the bylaws prevailed, then the church was legally obligated to pay retirement benefits to each pastor; but, "if the pension agreements prevail, then Pastor Paul is owed nothing because he violated his agreement by establishing a church within thirty miles and Pastor Nick is owed nothing yet because he has not yet reached the age of sixty-five."

The appeals court noted that "the articles of incorporation and bylaws of a nonprofit corporation constitute a contract between the state and the corporation, the corporation and its members, and the members among themselves." It concluded that this "contract" superceded the individual pension agreements as a result of the legal principle of "substituted contract." Generally, a substituted contract arises if: (1) a valid contract exists; (2) agreement of all parties to a new contract; (3) a new contract; and (4) an extinguishment of the old contract in favor of the new one. The court concluded that the church bylaws satisfied all four factors required to establish a substituted contract.

Religious nature of the controversy

The church asserted that Pastor Paul and Pastor Nick were not entitled to pension benefits because: (1) the division that resulted from Pastor Nick's alleged inappropriate relationship; (2) Pastor Nick's own admission that he had compromised his personal and the church's principles; (3) the fact that Pastor Paul and Pastor Nick started another church nearby; and (4) the fact that the church relies on the generosity of its members for financial support, and is required to pay a significant amount of money (over $17,000 per month) to two former pastors who, in the church's opinion, did not follow the principles of the organization during their tenure.

The court pointed out, however, that the amended bylaws contained no requirements for "a pastor's fidelity to church teachings or to other provisions of the church's bylaws in order for that pastor to be entitled to pension benefits." It continued:

In fact, the pension provision requires only that the pastor retire after a certain number of years of service to the church. In other words, the unambiguous, purely secular pension provisions of bylaws do not require the court to apply or interpret, any sections of the bylaws that set forth the religious or doctrinal teachings of the church. Based on this conclusion and on the fact that the church bylaws are the controlling document regarding the pension payments, we find no error in the trial court's granting of summary judgment to Pastor Paul and Pastor Nick.

The court rejected the church's argument that this was an inherently ecclesiastical dispute involving the employment of two pastors:

We cannot agree with the church that this case involves an ecclesiastical dispute. Instead, the issue revolves around how many years the pastors worked for the church. This fact does not require the invocation of any church doctrine-either the pastor did work the required number of years or he did not. The plain text of the pension provisions of the church bylaws does not require us to delve into Pastor Paul's or Pastor Nick's behavior, devotion to church beliefs, or effectiveness as pastors or bishops during the years they were employed. Their pensions were not contingent on such criteria. To discern their entitlement to their pensions, we must only determine that they were employed for the time period required, a fact that even the church does not dispute. Because deciding this case required no intrusion upon the faith, doctrine, and internal governance of the church, the trial court did not err in its decision to decide it.

What this means for churches

  1. The cost to the church as a result of the court's ruling is significant. The church was required to pay $426,000 in back retirement benefits to Pastor Paul, plus monthly benefits of $10,000 for life; and $306,000 to Pastor Nick plus monthly payments of $7,000 for life. As security for these judgments, Pastor Paul was granted a second mortgage on the church's property, and Pastor Nick was granted a third mortgage.
  2. Church leaders should recognize that the church's governing documents (charter, constitution, bylaws, etc.) may constitute a "contract" between the church and its members that takes precedence over conflicting provisions in individual employment contracts. As the church in this case found out, this can result in unforeseeable liability to the church. It is imperative for church leaders to be familiar with their church's governing documents, and to be sure that employment contracts are consistent with those documents.
  3. Some churches have enacted a binding arbitration policy in their governing documents that compels employees to resolve their disputes with the church by means of mediation or arbitration. This is a matter that church leaders should consider seriously. This newsletter has contained a number of articles addressing church arbitration clauses. We recommend that an attorney be consulted to discuss the advisability of such a policy. Calvary Temple Church v. Paino, 827 N.E.2d 125 (Ind. App. 2005).

Legal Developments

Protecting the Church’s Pocketbook

The consequences of check forgery are serious for both the victims and the forgers.

Richard R. Hammar, Attorney, CPA
Bio

Mullins v. State, 1999 WL 1261509 (Ind. App. 2000)

Background. A church layman ("David") removed several checks from the pastor's checkbook while visiting the church parsonage. He made one of the stolen checks payable to himself in the amount of $300, forged the pastor's signature, and then endorsed the check on the back. The bank teller required two forms of identification from David before cashing the check. He provided his identification card and social security card, and the teller recorded the corresponding numbers on the face of the check.

The pastor eventually noticed that his bank statement listed checks which he did not recognize. He went to the bank and obtained copies of the questionable checks. Upon examining them, he noticed that the checks were not in his handwriting and his name was even misspelled on one of the checks.

The pastor later asked David, who was someone he knew well, to come to the parsonage. While the two were in the kitchen, the pastor confronted David about the checks and asked him "why he did it." David apologized and told the pastor that he would try to pay him back. After several deadlines, David had failed to pay back any of the money.

The pastor turned the matter over to the police, and David was charged with forgery and theft. He was convicted on both counts. David appealed, claiming that the prosecutor failed to present sufficient evidence to support the forgery conviction. Specifically, he argued that his apology to the pastor was simply for taking the checks and not an admission that he forged a stolen check. Further, he challenged the bank teller's testimony, noting that she was unable to identify him as the individual who negotiated the forged $300 check.

The court rejected David's defenses and affirmed his conviction. It noted that a defendant commits forgery when, with intent to defraud, he or she executes a written instrument "in such a manner that it purports to have been made by another person." The court concluded,

Here, the stolen check was made payable to David, with his name endorsed on the back. Moreover, because David did not have an account with [the bank], the bank teller required two pieces of identification before she would cash the check. An identification card and a social security card were subsequently provided to the teller, and she recorded the numbers on the face of the check. Finally, most notably, when [the pastor] confronted David, he apologized and agreed to repay him. Thus, the state presented sufficient evidence from which the jury could infer that David forged the stolen check. We decline David's invitation to reweigh the evidence.

David also argued on appeal that the pastor should not have been allowed to testify concerning the conversation that took place in the parsonage because it was protected by the clergy-penitent privilege. He noted that the Catholic faith recognizes the sanctity of confession, and so his "confession" was a privileged communication to a clergyman pursuant to the state clergy-penitent privilege, which provides:

Except as otherwise provided by statute, the following persons shall not be required to testify regarding the following communications … clergymen, as to the following confessions, admissions, or confidential communications: (A) Confessions or admissions made to a clergyman in the course of discipline enjoined by the clergyman's church. (B) A confidential communication made to a clergyman in the clergyman's professional character as a spiritual adviser or counselor.

The court agreed that the Catholic sacrament of confession "clearly falls within the strictures of the statute as confessions made to a clergyman in the course of discipline enjoined by the clergyman's church." However, it insisted that "one need not be well versed in the Catechism to recognize that David's apology did not fall within the sanctity of confession. Here, only when confronted by the victim, who just happened to be a priest, David apologized and promised to repay. Further, this confrontation occurred in [the pastor's] kitchen after he had specifically requested David's presence." The court also noted that nothing in the conversation indicated that David "expected any confidentiality or that he was seeking advice or counseling from [the pastor] in his priestly capacity."

What this means for churches

There are several lessons to be learned from this case.

1. Church checkbooks should be protected from unauthorized access. The same is true of personal checkbooks that are brought on church property.

2. Church checks should require signatures of two designated officers.

3. Church treasurers should carefully review monthly bank statements to be sure that they can account for every check.

4. Forgery is a serious crime. David was convicted on two felony counts (forgery and theft) for forging a check in the amount of $300. Not only can such offenses lead to imprisonment, but they also can make it very difficult to find employment upon release from prison. What employer wants to hire a thief and forger?

5. This case illustrates that not every "confession" to a pastor will be protected by the clergy-penitent privilege from disclosure in court.

Posted:

Legal Developments

Court Rules Members Had Legal Authority to Retain or Remove Pastor

An Indiana court ruled that a majority of a “congregational” church’s members had the legal authority to determine whether or not to retain their pastor.

Richard R. Hammar, Attorney, CPA
Bio

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

• Key point 6-06.2. Officers and directors must be legally authorized to act on behalf of their church. Legal authority can be express, implied, inherent, or apparent. In addition, a church can ratify the unauthorized actions of its officers or directors, but this is not required. Church Officers, Directors, and Trustees

• Key point 6-09.2. Church members have such legal authority as is vested in them by their church's governing documents, and in some cases by state nonprofit corporation law. Church Members

An Indiana court ruled that a majority of a "congregational" church's members, rather than the church's board of trustees, had the legal authority to determine whether or not to retain their pastor. A church's board of trustees sent a "notice of termination" to the pastor. The trustees took this action without providing notice to the church congregation or seeking its approval. The pastor refused to relinquish his position, and the congregation convened a special business meeting at which it ousted the trustees and replaced them with a new board. The original trustees filed a lawsuit in the name of the church asking a court to recognize their removal of the pastor. The court refused, noting that the trustees had no authority to bring the lawsuit in the name of the church and that they failed to present any evidence that the pastor was a danger to the church's property or congregation. The trustees appealed, claiming that the first amendment guaranty of religious freedom prevented the civil courts from resolving internal church disputes such as this one. A state appeals court acknowledged that the "civil courts are precluded from resolving disputes involving church affairs if resolution of the disputes cannot be made without extensive inquiry into religious law and polity." However, "the courts do not inhibit free exercise of religion merely by opening their doors to disputes involving property, as there are neutral principles of law, developed for use in all property disputes, which can be applied without establishing churches to which property is awarded. Therefore, the first amendment commands civil courts to decide church property disputes without resolving underlying controversies over religious doctrine and practice."

The court noted that for churches of "congregational" polity, "the religious organization is represented by a majority of its members," and therefore "when presented with a dispute within a church of congregational polity, our courts will uphold the majority's decision, whether that is to purchase property or even remove the minister, unless the church has established its own decision-making body with the power to override the will of the majority." Without such a presumption, the court concluded, there would be chaos because members would have no avenue to resolve the dispute.

The court ruled that the dispute in this case was not a controversy over church doctrine or practice involving the interpretation of church doctrines. Rather, "this is simply a case where the trustees in a congregational church found themselves in the minority." As a result, the dispute had to be resolved according to the will of the majority of church members. The court noted that the members had voted not to recognize the authority of the trustees to fire the minister. The trustees insisted that the presumption of majority rule was rebutted by two provisions in the minister's original contract. One provision specified that "church delegated leaders" could terminate the contract without cause, and the other said that the "church delegated leaders" were the "only overseers of the church" and were "responsible for all of the affairs of the church … and "all ministers serve the congregation under the total oversight of and in partnership with the church delegated leaders to accomplish such purposes and objectives as are set forth in the scriptures."

The court rejected the trustee's claim that these provisions in the pastor's employment contract defeated the presumption of majority rule. It noted that only four of the "church designated leaders" had signed the contract; that the church leaders were referred to as "delegated"; and, that "despite the language in the contract, such leaders were still answerable to the majority will from which they obtained their authority" to enter into the employment contract.

Application. This case illustrates two important points. First, a majority of the members of a "congregational" church generally will decide how internal church disputes are resolved, unless the church's organizational documents or other controlling authority vests this authority in another person or group. Second, this case demonstrates the potential relevance of employment contracts in resolving questions over the status of a pastor or other church employee. In this case, the trustees insisted that they had the sole authority to determine whether or not the minister should be retained because of language in the minister's employment contract that seemed to give them extensive authority. While the court rejected the trustee's argument, the fact remains that it was a close question that could have been decided either way. The lesson is clear. If a congregational church's governing documents give the church membership the authority to select and remove a pastor, then the language in a pastor's contract of employment should not suggest that a church board has this authority. Cole v. Holt, 725 N.E.2d 145 (Ind. App. 2000).

© Copyright 2000 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m31 c0101

Legal Developments

Taxation—Church Property

An Indiana court ruled that a church’s property was entitled to exemption from property tax even though it did not have legal title to the property.

Richard R. Hammar, Attorney, CPA
Bio

Word of His Grace Fellowship, Inc. v. State Board of Tax Commissioners, 711 N.E.2d 875 (Ind. Tax Court 1999)

Key point. Property occupied and used by a church may be exempt from property tax even if the church does not own it.

An Indiana court ruled that a church's property was entitled to exemption from property tax even though it did not have legal title to the property.

A church purchased property under a "contract for deed" that is used for religious purposes. Under this arrangement, the seller retained title to the property to secure payment of the purchase price from the church. The church's application for a property tax exemption was denied on the ground that the church was not the legal owner of the property. Under Indiana law, property is eligible for exemption from property tax if it is "owned, occupied, and used" by a church or other religious entity for religious purposes.

A state tax board conceded that the property in question was occupied and used for religious purposes, but it insisted that the property was not "owned" by the church and therefore was not entitled to exemption. The state tax court disagreed, noting that "there is no requirement that the same entity own, occupy, and use the property for religious or charitable purposes. Rather, it is sufficient that the property is owned, occupied, and used for religious or charitable purposes." The court concluded that the property "was in fact owned, occupied, and used for religious purposes, and, therefore … was exempt from property taxation."

The state board of taxation also argued that the property was not entitled to exemption since the church rather than the legal titleholder applied for exemption. Under Indiana law the legal titleholder (the seller in this case) is required to apply for exemption. The tax court agreed that the legal titleholder is the party that must apply for a property tax exemption. However, the court pointed out that the tax board did not base its denial of the exemption on the fact that the church was not the proper party to apply for the exemption. This argument was raised for the first time on appeal, and therefore could not be considered.


Application.
 This case illustrates a couple of important points. First, property that is occupied and used for church purposes may qualify for exemption from property tax even though the church does not hold legal title to the property. Second, an exemption from property tax may not be granted if the wrong party applies for it. In some states, only the legal titleholder of property can apply for an exemption from property tax. If the church is not the legal titleholder of property that it occupies and uses, then it may not be the proper party to apply for a property tax exemption. These issues will be determined by the provisions of the property tax exemption law in each jurisdiction.

Legal Developments

Accrued Sick Leave

Use it or lose it, court says.

Richard R. Hammar, Attorney, CPA
Bio

Background. Many churches have adopted "sick leave" policies that provide employees with a specified number of "sick days" each year. Most employees do not use all of their available sick days, and so a question often arises as to the correct treatment of accumulated but unused sick leave. Do employees have a legal right to be paid for accrued but unused sick days, or do sick days represent a fringe benefit that is lost if not used? An Indiana court addressed this important issue in a recent case.

Facts of the case. A city adopted a sick leave policy for its firefighters that read:

Sick leave is time off work with pay due to the illness or injury of the employee. Sick leave is a privilege to assure the employee some continuity of compensation in times of illness or incapacity. If an employee is absent from work more than three days consecutively due to illness, a doctor's certification may be required. A supervisor can request such certification at any time if sick leave abuse is suspected. Sick leave is to be used only due to illness of the employee, non-job related injury, [or] an illness in the immediate family or the employee ….

Sick leave will be accumulated at the rate of one day per month not to exceed a total of sixty days accumulative leave. This will be retroactive to the date of employment of each individual officer.

Three firefighters voluntarily resigned from their employment. At the time of their resignations, they had each accumulated about 1,500 hours of unused sick leave. They asked the city to compensate them for all of these hours at their hourly rate of pay. The city refused to do so, and the firefighters filed a lawsuit asking a court to order the city to pay them for their unused sick leave. In particular, they argued that accumulated sick leave is actually "deferred compensation" to which employees are entitled when they terminate their employment.

The court's ruling. A trial court rejected the firefighters' argument, and ruled that they were not entitled to any compensation for their accrued but unused sick leave. It noted:

Sick leave, while defined … as wages, may only be received under the policy of the city when ill, injured, or when immediate family is ill or injured. Although sick leave is accumulated at one day per month and up to sixty days can be accumulated, it is payable only upon illness or injury …. One may accumulate it only for future illness or injury and you can receive it only if you are ill or injured or off work due to illness or injury.

Therefore, since [the three firefighters] terminated their employment and as such they can no longer satisfy the requirement of sick leave benefits, they forfeit the accumulated sick leave. There is no loss to them since they were paid for every day that they worked and every day they were off sick or injured. Vacation days are for idleness and to which an employee is entitled without regard to any other conditions.

The firefighters appealed, and a state appeals court agreed with the trial court and ruled that the city did not have to pay any compensation for the accrued but unused sick days. On appeal, the firefighters argued that sick leave benefits should be treated the same as vacation benefits. They cited other cases in which courts had ruled that employees are entitled to compensation for all accumulated and vested vacation benefits. The court conceded that employees have a right to compensation for accrued vacation benefits at the time of termination, but it refused to apply this principle to sick leave. It concluded:

[The firefighters] argue that sick leave benefits are analogous to vacation benefits. We disagree and are unwilling to [apply vacation benefits cases] to cases involving accumulated sick pay. There is an obvious difference between accumulated vacation pay and accumulated sick pay. Vacation time can be taken by an employee without any conditions after that benefit is earned. However, an employee may take sick leave only when that employee is ill or meets other conditions. [The city's] policy is clear that sick leave is payable only when an employee must take time off work for specific reasons. While employees may accumulate sick leave days under the city's policy, they may only use those days for a limited purpose. An employee must use be sick or other conditions must be present before an employee has right to use sick leave. As such, sick leave is not a benefit which automatically vests when earned. Absent some personnel policy language to the contrary, employees are not entitled to compensation for sick leave which has been accumulated but not used when the employee terminates employment.

Relevance to church treasurers. What is the relevance of this case to church treasurers? Consider the following points:

No vested right

The court concluded that "sick leave is not a benefit which automatically vests when earned. Absent some personnel policy language to the contrary, employees are not entitled to compensation for sick leave which has been accumulated but not used when the employee terminates employment."

Does your church have a written sick leave policy?

If so, be sure to review it carefully. In particular, be sure you can answer the following questions:

  • Does our church have a sick leave policy? Is it in writing? Has it been communicated to employees? Has it been amended? If so, have amendments been communicated to employees? Have employees agreed to be bound by such amendments? Is the policy explained to all new employees?
  • Which employees are eligible for sick leave?
  • What, if any, conditions trigger an employee's right to sick leave? Obviously, most policies condition this benefit on illness or injury to the employee or in some cases the illness or injury of a family member of the employee. Does your policy contain additional conditions? Whatever conditions your policy contains are of vital importance. The central ruling of the court in this case was that employees are not entitled to any compensation for accumulated but unused sick leave at the time of the termination of their employment since the conditions to payment of the benefit have not occurred (illness or injury).
  • Does our policy change the basic rule that employees are not entitled to compensation for accrued but unused sick leave at the time of their termination? The court stressed that employers are free to do so if they wish.
  • Does our policy limit the amount of sick leave that an employee can take in one year? If it does not, consider amending the policy to include such a provision.
  • Does our policy limit the amount of unused sick leave that an employee can accumulate during the year and carry over to the following year? If it does not, consider amending the policy to include such a provision.
  • Has our policy been reviewed by an attorney? This is a recommended practice.

Vacation benefits

The court pointed out that vacation benefits are different from sick leave. They are earned and "vested" during an employee's term of employment. Generally, there are no "conditions" (such as illness or injury) that must occur in order to qualify for the benefit. As such, employers should pay employees the value of their accrued but unused vacation days at the time of their termination—unless the right to compensation for accrued vacation days has been limited by policy or contract.

Check your state law

Some states have enacted laws or regulations addressing the legal status of accrued sick leave. This is why it is a good practice to have your sick leave policy reviewed by a local attorney.

Shorter v. City of Sullivan, 701 N.E.2d 890 (Ind. App. 1998)

Legal Developments

Recent Developments in Indiana Regarding Church Reportig Obligations

A federal court in Indiana ruled that an independent church was not exempt from paying more than $5 million in unpaid payroll taxes.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1999-05-01

Church Reporting Obligations

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

• Key point. The first amendment guaranty of religious freedom does not permit churches to avoid their federal payroll tax obligations, including the withholding and payment of income taxes and social security taxes, even if compliance interferes with a church’s religious beliefs.

A federal court in Indiana ruled that an independent church was not exempt from paying more than $5 million in unpaid payroll taxes. The church in question describes itself as a “New Testament Church.” One of its principal tenets is that Jesus Christ is the sole and exclusive head of the church. The church was founded in 1950, and was incorporated as a nonprofit corporation the same year. It later obtained a federal employer identification number. In 1983, the church’s membership decided to operate the church as an unincorporated religious society rather than as a corporation. As part of the transition, the church’s assets were transferred to the unincorporated religious society. The original corporation later was dissolved. In 1994, the IRS made an assessment of tax, interest, and penalties totaling nearly $3.5 million against the church for unpaid social security and federal income tax withholdings, interest, failure to deposit penalties, delinquency penalties, and failure to pay penalties for the years 1987 through 1992. Despite notice and demand for payment, the church did not pay any of the taxes, interest, or penalties. With accrued interest and penalties, the church’s obligation increased to $5.3 million by 1998. The IRS asked a federal court to enter a summary judgment in its favor and against the church for the full $5.3 million, and to foreclose on a tax lien the IRS had imposed on the church’s property. The church asserted that the first amendment barred the government’s claims, and that the IRS had mistakenly assessed these taxes against the defunct church corporation rather than the successor unincorporated church. Specifically, the church claimed that the federal tax system violates the first amendment’s “free exercise of religion” and “nonestablishment of religion” clauses by forcing it to pay taxes in violation of its religious convictions, and by giving preference to religions whose doctrine is not offended by the federal tax system. The court summarily rejected the church’s first amendment defense, noting that “the United States Supreme Court does not share its creative interpretation of the first amendment, making resolution of this issue rather straightforward.”

Free Exercise of Religion

In rejecting the church’s “free exercise of religion” defense under the first amendment, the court relied on a 1982 Supreme Court ruling in United States v. Lee, 455 U.S. 252. In the Lee case, the Supreme Court addressed the question of whether Amish employers can be compelled to withhold social security taxes from the wages of their employees, contrary to their religious beliefs. The Court recognized that compulsory participation in the social security system may “interfere with the free exercise [of religion] rights of [religious groups].” The Court also recognized, however, that the state may justify such an infringement by demonstrating that it is essential to the accomplishment of an overriding governmental interest. The Court then found that the broad public interest in maintaining the income tax and social security tax was of such a high order that religious belief in conflict with the payment of such taxes provides no constitutional basis for avoiding them.

The Indiana court concluded that the Lee case compelled it to reject the church’s “free exercise of religion” defense.

Nonestablishment of Religion

The church also asserted that the attempt by the IRS to collect $5.3 million in unpaid payroll taxes violated the first amendment’s “nonestablishment of religion” clause. The court concluded that this argument “also falls flat.” It noted that government actions (including tax assessments) do not violate the nonestablishment of religion clause if they have a clearly secular purpose, a primary effect that neither advances nor inhibits religion, and do not create an “excessive entanglement” between church and state. The court referred to a 1990 decision in which the Supreme Court ruled that “it is undeniable that a generally applicable tax has a secular purpose and neither advances nor inhibits religion.” Jimmy Swaggart Ministries v. Board of Equalization, 493 U.S. 378 (1990). As a result, the only remaining issue was whether federal tax law “fosters an excessive entanglement with religion.” The court concluded that it did not, noting that “carving out an exception to account for conflicting religious beliefs would result in the very entanglement that [the church] seeks to prevent, since it would require the IRS to examine the sincerity of a person’s religious beliefs.”

The court also relied on an earlier federal appeals court decision rejecting a church’s claim that requiring it to withhold social security taxes from nonminister employees’ wages violated the first amendment since it required government supervision and inspection of church records. The court, in rejecting this argument, concluded that the “entanglement” between church and state was minimal. Bethel Baptist Church v. United States, 822 F.2d 1334 (3rd Cir. 1987).

In summary, subjecting churches to the requirements of federal tax law does not violate the first amendment’s nonestablishment of religion clause, since “the tax system has a secular purpose, neither advances nor inhibits religion, and does not foster an excessive entanglement with religion.”

A “New Testament Church”

The church attempted to disregard all previous court decisions addressing the obligation of churches to pay taxes by pointing out that none of them involved a “New Testament Church.” The court rejected this argument, noting that “this is a distinction without a difference. We find no reason not to apply the clear principles set forth by the Supreme Court to [the church] simply because it designates itself as a New Testament Church.”

Neither a Corporation nor Unincorporated

The court also rejected the church’s novel argument that it was neither a corporation nor an unincorporated entity, but rather a New Testament Church and nothing more. The court observed that this position “fails to recognize the legal nature of [the church], which the record establishes to be that of an unincorporated religious society.”

The Correct Entity

The church asserted that the IRS was attempting to collect unpaid payroll taxes from the wrong entity. It pointed out that the IRS assessment of taxes was directed at the church corporation (which had been dissolved), rather than at the unincorporated church or New Testament Church. Part of the confusion no doubt was caused by the unincorporated church’s refusal to obtain an employer identification number. The court assumed that the IRS intended to direct its assessment against the unincorporated church entity, but that it failed to do so. The court warned that the unincorporated New Testament Church “could be held liable for the assessed taxes,” and it ordered the parties to file additional briefs on this issue.

Application. It is now clear, based on this case as well as those cases cited by the court, that any attempt by a church to avoid compliance with applicable federal payroll tax obligations (including the withholding and payment of income taxes and social security taxes) on the basis of the first amendment, its religious beliefs, or its unique structure or status, will be summarily rejected by the civil courts. United States v. Indianapolis Baptist Temple, ___ F. Supp.2d ___ (S.D. Ind. 1999).

Tip. The church was assessed a substantial amount of penalties for failure to file, failure to deposit, and failure to pay penalties. These penalties are explained in chapters 1 and 10 of Richard Hammar’s 1999 Church and Clergy Tax Guide.

© Copyright 1999 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m106 m43 c0399

Legal Developments

Recent Development in Indiana Regarding Employment Practices

A federal court in Indiana rejected the claims of a 61-year-old employee of a church-operated hospital that she had been a victim of age discrimination.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax1999-05-01

Employment Practices

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

• Key point. An employer does not necessarily commit unlawful age discrimination by dismissing an employee, or converting a full-time employee to part-time status, on the basis of economic necessity.

• Key point. Church retirement plans are exempt from regulation under the Employee Retirement Income Security Act of 1974 (ERISA), unless they specifically elect to be covered.

A federal court in Indiana rejected the claims of a 61-year-old employee of a church-operated hospital that she had been a victim of age discrimination. The court also rejected her claim that the hospital’s amendments to its pension program, which unfavorably affected some retirees, violated the Employee Retirement Income Security Act (ERISA). A woman (the “plaintiff”) began working for a church-operated hospital as a full-time cashier in 1978. In 1994, the hospital needed to make financial cutbacks, and underwent a reduction in force (RIF) that included decreasing the number of employees. The plaintiff’s cashier position was reduced to part-time. Her duties changed somewhat when she dropped to part-time. She was given the duty of posting private checks, and several of her other responsibilities were transferred to other employees, including filing, processing returned mail, and posting fees from collection agencies. She discussed her reduction in hours with the hospital’s director of human resources, but did not complain to anyone about the reduction and did not file a charge of discrimination with the Equal Employment Opportunity Commission (“EEOC”). In 1995, hospital managers decided that further cost-cutting was needed, and a decision was made to terminate the plaintiff’s position. She was 61 years old at the time. In making this decision, hospital management considered that others in the department were already performing the plaintiff’s duties when she was not there, that the plaintiff would have needed additional training to perform billing and collection functions, and that the plaintiff was the only part-time employee in the department. The plaintiff was offered a part-time registrar position in the emergency room, working the “midnight” shift. She submitted a letter of resignation stating that she intended to retire because she found working midnights very difficult and because of the changes in the health insurance plan. A few weeks later, the plaintiff filed a “charge of discrimination” with a local civil rights commission, alleging that she was being demoted, receiving less pay, and her benefits were in jeopardy because of her age. She also filed a lawsuit in federal court, alleging that the hospital interfered with her pension rights under the Employee Retirement Income Security Act of 1974 (ERISA), and discriminated against her on the basis of her age in violation of the Age Discrimination in Employment Act.

The ERISA Claim

The plaintiff alleged that the hospital, as part of its cost-cutting campaign, made changes to its pension plan that directly and unfavorably affected her and other retirees. The hospital countered by pointing out that its pension plan was a “church plan” and as such was exempt from ERISA. ERISA specifies that it “shall not apply to any employee benefit plan if … such plan is a church plan with respect to which no election has been made ….” The term church plan is defined as a plan “established and maintained … for its employees (or their beneficiaries) by a church or by a convention or association of churches which is exempt from tax ….” ERISA further provides:

A plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches includes a plan maintained by an organization, whether a civil law corporation or otherwise, the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or association of churches, if such organization is controlled by or associated with a church or a convention or association of churches.

The term employee of a church or a convention or association of churches is defined to include a “duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry, regardless of the source of his compensation,” and an employee of an organization “which is exempt from tax … and which is controlled by or associated with a church or a convention or association of churches.” ERISA further provides that an organization “is associated with a church or a convention or association of churches if it shares common religious bonds and convictions with that church or convention or association of churches.”

The hospital relied on a letter from the IRS acknowledging that the hospital’s pension plan was a church plan. The plaintiff questioned the pension plan’s “church plan” status. She asserted that the hospital had not demonstrated that it was controlled by a church or that its retirement plan was established and maintained by a church. She claimed that ERISA is construed liberally, and exemptions to its coverage defined narrowly, to further its purposes of preventing deprivations of benefits.

The court rejected the plaintiff’s arguments, relying entirely on the IRS determination that the hospital’s pension plan was a church plan.

The Age Discrimination Claim

The plaintiff claimed that she was performing satisfactorily, but her position was eliminated and a younger employee continued to perform her duties in a full-time position. This, she asserts, shows that her position was not eliminated because it was no longer necessary or because the hospital could not afford to keep someone in the position at full-time hours. She also insisted that pressure was put on her, and not other employees, to retire.

The federal Age Discrimination in Employment Act (ADEA) makes it unlawful for an employer to discharge or otherwise discriminate against an individual (who is at least 40 years of age) on the basis of age. To prevail in an ADEA claim, a plaintiff may establish age discrimination by (1) presenting direct or circumstantial evidence that age was a determining factor in the decision at issue, or (2) may use the indirect, “burden-shifting” method of proof. Since the plaintiff did not present direct evidence that her age played a role in the decision to reduce her to part-time, the court applied the burden-shifting analysis. Under this analysis, the plaintiff must first show a “prima facie case” of age discrimination, thereby shifting the burden of proof to the employer to articulate a legitimate non-discriminatory reason for the decision. Once the employer does so, the plaintiff must come forward with evidence that would allow a jury to conclude that the reason given is a “pretext” for age discrimination. A plaintiff can establish pretext by showing either that a discriminatory reason more likely motivated the employer or that the employer’s explanation is not credible. The court observed:

These formulations are simply different ways of recognizing that when the sincerity of an employer’s asserted reasons for discharging an employee is cast into doubt, a [jury] may reasonably infer that unlawful discrimination was the true motivation: If the only reason an employer offers for firing an employee is a lie, the inference that the real reason was a forbidden one, such as age, may rationally be drawn.

Applying these principles to this case, the court must determine whether a [jury] could find that the hospital’s true reason for reducing her hours was the RIF going on at that time, and not whether that decision was a sound business decision. The evidence on which [the plaintiff] relies does not call into doubt the hospital’s proffered reason for eliminating her cashier position. The hospital asserts that [the plaintiff’s] position was eliminated because it was the department’s only part-time position (and elimination of part-time positions was a suggested method of cutting costs) and other full-time employees had the skills necessary to perform her duties, while she would have required additional training to perform their duties. [The plaintiff’s] assertions that she was performing satisfactorily, that her duties still needed to be performed, and that a younger employee continued to perform her duties simply do not refute the specific reason given for her elimination, and therefore could not support a finding that the reason is a pretext for age discrimination ….

Application. This case presents one of the few discussions of the application of ERISA to churches or church-controlled organizations. The court’s liberal interpretation of the “church plan” exemption will be a useful precedent to any religious organization that is sued for an alleged violation of ERISA in the administration of a retirement or employee benefit plan. The case also confirms that employment decisions that adversely impact older employees do not necessarily constitute age discrimination-if the employer can demonstrate that the decision was based on economic necessity. Humphrey v. Sisters of St. Francis Health Services, Inc., 979 F. Supp. 781 (N.D. Ind. 1997). [The Civil Rights Act of 1964]

© Copyright 1999 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m43 m42 c0399

Legal Developments

Recent Developments in Indiana Regarding Unincorporated Churches

The Indiana Supreme Court ruled that members of an unincorporated church can sue their church for injuries they suffer on church property or in the course of church activities.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax1999-03-01

Unincorporated Churches

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

• Key point.. In some states, unincorporated churches are viewed as an entity rather than a group of individuals. As a result, members who are injured in the course of church activities can sue their church without having the case dismissed as an example of “members suing themselves”.

The Indiana Supreme Court ruled that members of an unincorporated church can sue their church for injuries they suffer on church property or in the course of church activities. The court reversed previous rulings in which it had applied the traditional rule that members of an unincorporated church cannot sue their church. The facts of the case can be quickly stated. A church member (the “victim”) attended a meeting of a local “Toastmasters” chapter that had rented a portion of the church for the evening. Both members and non-members of the church attended the function. Over the course of the evening, some snow and ice accumulated in the parking lot of the church. After spending about two hours inside, the victim left the church and walked toward her automobile. As she neared her car, she slipped and fell. An associate pastor saw her fall and immediately drove her to the hospital, where she received treatment for a broken arm. The associate pastor later commented to the church’s business manager that the parking lot had been slick on his way into the church earlier that evening and was still slippery on his way out when he saw the victim fall.

The victim later sued her church and its 9-member board of trustees for her personal injuries, alleging negligence for failure to properly maintain the parking lot, failure to inspect the parking lot for dangerous conditions, failure to remove the snow and ice from the parking lot, and failure to warn her of the dangerous conditions. The trustees and church pointed out that the church was unincorporated, and as a result the victim could not sue them. A trial court agreed, applying the traditional rule that a member of an unincorporated association cannot sue the association for the negligence of another member. This rule is based on the following considerations: (1) unincorporated associations are not “legal entities” and therefore cannot be sued directly; (2) members of an unincorporated association are engaged in a “joint venture,” and therefore the negligence of one is imputed to all the others. In this case, this meant that the negligence of the church leaders in failing to remove snow and ice from the parking lot was imputed to the victim, preventing her from maintaining her lawsuit. The victim appealed. A state appeals court agreed that the victim could not sue the trustees, but it concluded that she could sue her church. The church appealed to the state supreme court.

The supreme court began its opinion by observing:

As a general rule, a member of an unincorporated association may not sue the association itself for injuries suffered as a result of the tortious acts of the association or its members. The rule rests upon the doctrine of imputed liability. Under the theory of imputed liability … members of an unincorporated association are engaged in a joint enterprise. The negligence of each member in the prosecution of that enterprise is imputable to each and every other member so that the member who has suffered damages through the tortious conduct of another member of the association may not recover from the association for such damage. It would be akin to the person suing himself as each member becomes both a principal and an agent as to all other members for the actions of the group itself.

However, the court concluded that the traditional rule had to be abolished, and that members should be allowed “to bring tort actions against the unincorporated associations of which they are part.” It listed the following considerations to justify its decision: “(1) it is inherently unfair to require an injured member, who is one of a number of equally faultless members, to bear a loss incurred as a result of the association’s activities; (2) there is no reason to limit the availability of the insurance that associations can, and presumably often do, obtain to avoid unexpected liabilities of the members as a result of exposure to third party claims.”

The court cautioned that an injured member’s right to sue his or her unincorporated church was subject to some important limits. Most importantly, “while a member may now sue an unincorporated association in tort, she may only reach the association’s assets. If she wishes to reach the assets of any individual, she must name that individual as a party and prove that individual’s fault, as always. As a result, individual members, including officers and trustees, may not be held vicariously liable for a judgment against the association.” This is an important clarification, for it demonstrates that members of unincorporated churches (in Indiana) will not be personally liable for the acts of other members so long as they did not participate in or ratify those acts.

The court sent the case back to the trial court for trial.

Application. What is the significance of this case? Consider the following:

1. It demonstrates the erosion of the traditional rule that unincorporated churches could not be sued by members.

2. The court noted, however, that the tradition rule is still applied in several states, including Rhode Island, Wyoming, Vermont, Pennsylvania, Wisconsin, and Washington. It is likely, however, that courts in these states eventually will abolish the traditional rule.

3. The court stressed that individual members of unincorporated churches (in Indiana) cannot be sued as a result of the acts of other members, unless they participated in or ratified those actions. To illustrate, if a member of an unincorporated church injures someone through negligent driving of a church vehicle, the victim can sue the church and negligent driver but not members having nothing to do with the accident. Of course, the victim may be able to demonstrate that church board members were negligent in allowing the member to drive (for example, if the driver had a poor driving record or had a suspended license). Hanson v. Saint Luke’s United Methodist Church, 1998 WL 904830 (Ind. 1998). [Unincorporated Associations]

© Copyright 1999 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m77 m58 m86 c0299

Legal Developments

Recent Developments in Indiana Regarding the Taxation of Church Property

An Indiana court ruled that a church-owned building was exempt from property taxation even though it was not currently being used for exempt purposes.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax1999-03-01

Taxation-Church Property

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

• Key point.. A building purchased by a church may be exempt from property taxation even though the church does not presently use the property for religious purposes.

An Indiana court ruled that a church-owned building was exempt from property taxation even though it was not currently being used for exempt purposes. A church purchased an adjacent building and parking lot for use as a community mental health center. While the building was structurally sound, it needed extensive interior renovations in order to be used as a mental health center. These renovations were in progress on the date the church filed an application to exempt the building and parking lot from property taxation. A state tax board granted an exemption for the parking lot, since it was being used by parishioners who attended the church. But the tax board denied the exemption for the building since it was “vacant and unoccupied” on the assessment date. The church appealed, and the state tax court ruled that the building was exempt. Indiana law exempts from taxation “all or part of a building [that is] owned, occupied, and used by a person for … religious or charitable purposes.” The court acknowledged that exemption statutes are “strictly construed against the person claiming the exemption.” But it insisted that “exemption provisions are not to be construed so narrowly that the legislature’s purpose in enacting it is defeated or frustrated.”

The “proper focus,” concluded the court, is “whether the use of the property furthers exempt purposes.” Such an approach is “consistent with the legislative purpose of rewarding charities for providing a public benefit.” The court noted that the building in question was undergoing extensive renovations on the tax assessment date (the date on which property tax exemptions are determined). The question to be decided “is whether preparing the building for future use in furtherance of exempt purposes qualifies the building for exemption.”

The court agreed that “mere ownership alone is insufficient to support an exemption and that the intent to use the property for an exempt purpose must be more than a mere dream.” It continued:

In this case, it is apparent that, on the assessment date [the church’s] intent to use the building in furtherance of exempt purposes was more than a dream, and that it did more than merely own the building. [It] had taken concrete steps at great expense to prepare the building for use as a community mental health center. This is more than enough objective evidence to support [the church’s] contention that, as of the assessment date, it held the building with an intention to use the building in the future for exempt purposes. It was therefore an abuse of discretion to deny [the building’s] exemption.

Application. This case is important for one reason-it illustrates that church-owned buildings may be exempt from taxation though they are not being used for religious or charitable purposes on the tax assessment date. So long as the church intends to use the building for exempt purposes in the future, and this intent is demonstrated by renovations or other actions, then the property may qualify for exemption. Many states, like Indiana, have statutes exempting property that is owned, occupied, and used for religious or charitable purposes. The fact that the court interpreted this language to apply to an unused building undergoing renovations for future use will be a helpful precedent for churches that own (or are considering the purchase of) a vacant building that is not currently being used for exempt purposes. The fact that the building is not currently being used for exempt purposes does not necessarily mean that it will not qualify for exemption-especially if the church can demonstrate by its actions that its intent to use the property in the future for exempt purposes is real. Trinity Episcopal Church v. Board of Tax Commissioners, 694 N.E.2d 816 (Ind. Tax 1998). [State Taxes]

© Copyright 1999 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m70 c0299

Legal Developments

Recent Developments in Indiana Regarding Unincorporated Churches

An Indiana court recognized an exception to the general rule that members of an unincorporated church cannot sue their church for injuries they suffer on church premises or during church activities.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax1998-03-01

Unincorporated Churches

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

• Key point. Under the general rule, members of an unincorporated church cannot sue their church for injuries they sustain on church premises or in the course of church activities.

• Key point. A few courts have recognized an exception to the general rule that members of an unincorporated church cannot sue their church for injuries occurring on church premises or in the course of church activities. Under this exception, members are permitted to sue the church if (1) the church has an existence separate from its members, and (2) the members do not exercise control over the operations of the church.

• Key point. Church board members are not liable for the obligations and actions of their church solely on the basis of their status as board members.

An Indiana court recognized an exception to the general rule that members of an unincorporated church cannot sue their church for injuries they suffer on church premises or during church activities. A church member (the “victim”) attended a large church with approximately 3,800 members, including 9 trustees. The victim was injured when she slipped and fell on ice and snow that had accumulated on the church’s parking lot. She sued her church and board of trustees claiming that they had been negligent in failing to inspect and maintain the parking lot, failing to discover the dangerous condition, failing to remove the ice and snow, and failing to warn her of the danger. The church argued that the victim, as a member of an unincorporated church, could not maintain a lawsuit against her church. A trial court agreed, and dismissed the lawsuit against both the church and trustees. The victim appealed.

The church

The appeals court first addressed the question of whether or not the member of an unincorporated church can sue the church for injuries occurring on church premises. The court acknowledged that “as a general rule, a member of an unincorporated association cannot sue the association for the tortious acts of one or more of its members.” The court explained the justification for this rule as follows:

The theory of the general rule is that the members of an unincorporated association are engaged in a joint enterprise. The negligence of each member in the prosecution of that enterprise is imputable to each and every other member so that the member who has suffered damages through the tortious conduct of another member of the association may not recover from the association for such damage. It would be akin to the person suing himself as each member becomes both a principal and an agent as to all other members for the actions of the group itself.

The court claimed that an “exception” to the general rule has been recognized in some states under the following circumstances: (1) the unincorporated association has a legal existence separate from its members, and (2) the members do not exercise control over the operations of the association. It referred to cases in California, Delaware, New Jersey, Ohio, South Carolina, and Texas that have recognized this exception. The exception recognizes that the general rule is “inherently unfair to the injured member of the unincorporated association” and “unnecessarily limits the availability of insurance which most, if not all, unincorporated associations maintain.”

The court made the interesting argument that application of the general rule (members cannot sue unincorporated churches) may discourage persons from becoming church members:

In addition, we note that the general rule as currently applied in Indiana discourages persons from becoming members of unincorporated associations. For example, a person who is a frequent visitor at [a church] may recover from the church if he or she is injured while attending services. However, once that frequent visitor becomes a member of the church, he or she gives up all protection from the church’s tortious acts. Persons who wish to remain protected, therefore, are discouraged from joining churches. Our decisions applying the general rule have sanctioned this result, one with which, given the well—established separation between church and state, we are increasingly uncomfortable.

The court concluded that the exception to the general rule should apply in this case:

Here, the evidence designated to the trial court reveals that [the church] is a 3,800 member Methodist church located in Indianapolis, Indiana. [It] employs many people, including, among others, several pastors, a business administrator, a maintenance supervisor and a large custodial staff. Additionally [it] is governed by a board of nine trustees, each with a different area of responsibility. The trustees are not elected by the general congregation; rather, they are nominated and approved by various groups within the church. Finally, [the church] operates pursuant to a uniform set of bylaws entitled The Book of Discipline of the United Methodist Church. None of this evidence indicates that church members are involved in the church’s decision—making or even in choosing the decisionmakers. Instead, the record supports a conclusion that [the church] is much like a corporation, which exists perpetually and independently regardless of its individual members. In light of these facts, we conclude that the reasons supporting the general rule, including the prevention of collusive lawsuits and the avoidance of suits by a member against herself, do not apply in this case.

The board of trustees

The victim insisted that the trustees were responsible for the maintenance of the church property and had a legal duty to make the parking lot reasonably safe. She claimed that their negligent failure to do so caused her injuries. The court disagreed. It emphasized that “a corporate officer, director or employee is not personally liable for the torts of a corporation merely because of his office. Some additional connection with the tort is required.” The court continued:

Here [the victim’s] claim against the trustees is predicated on their general duty to maintain the church property. However [she] does not allege, nor does the record show, that any of the trustees was responsible for clearing the parking lot or warning patrons of the dangerous conditions. To the contrary, the record reveals that [the church] contracted with a snow removal service for ice and snow removal. Thus, we cannot say that the trustees had sufficient connection with the failure to remove the ice and snow to give rise to individual liability.

Application. What is the relevance of this case to your church? Consider the following:

If your church is unincorporated, then members may not be able to sue the church for injuries they suffer on church premises or during church activities. This should not be viewed as an “advantage” of unincorporated status, for three reasons. First, as noted in this case, some courts have recognized an exception to the “general rule” and allowed members to sue unincorporated associations under some circumstances. Second, members of unincorporated churches may face personal liability for the actions of other members in the course of church activities. This risk far exceeds any “benefit” to the church in being immune from lawsuits by members. Third, most churches have obtained liability insurance. As a result, insurance proceeds are available to compensate members for injuries that occur on church premises. It would indeed come as a shock to most members of unincorporated churches to discover that their church insurance policy will not cover them if they are injured as a result of their church’s negligence. That may be “good news” to the church leadership, but it will be very difficult to accept if you break your leg on church premises and incur thousands of dollars in medical bills.

The court ruled that members of unincorporated churches can sue their church if (1) the church has a legal existence separate from its members, and (2) the members do not exercise control over the operations of the church. The court referred to rulings in California, Delaware, New Jersey, Ohio, South Carolina, and Texas that have recognized this exception to the general rule. It is possible that courts in other states will reach a similar conclusion. The court suggested that it will be easier for larger churches to qualify for this exception since they often have “a hierarchy of structure that drastically alters the relationship of membership to the association and the control that a member has in its affairs.” On the other hand, smaller churches may not qualify for the exception to the general rule. The court referred to a 1988 ruling in which the state supreme court held that a member of a small unincorporated church who had been injured when he fell off a ladder while assisting in repairing the church’s roof could not sue the church. Calvary Baptist Church v. Joseph, 522 N.E.2d 371 (Ind. 1988).

Finally, it is also important to note that the court refused to allow the victim to sue the members of the board of trustees. The court recognized that board members are not automatically responsible for the liabilities and obligations of their church. Rather, there must be a “sufficient connection” between the board members and whatever caused an injury. This standard was not met in this case. Hanson v. St. Luke’s United Methodist Church, 682 N.E.2d 1314 (Ind. App. 1997). [ Unincorporated Associations]

© Copyright 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m77 m58 m86 c0298

Legal Developments

Abuse Victim Sues Church for Negligence

Adult victims may be able to sue for abuse suffered as a child

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1997-05-01

Sexual Misconduct by Clergy and Church Workers

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

• Key point. A church may be legally responsible for injuries caused by incidents of child molestation if it was negligent in selecting, supervising, or retaining the perpetrator.

• Key point. In some states members of an unincorporated church cannot sue their church as a result of injuries they sustain.

An Indiana court ruled that the first amendment does not prevent a woman from suing her church and a denominational agency on account of injuries she suffered as a result of being molested by her pastor when she was a minor. The woman claimed that the pastor began molesting her when she was 7 years old, and that the molestation continued until she was 20. The woman sued her church and the regional and national denominational agencies with which her church was affiliated. A state appeals court concluded that the woman could pursue some of her claims against the church and regional agency, but not against the national church. The court made a number of important observations that are summarized below.

first amendment

The church, along with the regional and national denominational agencies, insisted that the woman’s claim was barred by the first amendment nonestablishment of religion clause which prohibits “excessive entanglement” between church and state. The court acknowledged that some courts have reached such a conclusion, but it declined to do so noting that a review of the woman’s claims “does not require any inquiry into religious doctrine or practice.” It continued:

[The pastor’s] actions were not religiously motivated. Instead, review only requires the court to determine if the church knew of [his] inappropriate conduct, yet failed to protect third parties from him. The court is simply applying secular standards to secular conduct which is permissible under first amendment standards. The first amendment does not provide an absolute freedom to act with regard to religious beliefs. Instead, that freedom can be regulated for the protection of society. The protection of society requires that religious organizations be held accountable for injuries they cause to third persons.

statute of limitations

The statute of limitations specifies the deadline for filing a lawsuit. In Indiana the statute of limitations for personal injuries is 2 years. However, Indiana (like many states) has adopted the so-called “discovery rule.” Under this rule, the 2-year limitations period does not begin to run until a person “knew, or in the exercise of reasonable diligence, could have discovered that an injury had been sustained” as a result of the wrongful conduct of another. The court stressed that the woman in this case “knew the sexual molestation was occurring and that it was wrong when she was 15 or 16 years old.” Further, she had been receiving counseling for the behavioral problems associated with the pastor’s actions. As a result, she was well aware of the nature and cause of her injuries when she was a minor. Since the statute of limitations does not begin to run for injuries occurring to a minor until the minor’s 18th birthday, the woman had 2 years to bring her lawsuit after she attained age 18. Since she failed to file her lawsuit by this deadline, any recovery of damages for injuries occurring while she was a minor were barred. She could sue only for damages associated with the relatively infrequent acts of molestation occurring within two years of the date she filed her lawsuit.

member of an unincorporated association

The church argued that the woman’s lawsuit had to be dismissed as a result of the general rule that members of an unincorporated association cannot sue the association. The court acknowledged that the church was unincorporated, and then summarized the rule as follows:

The theory of the general rule is that the members of an unincorporated association are engaged in joint enterprise. The negligence of each member in the prosecution of that enterprise is imputable to each and every other member so that the member who has suffered damages through the tortious conduct of another member of the association may not recover from the association for such damage. It would be akin to the person suing himself as each member becomes both a principal and an agent as to all other members for the actions of the group itself.

The court concluded that the woman had been a member of the church for most of her life. It acknowledged that she had recently begun attending a different church, and therefore she could sue for those acts of molestation (if any) occurring after she ceased to be a member of the former church.

negligent selection

The court concluded that neither the church, nor the regional or national denominational agency, could be sued on the basis of negligent selection of the pastor. The court observed that the pastor was hired by the church in 1954, and that there was no evidence whatever that the church or either denominational agency was aware of any misconduct on his part at that time.

negligent supervision and retention claim against the national agency

The court concluded that the national church was not liable on the basis of negligent supervision or retention for the actions of the pastor. It observed:

The [national church], which is only affiliated with the local church and [regional agency] through its constitution and judicial procedures, was not informed. The evidence … does not indicate that [the woman] invoked the judicial procedures, which is the only mechanism by which the [national church] could have taken action against [the pastor]. According to the judicial procedures, the [regional agency] forms a committee to investigate alleged misconduct upon the submission of a complaint signed by two or more persons. Only after this investigation is completed and the [regional agency] determines that the evidence warrants a trial does the [national church] become involved. [The woman] has not alleged … that she or anyone else ever filed a complaint against [the pastor] with the [regional agency]. Therefore, the [national church] could not have disciplined [the pastor]. Accordingly, we conclude that because the evidence does not show that the [national church] was aware of [the pastor’s] actions, summary judgment in favor of the [national church] is proper on [the woman’s] claims for negligent hiring, supervision, and retention.

negligent supervision and retention claim against the church and regional agency

The court concluded that there was evidence that the local church and regional agency were aware of the pastor’s actions, and therefore they could be sued for negligent supervision and retention. The court sent the case back to the trial court for trial.

Application. There are a number of aspects to this decision that are noteworthy. Consider the following: (1) The case demonstrates the difficulty that adults often experience in filing a lawsuit as a result of injuries received while a minor. Even in those states where the statute of limitations does not begin to run until the victim “discovers” the cause of his or her injuries, the courts have been reluctant to accept such claims-particularly when the injuries occurred when the person was an adolescent. (2) The case illustrates the rule recognized in many states that members of an unincorporated church cannot sue their church for injuries they sustain on church property or in the course of church activities. However, this rule does not affect nonmembers. (3) There can be no liability for incidents of sexual misconduct based on “negligent selection” if a church had no knowledge at the time it hired the perpetrator that he or she posed a risk to others. (4) A church can be sued on the basis of negligent supervision or retention if it retains a worker who is known to have engaged in acts of sexual misconduct. (5) Finally, the court ruled that the national church was not liable for the pastor’s acts of molestation, even if it had some knowledge of them, if the disciplinary procedure outlined in its bylaws was not activated. This is a significant point. Many denominational agencies have procedures for disciplining ministers. These procedures may be invoked only in specified ways. If the procedures are not properly invoked, the denominational agency may not be liable for failing to bypass its own procedures and engage in a unilateral act of discipline. Konkle v. Henson, 672 N.E.2d 450 (Ind. App. 1996). [Seduction of Counselees and Church Members, Unincorp orated Associations, Negligence as a Basis for Liability, Denomina tional Liability]

© Copyright 1997, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m67 m39 m86 m88 c0397

Legal Developments

Woman Sues Church Over Molestation by Former Pastor

Her lawsuit was barred by the statute of limitations.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1997-05-01

Sexual Misconduct by Clergy and Church Workers

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

• Key point. Minors who are sexually molested by church workers may not sue their church after the statute of limitations has expired. Generally, the statute of limitations begins to run on a minor’s 18th birthday. In some states the statute of limitations does not begin to run until an adult survivor of child sexual molestation “discovers” that he or she has experienced physical or emotional suffering as a result of the molestation. Other states do not recognize this so-called “discovery rule.”

An Indiana court ruled that an adult female who was molested by her former pastor was prevented from suing her church by the statute of limitations. The victim was born to a large family in 1968. A high achiever, she was elected president of her class all four years of high school and ultimately graduated as valedictorian. The victim began seeing a minister in her church for counseling when she was sixteen. The minister was a married man about twice the victim’s age. The minister soon abused the counseling relationship to manipulate the victim into having a sexual relationship with him. He claimed that having sexual intercourse with him would be “therapeutic,” and assured her that it was an appropriate part of the counseling process. The sexual relationship continued until the victim was twenty years old. The minister convinced her that they had a “love” relationship. Through domination and manipulation, he persuaded her to keep the sexual relationship secret.

The victim was aware that the minister was married and that her sexual relationship with him was prohibited by church teaching. She was also aware that her parents and others would not approve and would have believed that the minister was harming her. Nevertheless, she kept the sexual relationship secret because she understood that the minister might lose his job or even be arrested if found out. While attending college, the victim would skip classes and tests to be with the minister, despite the adverse effect upon her grades. Even after the sexual relationship ended, the minister continued to exert domination and control over the victim by expressing his love and affection for her.

The victim continued to suffer from depression and sought professional help in 1988. During the next few years, she received counseling and medical attention from several different health care professionals. These professionals were unanimous in their opinion that the victim’s relationship with the minister was destructive, and all encouraged her to end it. However, the victim continued to defend the minister and her “love” relationship with him and could not be persuaded to understand or accept that the relationship was harmful to her. She eventually became suicidal, was hospitalized on four occasions, and received electroconvulsive therapies.

In 1991, the victim’s therapists held an intervention-type family meeting which was attended by her mother, father, and siblings. At this meeting, the victim was required to disclose that she had been having a sexual relationship with the minister. Neither of her parents, nor any other family member, had any previous knowledge of the sexual relationship. Her family reacted with outrage. About twenty months later, when the victim was twenty-five years old, she sued the minister claiming that he had committed sixty acts of sexual battery and rape against her. The lawsuit also named her church as well as state and national church agencies claiming that they were responsible for her injuries on the basis of negligent retention, training, and supervision of the minister.

An appeals court concluded that the lawsuit against the church defendants had to be dismissed on the ground that it was filed after the statute of limitations had expired. Under Indiana law, lawsuits for personal injuries have to be brought within two years of the injury. The statute does not begin to run for a minor until his or her eighteenth birthday. However, Indiana, like many states, recognizes the so-called “discovery rule.” Under this rule, the statute of limitations does not begin to run until a plaintiff “knew or, in the exercise of ordinary diligence, could have discovered that an injury had been sustained as a result of the [wrongful] act of another.” The victim claimed that the minister exercised such domination and control over her that she did not discover that his actions were wrong and were harmful to her before the family meeting in 1991 when her therapists and family finally convinced her that the minister’s conduct had been abusive and that the minister’s actions were the cause of her depression and emotional injuries. As a result, the victim insisted that her lawsuit was brought within the two-year statute of limitations. The court disagreed. It observed:

Where the plaintiff understands the significance of the events and their moral character, a reasonable person would have known that she had been the victim of abuse and that her injuries had been caused by the abuse …. It is not possible that a reasonable person in her situation would discuss past instances of sexual abuse during a treatment session for severe psychological problems without understanding at some level that the past incidents had some connection to her current situation.

The court pointed out that the victim knew that her parents and others would not have approved of her sexual relationship with the minister and would have viewed the minister as harming her. Also, she admitted that she was aware that her sexual relationship with the minister was prohibited by church teaching, and that he might lose his job or be arrested if the conduct were discovered. Finally, she was repeatedly advised by her mental health care professionals that she was the victim of the minister’s abuse and that it was harmful to her emotional and mental health. The court concluded: “The sexual relationship ended in 1988 when [the victim] was twenty years old. It is not possible that a reasonable person in [her] position would not have understood, on some level, that the minister’s actions were wrong and had some connection to her current situation …. [W]e must conclude, as a matter of law, that in the exercise of ordinary diligence, [she] should have discovered that she had sustained injury as a result of [the minister’s] abusive acts in excess of two years before her lawsuit was filed. Accordingly, her action is time-barred.” Doe v. United Methodist Church, 673 N.E.2d 839 (Ind. App. 1996). [Seduction of Counselees and Church Members, Negligence as a Basis for Liability, Denomina tional Liability]

© Copyright 1997, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m67 m86 c0397

Legal Developments

Member Barred from Suing Charity

Man had suffered injuries on the premises of the unincorporated charity.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1997-03-01

Unincorporated Churches

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

• Key point. The members of an unincorporated organization ordinarily cannot sue the organization for injuries they sustain on its premises or during its activities.

An Indiana court ruled that a member of an unincorporated charity was barred from suing the charity for injuries that he suffered on its premises. The member was injured while diving in a lake on the charity’s premises. He sued the charity to recover damages for his injuries, claiming that his injuries were due to the charity’s negligence. A state appeals court ruled that the member was barred from suing the charity on the basis of the general rule that members of unincorporated associations cannot sue their association. The court referred to an earlier Indiana Supreme Court case that explained the rationale for this rule:

The theory of the general rule is that the members of an unincorporated association are engaged in a joint enterprise. The negligence of each member in the prosecution of that enterprise is imputable to each and every other member so that the member who has suffered damages through the … conduct of another member of the association may not recover from the association for such damage. It would be akin to the person suing himself as each member becomes both a principal and an agent as to all other members for the actions of the group itself. Calvary Baptist Church v. Joseph, 522 N.E.2d 371 (Ind. 1988).

The victim claimed that the unincorporated charity should be treated like a corporation because of its relationship with a national charity. He noted that the local charity collected dues for the national charity; the national charity establishes rules governing the operation of local affiliates; and the national charity exercises supervisory authority over local affiliates. The victim claimed that these facts demonstrate that the local charity should be considered an “extension” of the national charity and that the corporate status of the national charity should be “imputed” to the local charity. The court rejected this argument, noting that it could not find a single case supporting the theory that “because the national organization is incorporated the local should be treated as an extension of the national for purposes of imputed corporate existence.” The court continued: “The state alone can incorporate such an association, and the mere fact that a benevolent organization of a local nature has received a so—called charter from the central or governing body of the [organization] with which it desires to affiliate does not constitute it a corporation.”

The victim also claimed that he was not subject to the general rule (that members cannot sue an unincorporated association) because his membership had expired as a result of his failure to pay his dues. The court disagreed, noting that the bylaws of the national organization specified that members are not automatically dismissed for failing to pay dues. Rather, membership is revoked for nonpayment of dues only after the dues have been in arrears for one year or upon two—thirds vote of the local membership. Since neither event had occurred, the member’s status had not been affected by his failure to pay dues. As a result, the victim was a member on the day of his injury, and therefore was barred from suing the charity.

What is the significance of this case to church leaders? Simply this-church leaders must recognize that one of the consequences of the unincorporated form of organization in many states is that church members injured during church activities cannot sue their church for money damages. This may seem like an advantage as far as the church is concerned. But, this is small consolation to a member who suffers severe injuries during a church activity. Such a result often comes as a shock to the injured member, and to other members. This case also will be helpful to denominational offices that are sued for the liabilities of local affiliated churches or programs. The court’s finding that such relationships do not result in any “imputed” corporate status to the local affiliate will be a useful precedent. Benevolent and Protective Order of Elks v. Mooney, 666 N.E.2d 970 (Ind. App. 1996). [ Unincorporated Associations]

© Copyright 1997, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m77 58 m86 c0297

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Legal Developments

Statute of Limitations and Victims of Abuse

Minors who were abused by clergy may not sue after the statute of limitations expires.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1994-07-01 Recent Developments

Sexual Misconduct by Clergy and Church Workers

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

• Key point: Minors who are sexually molested by church workers may not sue their church after the statute of limitations has expired. Generally, the statute of limitations begins to run on a minor’s 18th birthday. In some states the statute of limitations does not begin to run until an adult survivor of child sexual molestation “discovers” that he or she has experienced physical or emotional suffering as a result of the molestation. Other states do not recognize this so-called “discovery rule.”

• An Indiana state court ruled that the statute of limitations prevented two adult survivors of childhood sexual abuse from suing the ministers who allegedly abused them. In 1960, two girls (8 and 9 years of age) were placed as wards in a children’s home affiliated with a church. The girls remained in the home for nearly 9 years. While in the home, the girls were repeatedly molested by an ordained minister who served as activities director. The molestation included repeated acts of sexual intercourse. The minister frequently gave the girls quinine pills which caused severe vomiting, bleeding, and diarrhea, in at effort to induce abortions. The girls also were molested by a second ordained minister who was superintendent of the home. The abuse caused the girls to develop severe psychological distress, which manifested itself in the form of shame, guilt, self-blame, denial, depression, nightmares, and ultimately disassociation from their experiences. Through these coping mechanisms the girls were unable to comprehend that they suffered damages as a result of the abuse. Thirty years later, in 1990, both girls experienced several “flashbacks” of the abuse. It was at this time that the victims began to realize that many of their nightmares were in fact true. The victims separately confronted the ministers. The former activities director admitted to having molested the girls “hundreds of times.” The former superintendent also admitted his acts of abuse. The victims filed a lawsuit against the ministers and the children’s home in 1990. The victims alleged that the ministers were guilty of sexual battery, clergy malpractice, breach of fiduciary duty, and intentional infliction of emotional distress. They alleged that the children’s home was liable for the ministers’ acts on the basis of negligent hiring, negligent supervision, and negligent retention. The ministers and children’s home sought to have the lawsuit dismissed on the ground that the statute of limitations had expired many years before. A trial court ruled that the statute of limitations did not barr the lawsuit, and the case was appealed. A state appeals court agreed that the statute of limitations did not prevent the victims from suing, even though the abuse occurred thirty years before. The court acknowledged that the statute of limitations for personal injuries under Indiana law requires lawsuits to be commenced within two years “after the cause of action accrues.” It noted that this rule is subject to two exceptions. First, in cases involving injuries to minors, the statute of limitations does not begin to run until the minor reaches his or her 21st birthday. Second, the Indiana Supreme Court ruled in 1992 that the statute of limitations does not begin to run in any case involving personal injury until the victim “knew, or in the exercise of ordinary diligence, could have discovered that an injury had been sustained as a result of the tortious act of another.” The Indiana appeals court observed: “In the case before us the plaintiffs have asserted both that they had repressed knowledge that a number of the acts had occurred such that they had no memory of the act having happened until 1990, and that while they were aware of other acts and of feelings of guilt, depression, low self-esteem, etc. they were without knowledge of any causative connection between their psychological and personality problems and the alleged molestations until 1990.” The court found the victims’ allegations of repressed memory sufficient to overcome the statute of limitations. However, it did acknowledge that “what knowledge each [victim] might be charged with based upon the exercise of ordinary care remains a disputed question of fact.” That is, the case was sent back to the trial court where the women would have to prove that they in fact could not have known prior to 1990, through the exercise of reasonable care, that they had suffered emotional injuries as a result of the acts of molestation that occurred when they were children.

This case illustrates the important fact that the statute of limitations does not necessarily shield churches and other religious institutions from liability for incidents of molestation that occurred many years ago. This is another reason for churches to implement effective screening procedures for any employee or volunteer who will work with minors. Shultz-Lewis Child & Family Services, Inc. v. Doe, 604 N.E.2d 1206 (Ind. App. 3 Dist. 1992).

See Also: Negligence as a Basis for Liability – Defenses

© Copyright 1994, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m67 m29 c0494

Legal Developments

“Equal Pay Act” and Church-Run Schools

Do federal labor laws apply to church schools?

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1992-07-01 Recent Developments

Employment Practices

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

• A federal district court in Indiana ruled that the “Equal Pay Act” applies to a church-operated school. A Baptist church operated a private school. The federal Equal Employment Opportunity Commission (“EEOC”) sued the church for alleged violations of the Equal Pay Act. The EEOC alleged that the church unlawfully paid higher wages and benefits to male teachers than to a class of female teachers performing equal work, and further that the church unlawfully reduced the male teachers’ wages in an attempt to comply with the Equal Pay Act. The Equal Pay Act was enacted in 1963 as an amendment to the Fair Labor Standards Act (the federal minimum wage and overtime law). The Equal Pay Act provides that no employer covered by the Act shall discriminate … between employees on the basis of sex by paying wages to employees … at a rate less than the rate at which he pays wages to employees of the opposite sex … for equal work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions …. provided, that an employer who is paying a wage rate differential in violation of this subsection shall not, in order to comply with the provisions of this subsection, reduce the wage rate of any employee.

The church claimed that the EEOC had no jurisdiction over the school, since the Equal Pay Act did not apply to church schools. The church claimed that Congress did not intend for the Fair Labor Standards Act, or the Equal Pay Act, to apply to churches or church-operated schools. Accordingly, the church claimed that neither the EEOC nor the federal court had “jurisdiction over the church” under either the Fair Labor Standards Act or the Equal Pay Act. The church relied primarily on a 1979 decision of the United States Supreme Court (NLRB v. Catholic Bishop) addressing the applicability of the National Labor Relations Act to church-operated schools. The National Labor Relations Act is a federal law guarantying the right to organize labor unions. The Supreme Court devised a test for determining the applicability of the Act to church schools. The test (known as the Catholic Bishop test) provides that if the exercise of jurisdiction by a federal agency over a religious organization would give rise to serious constitutional questions under the first amendment religion clauses, then the agency may not exercise jurisdiction without showing an “affirmative intention of the Congress clearly expressed” to confer such jurisdiction. The EEOC rejected the application of the Catholic Bishop test, arguing that it applied to the National Labor Relations Act and not the Fair Labor Standards Act or Equal Pay Act. It pointed out that every federal court that has addressed the Equal Pay Act’s applicability to church-operated schools has found that such organizations are subject to the Act and that no court has extended the holding in Catholic Bishop to the Equal Pay Act or Fair Labor Standards Act.

The court agreed with the EEOC’s interpretation of the Catholic Bishop case. It noted that the Catholic Bishop case addressed the National Labor Relations Act—a statute without expressed congressional intent with respect to church-operated schools. Further, the Supreme Court, in the Catholic Bishop case, pointed out the significant risk of infringement upon the first amendment guaranty of religious freedom in applying the Act to church-operated schools. The Court also found that neither the Act’s language nor its legislative history disclosed any “affirmative intention of the Congress clearly expressed” to subject church-operated schools to the Act.

The court noted that the Fair Labor Standards Act does specifically apply to church-operated schools. It “explicitly includes schools (public or private) and other not for profit organizations within the definition of `enterprises’ subject to that statute.” It referred to several court decisions reaching this same conclusion. Moreover, the court noted that “when parties have relied on Catholic Bishop as a basis for the argument that the Fair Labor Standards Act is not applicable to churches or church-operated schools, federal courts have rejected that position.” The court concluded:

Accordingly, the court rejects the church’s contention that Catholic Bishop deprives this court of the subject matter jurisdiction to entertain actions against church-operated schools brought under the Equal Pay Act. Catholic Bishop addressed the National Labor Relations Act and no other federal statute. Moreover, several courts addressing the applicability of Catholic Bishop to the Fair Labor Standards Act have found the Court’s holding distinguishable. The courts that have been faced with Equal Pay Act complaints brought against church-operated schools by the EEOC or the Department of Labor have found the jurisdiction to hear those claims.

Accordingly, the court upheld EEOC jurisdiction over the church-operated school. Equal Employment Opportunity Commission v. First Baptist Church, 1991 WL 270110 (N.D. Ind. 1991 unpublished).

See also the feature article in this issue entitled “Liability of a Church and Parent Denomination for Acts of Sexual Harassment by Clergy.”

See Also: Fair Labor Standards Act

© Copyright 1992, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m43 m65 c0492

Legal Developments

Injuries Occurring on Church Premises During Use by Outside Groups

An Indiana court makes an important ruling.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1992-05-01 Recent Developments

Personal Injuries – On Church Property or During Church Activities

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

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

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

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

See Also: Premises Liability

© Copyright 1992, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m58 m86 c0392

Legal Developments

Employee References and Defamation

Can an employer be sued for defamation over a negative reference?

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1992-01-01 Recent Developments

Employee Relations

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

• An Indiana state appeals court threw out a lawsuit brought by a worker against her former employer for allegedly defamatory references given to prospective employers. A worker quit her employment with a secular employer following a dispute over working conditions. She then sought new employment. When she began experiencing difficulty finding another job, she became suspicious of the references her former employer was giving. In an attempt to determine the nature of the references, the woman had her mother and boyfriend contact the former employer, represent themselves as prospective employers, and request references. Supervisory personnel made the following remarks about the former employee: “Did not get along well with other employees”; “could work without supervision on occasion”; “was somewhat dependable”; “does not work good with other people”; “is a trouble maker”; “was not an accomplished planner”; and “would not be a good person to rehire.” The woman sued her former employer for defamation. The defendants asked the court to dismiss the case, and the court did so. It observed:

As a general rule an employee reference given by a former employer to a prospective employer is clothed with the mantle of a qualified privilege. A former employer has an interest in open communications with a prospective employer regarding a former employee’s work characteristics. Without the protection of the privilege, employers might be reluctant to give sincere yet critical responses to requests for an appraisal of a prospective employee’s qualifications …. There is a self-evident social utility in free and open communications between former and prospective employers concerning an employee reference. Accordingly, we hold that such communications are protected by a qualified privilege …. However, a statement otherwise protected by the doctrine of qualified privilege may lose its privileged character upon a showing of abuse, namely: (1) The communicator was primarily motivated by ill will in making the statement; (2) there was excessive publication of the defamatory statement; or (3) the statement is made without belief or grounds for belief in its truth.

The court concluded that the former employee had failed to prove any of the grounds for disregard of the qualified privilege, and accordingly her lawsuit had to be dismissed. Chambers v. American Trans Air, Inc., 577 N.E.2d 612 (Ind. App. 1991).

See Also: Termination of Employees

© Copyright 1992, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m42 m61 c0192

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Legal Developments

Members’ Lawsuits Against Unincorporated Organizations

Can an unincorporated organization be sued by one of its members?

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1992-01-01 Recent Developments

Unincorporated Churches

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

• An Indiana state court ruled that a member of an unincorporated nonprofit organization cannot sue the organization for injuries sustained during an organization activity. An 18-year-old university freshman became a member of a fraternity. While participating in a fraternity party he consumed an excessive amount of alcohol, removed his clothing, climbed atop a brick wall and dove head first onto a concrete patio (thinking it to be a pool). He broke his neck and was rendered a quadriplegic. He sued his fraternity, claiming that it had been negligent in providing alcohol to persons under the legal drinking age, and in failing to provide adequate supervision of activities at the party. A trial court dismissed the lawsuit, and the victim appealed. A state appeals court upheld the dismissal of the lawsuit against the fraternity. It based its decision on the “general rule in Indiana that a member of an unincorporated association cannot sue the association for the tortious conduct of another member. As the members are engaged in a joint enterprise, each member has a right to exercise control over the operations of the association. The negligence of a single member is imputed to all other members of the association.” The court relied squarely upon a decision of the state supreme court refusing to permit an injured church member from suing his unincorporated church. The court rejected the fraternity member’s argument that the general rule should not be applied to a new member of an unincorporated association (he was a freshman), or to any association whose membership changes significantly from year to year. What is the significance of this case to church leaders? Simply this—church leaders must recognize that one of the consequences of the unincorporated form of organization in many states is that church members injured during church activities cannot sue their church for money damages. This may seem like an advantage as far as the church is concerned. But, this is small consolation to a member who suffers severe injuries during a church activity. Such a result often comes as a shock to the injured member, and to other members. Foster v. Purdue University, 567 N.E.2d 865 (Ind. App. 1991).

See Also: Unincorporated Associations

© Copyright 1992, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m77 m58 m86 c0192

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Legal Developments

Abortion

Church Law and Tax 1989-01-01 Recent Developments Abortion Richard R. Hammar, J.D., LL.M., CPA •

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1989-01-01 Recent Developments

Abortion

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

• Does a husband have a constitutional right to “veto” his wife’s decision to have an abortion? No, concluded an Indiana appeals court. The court relied on a 1976 decision of the United States Supreme Court in which the Court ruled that “a state may not constitutionally require the consent of the spouse … as a condition for abortion during the first 12 weeks of pregnancy,” and accordingly, that “the state cannot delegate to a spouse a veto power which the state itself is absolutely and totally prohibited from exercising during the first trimester of pregnancy.” The Indiana court, though noting that the right of abortion and the authority of the United States Supreme Court to legislate morality were “troublesome to some members of this court,” found itself bound by the Supreme Court’s pronouncement, and accordingly denied the father a veto power over his wife’s decision to have an abortion. The Indiana court observed that “the obvious fact is that when the wife and the husband disagree on this decision, the view of only one of the two marriage partners can prevail. Inasmuch as it is the woman who physically bears the child and who is the more directly and immediately affected by the pregnancy, as between the two, the balance weighs in her favor.” Conn v. Conn, 525 N.E.2d 612 (Ind. App. 1988).

© Copyright 1989, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m01 c0189

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