Court Affirms South Dakota Priest’s Embezzlement Conviction

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

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State: South Dakota
Categories: Fraud

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

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

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

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

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

Lavish Purchases, False Tax Returns

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

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

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

Court: Stolen funds must be reported as income

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

The court disagreed.

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

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

Again, the court disagreed.

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

What this means for churches

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

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

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

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

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

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

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

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

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

Legal Developments

Priest Sentenced to Nearly Eight Years for Embezzlement

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

Richard R. Hammar, Attorney, CPA

Bio

State: South Dakota
Categories: Fraud

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

More Insights and Guidance on Embezzlement

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

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

Background

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

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

Caught on video

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

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

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

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

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

What this means for churches

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

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

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

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

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

The financial consequences are severe for a congregation and also for the perpetrator in the event he or she is caught and ordered to pay restitution. Additionally, congregations face the challenges of lost trust among their ranks when crimes like these have been committed against them by persons in positions of trust.

The tax consequences of embezzlement for the perpetrator are often overlooked—and a church faces potential IRS penalties if it does not report stolen funds as taxable income for the perpetrator to the IRS. Here, the IRS was appropriately contacted, and the perpetrator was forced by the court to pay $46,000 in back taxes.

Consult with legal counsel about the application of state law to the use of video technology. Note: (1) Some states limit or prohibit the use of hidden video cameras in the workplace; (2) the use of hidden cameras may constitute an invasion of privacy under state law; (3) videos depicting a volunteer or employee embezzling church funds may be inadmissible in a criminal prosecution. The law often lags behind technological innovation. As a result, it is important for church leaders to be aware of legal developments in their state and at the federal level that directly or potentially affect the use of surveillance technology.

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

Legal Developments

The Importance—and Lack of Exceptions—for Filing Lawsuits, Claims within the Statute of Limitations

Key point 10-16.7. A liability insurance policy provides a church with a legal defense to

Richard R. Hammar, Attorney, CPA

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State: South Dakota
Categories: Church Property

Key point 10-16.7. A liability insurance policy provides a church with a legal defense to lawsuits claiming that the church is responsible for an injury, and it will pay any adverse settlement or judgment up to the limit specified in the policy. Liability insurance policies exclude a number of claims. For example, some policies exclude injuries based on criminal or intentional acts and claims for punitive damages. A church has an obligation to promptly notify its insurer of any potential claim, and to cooperate with the insurer in its investigation of claims .

The Supreme Court of South Dakota ruled that a church's lawsuit seeking monetary damages against a contractor whose negligence in completing a remodeling project allegedly caused significant water infiltration had to be dismissed since it was filed after the deadline specified by the statute of limitations.

In 2002 a church contracted with a company ("contractor") for construction of a new addition and renovation of its existing structure. The contractor hired subcontractors to perform much of the work. The project was completed in 2003, and almost immediately the church experienced a variety of problems throughout the structure, including ice dams, bats in the church, chipping concrete, hail penetration, and drainage issues. But the overriding problem was water infiltration "throughout the structure." The water infiltration persisted and resulted in the church filing a lawsuit in 2010 against the contractor and subcontractors ("defendants"). The defendants asked the court to dismiss the lawsuit on the ground that it was filed after the six-year deadline imposed by the statute of limitations.

The church responded that its lawsuit was based in part on the project's structural design errors and construction errors. Because it did not know of the structural design errors and construction errors until it obtained an engineer's report in 2010, its claims did not accrue until 2010, making its suit timely. The church also argued that the doctrine of "equitable estoppel" prevented the defendants from benefiting from the statute of limitations.

Statute of limitations

The court noted that it was undisputed that the church knew water infiltration existed throughout the building almost immediately after construction was completed in 2003, and therefore the lawsuit's water infiltration claims were barred by the six-year statute of limitations.

The court then addressed the church's argument that "many of the structural deficiencies and defects discovered in 2010 had nothing to do with water infiltration," and as a result they were not time-barred by the statute of limitations. The defendants countered that "there have not been different acts constituting separate breaches of contract, but only the church learning the full extent of its damages."

The court noted that "statutes of limitations begin to run when plaintiffs first become aware of facts prompting a reasonably prudent person to seek information about the problem and its cause." The court concluded: "The church had actual notice of the water infiltration throughout its building prior to 2004. Whether that actual notice is enough to put it on constructive notice of its structural design error and construction error claims (making the structural design error and construction error claims accrue prior to 2004), is the heart of this case." The court stressed that it lacked sufficient information to resolve this question, and so it remanded the case back to the trial court to determine if the church's "actual notice of the water infiltration constitutes a sufficient circumstance to put a prudent person on inquiry of each of the construction error and design error claims." If the church "was put on actual or constructive notice of the alleged deficiency because of the actual notice of the water infiltration, then a claim based on that alleged deficiency is not a separate cause of action but accrued at the time of the water infiltration and is therefore barred by the statute of limitations." But, if the church was not put on actual or constructive notice of the alleged deficiency because of the actual notice of the water infiltration, then a claim based on that alleged deficiency is a separate cause of action with a separate accrual date."

Equitable Estoppel

The court noted that the statute of limitations may be "tolled" or suspended if the following four factors are established by clear and convincing evidence: (1) Defendants made false representations to or concealed material facts from the church; (2) the church did not have knowledge of the real facts; (3) the misrepresentations or concealment was made with the intention that it should be acted upon; and (4) the church relied upon those misrepresentations or concealment to its prejudice or injury.

The church claimed that the defendants lulled it into a "false sense of security" when they continually reassured it that the water infiltration would be fixed. The court disagreed: "Even if the church was lulled into a false sense of security that its problems would be fixed, it fails to identify a single fact demonstrating that defendants misrepresented or concealed material facts. Indeed, the defendants, on numerous occasions, attempted to fix the water infiltration and even stated that it did not know why the infiltration continued. In addition, the church had knowledge of the real facts of the case—that there was leaking throughout the building."

What this means for churches

This case illustrates an important point. No matter how meritorious a church's claims are against contractors and other vendors, those claims must be contained in a lawsuit that is filed prior to the expiration of the applicable statute of limitations. Statutes of limitations vary from state to state, and so it is important to be familiar with applicable state law. All states have different statutes of limitations based on the type of injury. For example, there will be different time limits for breach of contract, fraud, breach of warranty, and property damage. The takeaway point is to consult with legal counsel as soon as you believe that the church has a viable legal claim against another party. NEXT, Inc., 852 N.W.2d 434 (S.D. 2014).

Legal Developments

Freedom of Religion – Part 1

Church Law and Tax 1989-09-01 Recent Developments Freedom of Religion Richard R. Hammar, J.D., LL.M.,

Richard R. Hammar, Attorney, CPA

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State: Arkansas
Categories: Schools

Church Law and Tax 1989-09-01 Recent Developments

Freedom of Religion

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

• Two federal appeals courts addressed the issue of the right of Christian student groups to meet on public high school campuses for Bible study and prayer prior to the start of the school day. One court concluded that such groups have a legal right to meet on public school property, and the other court ruled that they do not. The United States Court of Appeals for the Eight Circuit (which includes the states of Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, South Dakota) concluded that Christian student groups have a legal right to meet on a public high school campus for Bible study and prayer prior to the start of the school day. The group in question (comprised of students at a Nebraska public high school) had argued that their school’s refusal to allow them to meet on school property violated the constitutional guaranty of religious freedom and the federal “Equal Access Act.” The Equal Access Act prohibits public high schools from denying any group access to school facilities during “noninstructional” hours on account of the religious content of the group’s speech if the school has established a “limited open forum” by making the same facilities available to “one or more noncurriculum related student groups.” The Christian group argued that the school had created a limited open forum by permitting several “noncurriculum related groups” to meet on school property (including the chess club, a junior Rotary Club, and a scuba diving club), and accordingly the school could not deny the Christian group access to the same facilities during noninstructional hours. School officials argued that they had not created a limited open forum, since all of the clubs that met on school property were curriculum related. They pointed out that the chess club was related to logic (though no logic courses were taught at the school), the junior Rotary Club was related to sociology, and the scuba diving club was related to physical education. The federal appeals court rejected the school’s claim that the Equal Access Act did not apply since all of the student clubs were curriculum related: “Allowing such a broad interpretation of ‘curriculum-related’ would make the Equal Access Act meaningless. A school’s administration could simply declare that it maintains a closed forum and choose which student clubs it wanted to allow by tying the purposes of those student clubs to some broadly defined educational goal. At the same time the administration could arbitrarily deny access to school facilities to any unfavored student club on the basis of its speech content. This is exactly the result that Congress sought to prohibit by enacting the Equal Access Act. A public secondary school cannot simply declare that it maintains a closed forum and then discriminate against a particular student group on the basis of the content of the speech of that group.” The court concluded that “many of the student clubs [at the high school in question], including the chess club, are non-curriculum-related” and therefore the school had established a limited open forum and “the Equal Access Act forbids discrimination against [the Christian student group] on the basis of its religious content.” The court also rejected the school’s claim that the Equal Access Act violated the constitution. The court noted that the United States Supreme Court had ruled in 1981 that a public university could not deny a Christian student group access to university facilities that were available to other student groups. This ruling, concluded the appeals court, demonstrated the validity of the Equal Access Act. The court rejected the school’s argument that the Supreme Court’s ruling should be limited to university students on account of the greater impressionability and immaturity of high school students. It noted that “Congress considered the difference in the maturity level of secondary students and university students before passing the Equal Access Act. We accept Congress’ fact-finding.” The ruling is controlling in the eighth federal judicial circuit (which includes the states of Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, South Dakota)—unless reversed or modified by the same court in a later decision, or by the United States Supreme Court. Mergens v. Board of Education of Westside Community Schools, 867 F.2d 1076 (8th Cir. 1989).

© 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: m47 c0589