Background
A court in the District of Columbia ruled that the first amendment guaranty of religious freedom prevents the civil courts from resolving internal church disputes over accounting and reporting practices, except in limited circumstances. The court relied on principles that will be useful precedent to other churches in similar cases.
Can a church be sued by its own members as a result of sloppy accounting and reporting practices? This was the issue before a court in the District of Columbia in a recent case. A member sued her church on the basis of "negligent accounting and reporting to church members." The court's ruling will be instructive to all church leaders, particularly those with any concerns regarding the regularity of their church's accounting and reporting practices.
Facts
A woman who had served as a church's financial secretary for many years was dismissed as a result of an internal reorganization that eliminated her position. She later filed a class action lawsuit on behalf of herself and "all past and present members" against her church, claiming that it was guilty of negligent accounting and reporting in violation of various "standards" applicable to churches. In particular, the woman alleged the following church violations:
failing to monitor funds received from all sources for more than twenty years
permitting itself to "fall under the complete domination" of the pastor
failing to comply with social security and other federal and local tax laws
failing to separate the church's religious operations from its "purely secular" activities such as a child care center, an apartment complex, and a grocery store
failing to account for funds turned over to the wife of the founding pastor
failing for more than fifteen years to account for the receipts averaging over $150,000 from the annual church banquet
failing to provide annual financial reports to the members based on monthly statements prepared by the former financial secretary
failing to account for church funds collected from "annual rallies" of various groups within the church
failing to account for the "tithes" paid by "more than 3,000 dues paying members of the church
failing to maintain accurate records of funds received by the church prior to the time the former financial secretary was employed
The church asked the trial court to dismiss the lawsuit on the ground that it addressed matters of internal church governance. The trial court refused, and the church appealed.
The court's ruling
On appeal, the church argued that the civil courts have no jurisdiction to resolve internal church controversies. The woman claimed that the case could be resolved on the basis of neutral principles of law involving no inquiry into religious doctrine. She compared the case to a secular dispute over church property, which the civil courts have been able to resolve in some situations without offending the first amendment's guaranty of religious freedom.
The appeals court began its opinion by acknowledging that the first amendment "precludes civil courts from adjudicating church fights that require extensive inquiry into matters of ecclesiastical cognizance." However, "occasions can arise when civil courts are permitted to address church activity without running afoul of the first amendment." The central question, according to the court, was whether a lawsuit claiming negligent accounting and reporting by a church "can be decided, consistent with the [first amendment] by applying the objective, well—established concepts of accounting and recordkeeping …."
The court concluded that there are two possible circumstances that would permit a court to apply clear, objective accounting and reporting criteria to church financial practices without implicating church doctrine:
(1) if the principles are so universally … applicable to every organized church that they can, indeed must, be taken for granted without need for church action to adopt them; or
(2) even if these principles are not automatically applicable to every church, they are applicable in a particular case because the church has in fact adopted them
In either circumstance, "the court would not have a role in deciding what principles apply to the church; the court merely would be asked to apply, without ecclesiastical judgment or intrusion, a previously prescribed, authoritative, nondiscretionary, and clear, policy."
The court concluded that neither exception existed in this case, since there are no "universally accepted" principles of church accounting and reporting that apply to all churches, and the church in this case had never adopted a particular set of financial or reporting standards. It observed that "[t]he possibility of universal, indisputable accounting and reporting criteria for all churches is almost self—evidently contrary to reason." The court cautioned that if a church does adopt "clear, objective accounting and reporting standards" that do not involve the application of religious doctrine "then arguably a civil court can apply them-much as a court can resolve secular disputes over church property-because the church itself presumably has obviated all first amendment concerns." On the other hand, if a church has not adopted specific accounting and reporting standard then a court, "by having to decide whether particular principles should be applied, will inevitably have to exercise discretion over a matter that initially requires ecclesiastical judgment." The court added:
a church's financial regime, including any required reports to members, necessarily reflects an array of decisions about a member's obligation to pledge funds, and about the leaders' corresponding responsibility to account for those funds, that a civil court cannot arbitrate without entangling itself in doctrinal interpretations.
In support of its decision, the court pointed out that "accounting is an area riddled with major subjective decisions," and that when a church is involved "those subjective decisions raise questions of internal church governance which are often themselves based on the application of church doctrine."
To illustrate its point, the court noted several examples of questions that must be resolved by the church itself rather than by the civil courts:
What should be the collection, tithing, or offering practices of the church?
Should the church pursue pledges from-or take any other particular type of action affecting-members who neglect to remit their obligations?
What cash management and investment decisions should be made?
Who in the church establishes its spending priorities?
Should the pastor have one or more discretionary funds?
Should there be an audit committee, and if so, should its membership be internal, external, or both, and how many members of each type should there be?
Should the church maintain any of its funds as imprest accounts useable only for specified purposes, or should church finances be operated as a general account?
For each of the above questions, who makes the decision?
The court then ruled that a lawsuit alleging that a church has negligently failed to follow its own accounting or reporting procedures must specifically refer to the procedures that have been violated. Vague allegations that the church has disregarded such procedures are not enough, since the first amendment protects churches from having to defend against such possibly meritless charges. The court observed:
A mere reference to the existence of published accounting standards, without alleging that they … apply [or] that the church formally has adopted them, would leave the [lawsuit] too fuzzy for the court to be sure it constitutionally can rule. In short, because a [lawsuit] challenging church action is not easily cognizable in a civil court, there is a heightened pleading requirement to assure that the [church] will not be unduly burdened ….
[W]hen the first amendment casts a shadow over the court's … jurisdiction, the plaintiff is obliged to plead unqualified jurisdictional facts that clearly take the case outside the constitutional bar. There is no justifiable reason to make a church answer a complaint, let alone go through discovery, unless a plaintiff specifically and unequivocally pleads all facts necessary to establish the court's jurisdiction.
The court noted that the requirement that lawsuits brought against churches for negligent accounting or reporting refer to specific rules that have been violated is not new. It referred to the rule adopted in many states that lawsuits alleging fraud must specifically plead facts constituting fraud, and cannot rely on vague generalizations. Similarly, some states will not permit churches to be sued for negligent selection of clergy by victims of a minister's sexual misconduct unless the lawsuit pleads specific incidents of prior misconduct by the minister that were known to the church. The most prominent court to reach this result is the Ohio Supreme Court in Byrd v. Faber, 565 N.E.2d 584 (Ohio 1991), a case addressed fully in a feature article in the September—October 1991 edition of this newsletter.
The court acknowledged that "a church's very failure to adopt accounting and reporting standards effectively protects church leaders against civil court scrutiny that might well occur if the church, acting more responsibly, had adopted objective criteria that a court could apply without intruding on church doctrine." However, it insisted that this concern "overlooks the primacy of church tribunals for deciding such matters, consistent with the first amendment." It further noted that "absent an effective church tribunal or adoption of standards a civil court can apply without crossing an ecclesiastical line, a church member's only remedy for perceived financial irregularity appears to be cutting one's losses by leaving the membership."
What this means for churches
This case is highly relevant to all church leaders, and should be studied carefully. While it is not binding outside of the District of Columbia, the court's ruling represents one of the few attempts by a court to address church accounting practices. For this reason, the case may be given greater weight in other jurisdictions. Summarized below are the most significant aspects of the court's ruling.
1. When will a court review church accounting irregularities? Some of the alleged accounting and reporting irregularities in this case are not uncommon. For example, many churches have been accused of failing to comply with social security and other federal and state tax laws; failing to properly account for funds raised for a specific purpose; or failing to provide accurate financial reports to donors. Can concerned members have a civil court intervene and "correct" such irregularities if they are not happy with their church's response? This is an important question that few courts have addressed.
The court in this case acknowledged that the first amendment guaranty of religious freedom greatly restricts the authority of the civil courts to resolve internal church disputes, including those involving alleged accounting or reporting irregularities. However, the court concluded that the first amendment would not bar the civil courts from resolving such disputes if they could do so on the basis of clear, objective accounting and reporting criteria requiring no inquiry into religious doctrine-assuming that a church in fact had adopted them. A civil court could enforce such rules since it "would not have a role in deciding what principles apply to the church; the court merely would be asked to apply, without ecclesiastical judgment or intrusion, a previously prescribed, authoritative, nondiscretionary, and clear, policy."
Example. A church board adopts standards for handling designated contributions that were formulated for all charitable organizations. A donor questions whether the church is following the standards. When church leaders refuse to respond to the donor's concerns, she asks a civil court to intervene. A court may decide that it can do so since the issue of whether the church is complying with these standards involves no inquiry into religious doctrine.
Example. A member is concerned that his church board has spent some designated missions funds for general administrative purposes. When church leaders refuse to respond to the member's concerns, he asks a civil court to intervene. He is unable to point to any specific accounting principles the church has adopted that govern the dispute. According to the case discussed in this feature article, the court will not intervene since the first amendment guaranty of religious freedom protects internal church financial decisions from civil court review-if no set of accounting principles has been adopted by the church that can be enforced by a civil court without delving into church doctrine.
2. Questions the civil courts cannot resolve. The court gave eight examples of accounting and reporting irregularities that the civil courts cannot resolve: (1) What should be the collection, tithing, or offering practices of the church? (2) Should the church pursue pledges from-or take any other particular type of action affecting-members who neglect to remit their obligations? (3) What cash management and investment decisions should be made? (4) Who in the church establishes its spending priorities? (5) Should the pastor have one or more discretionary funds? (6) Should there be an audit committee, and if so, should its membership be internal, external, or both, and how many members of each type should there be? (7) Should the church maintain any of its funds as imprest accounts useable only for specified purposes, or should church finances be operated as a general account? (8) For each of the above questions, who makes the decision? The civil courts cannot resolve these questions since they cannot do so without delving into church doctrine and polity.
Example. A Minnesota court dismissed a lawsuit brought by Lutheran pastors against a denominational pension board for allegedly breaching their fiduciary duty to participants by not investing in companies that did business in South Africa. The Evangelical Lutheran Church in America (ELCA) established a board of pensions in 1988 to manage and operate a pension fund for Lutheran pastors and lay employees "exclusively for the benefit of and to assist in carrying out the purposes of the ELCA." The ELCA adopted the position that the system of apartheid in South Africa was so contrary to Lutheran theology that it had to be rejected as a matter of faith. The ELCA passed a resolution to "see that none of our ELCA pension funds will be invested in companies doing business in South Africa." The board of pensions enforced this policy from 1988 to 1993. A dissenting group of Lutherans opposed the ELCA's decision to use its assets as a political weapon and asked to withdraw their pension funds. When their request was denied they sued the board of pensions and the ELCA, claiming that both groups had violated their fiduciary duties to participants in the pension program by elevating social concerns over sound investment strategy. A state appeals court dismissed the lawsuit on the ground that a resolution of the lawsuit would require the court to interpret religious doctrine in violation of the first amendment's nonestablishment of religion clause. The court noted that "if a claim involves core issues of ecclesiastical concern, the potential for government entanglement in religious matters prevents judicial review." This was just such a case, the court concluded: "While the Board of Pensions is required to prudently invest its holdings, the ELCA created the Board to both provide for pastors' retirement needs and assist the ELCA in accomplishing doctrinal goals. The ELCA enacted the [apartheid] policy in an effort to further its social and doctrinal goals …. Accordingly, any review of the Board of Pensions' [investment policy] would entangle the court in reviewing church doctrine and policy." Basich v. Board of Pensions, 540 N.W.2d 82 (Minn. App. 1995).
3. Lawsuits alleging church accounting irregularities must be specific. Perhaps the most important aspect of the court's decision was its conclusion that lawsuits brought by persons alleging church accounting or reporting irregularities must specifically document that the church adopted accounting standards and that they were not followed. Vague allegations that a church's accounting practices were sloppy are not enough. The court observed:
A mere reference to the existence of published accounting standards, without alleging that they … apply [or] that the church formally has adopted them, would leave the [lawsuit] too fuzzy for the court to be sure it constitutionally can rule. In short, because a [lawsuit] challenging church action is not easily cognizable in a civil court, there is a heightened pleading requirement to assure that the [church] will not be unduly burdened.
The court insisted that this principle is required by the first amendment guaranty of religious freedom:
[W]hen the first amendment casts a shadow over the court's … jurisdiction, the plaintiff is obliged to plead unqualified jurisdictional facts that clearly take the case outside the constitutional bar. There is no justifiable reason to make a church answer a complaint, let alone go through discovery, unless a plaintiff specifically and unequivocally pleads all facts necessary to establish the court's jurisdiction.
The court insisted that this conclusion was not novel or unique. It cited the following examples of lawsuits that must specifically allege facts supporting a plaintiff's claims: (1) fraud; (2) ineffective assistance of counsel; and (3) allegations that a church is liable for a church worker's sexual misconduct since it was aware of similar incidents in the past. The court insisted that "no less should be required when the Constitution severely circumscribes the court's … jurisdiction over church controversies."
Key point.The court concluded that persons who sue churches are subject to a "heightened pleading requirement" if a resolution of the case would "unduly burden" the church's mission. This means that the lawsuit must plead specific facts which support the theory of liability. Vague or unsubstantiated allegations are insufficient, since they will force a church to divert resources from the prosecution of its religious mission to the defense of a potentially meritless lawsuit. Church leaders should be familiar with this principle, and be prepared to assert it in response to a lawsuit.
Example. A church is sued by a person claiming that he was discriminated against in an employment decision on the basis of his age. Since the church's defense of this lawsuit might burden the prosecution of its religious mission, the church should assert that the plaintiff must cite specific facts supporting the claim of discrimination. Vague generalizations of discrimination should not be enough.
Example. A church is sued by a person who claims that the church discriminates against women in its employment and disciplinary policies. Since the church's defense of this lawsuit might burden the prosecution of its religious mission, the church should assert that the plaintiff must cite specific facts supporting the claim of discrimination. Vague generalizations of discrimination should not be enough.
Key point. The court's decision may be summarized as follows:
A church does not have to adopt any particular set of accounting or reporting standards.
If a church does not adopt any set of accounting or reporting standards, the civil courts will not intervene in disputes alleging accounting or reporting irregularities. A court cannot apply standards that church leaders have not applied themselves.
If a church does adopt such standards, a civil court can resolve a dispute involving a violation of those standards only if it can do so without inquiring into religious doctrine. Further, such a lawsuit must recite facts demonstrating that the church adopted the standards, and that they were violated.
Bible Way Church v. Beards, 680 A.2d 419 (D.C. App. 1996).
