Key point 7-03.3. Most courts apply the "neutral principles of law" rule in resolving disputes over the ownership and control of property in "hierarchical" churches. Under this rule, the civil courts apply neutral principles of law, involving no inquiry into church doctrine, in resolving church property disputes. Generally, this means applying neutral legal principles to non-doctrinal language in any one or more of the following documents: (1) deeds to church property; (2) a church's corporate charter; (3) a state law addressing the resolution of church property disputes; (4) church bylaws; or (5) a parent denomination's bylaws.
An Iowa court ruled that a local church that was experiencing internal problems did not enter into an enforceable agreement to transfer governance responsibilities to a denominational agency. A church was founded in 1967, and became affiliated with the Evangelical Free Church of America (EFCA).
The EFCA is a national association of churches that is divided into regional districts that assist affiliated churches. By 2001, the church was suffering from internal problems and was in danger of closing. The church's congregation had dwindled to 35 members, and its pastor and three board members had resigned. The only remaining board member learned of a program in the EFCA to rescue struggling churches. The program involves transferring governance and control of church assets to a regional district of the EFCA for a period of time while the district assists the church in reorganizing and rebuilding. The board member was hopeful the same program could be implemented for his church, and so he contacted an official with the regional district for assistance.
The church had ongoing discussions with the district for several months regarding options for the church and the district's willingness to assist the church in rebuilding its congregation. These discussions culminated in a special congregational meeting at which the church members unanimously passed a resolution to "turn all governance, property and management over to the district" with the expectation that the district would be "responsible for the development of a healthy church." The resolution further provided that "as the church becomes healthy and viable again, all funds, property and governing authority will be returned to the church making it a healthy autonomous church."
The district sent a letter to the church indicating its willingness to "immediately begin the process of overseeing," governing, and managing the church's assets and property. The letter cautioned the church that "in turning over this ministry to us you are giving us full governing authority until we believe it is wise to return that authority to the local church." In response, the church conducted another meeting in which the members voted to amend the church's articles of incorporation to provide that all of the church's property would be transferred to district, but only in the event the corporation dissolved.
The church attempted to revitalize itself, and continued to conduct its own daily operations and exercise independent corporate functions. Updates on the church's progress occasionally were sent to the district.
It soon became evident that the church and district had different understandings of their relationship and different intentions regarding the future of the church. The congregation believed that the church would not close and that control of the church's property would be returned to them at some point. The district reminded the church that control of the church's property would be returned to the congregation only in the event it became a healthy church. The church held another meeting in which the members approved a resolution to "end our special relationship with the district and begin to manage our own affairs and assets."
A short time later, the district informed the church that it had determined that the church was "no longer a viable congregation and that efforts of the district to revitalize the same have failed." The district changed the locks on the church and indicated the property would be listed for sale. The church asked a court for relief, and the court issued an order prohibiting church members from having access to the church building. The court based its ruling on what it deemed an "enforceable agreement" between the church and district to transfer permanent control of the church's property to the district. The church appealed.
A state appeals court noted that the United States Supreme Court has recognized two primary methods for resolving church property disputes. The first is the "compulsory deference" rule. Under this rule, "the decision of the highest authority in a hierarchical church is conclusive on the civil courts in church property disputes." A hierarchical church exists where a local church is subordinate to the authority of a higher church tribunal or adjudicatory body. The second method is the "neutral principles approach" pursuant to which church property disputes are resolved through the use of neutral principles of law affecting ownership. The neutral principles approach promises neutrality in relying "exclusively on objective, well-established concepts of trust and property law."
The district argued that the compulsory deference approach should apply because the church's polity was converted to a hierarchical form when the church voted to transfer control of its assets to the district. The court rejected this argument, noting that the EFCA "is not a hierarchical church" but rather is "organized as an association of autonomous but interdependent congregations of like faith."
Its governing documents "reflect a congregational organization where each local church governs itself." The court found the neutral principles approach better-suited to the resolution of "the central question presented by this dispute: whether there was an enforceable agreement between the parties to transfer control of the church's property to the district."
The court noted that an enforceable agreement or contract requires an offer by one party and an acceptance of the offer by another party. It concluded that there was insufficient evidence that the district accepted the church's initial offer to transfer governance and control of the congregation. It based this conclusion on the following facts:
- After receiving the church's offer, the district authorized one of its officers to "further investigate and evaluate and bring a report to the district board whether we should take legal responsibility" for the church's property.
- A district officer informed the church that acceptance of the congregation's offer was contingent on a final vote at a district board meeting that would be conducted on a specified date. But, a final vote on the transfer did not occur at that meeting. Instead, the board noted that "details are being worked on."
- At one point, the church requested clarification from the district regarding their relationship due to the ambiguity of the arrangement.
- Church members assumed control of the church would be returned to them at some point, while the district believed it had the absolute right to control and dispose of the church's assets.
- The church continued to conduct its own daily operations, such as organizing church activities and services, paying bills, receiving donations, and accepting new members into the congregation, without interference from the district.
- The church continued to exercise independent corporate functions, such as refinancing a loan and amending its articles of incorporation. The congregation did not always request permission from the district before performing these tasks.
These facts convinced the court that "although the church received assistance, control really never passed or was assumed by the district." As a result, the district did not "accept" the church's offer to transfer control of the congregation. At best, the parties "had an agreement to agree to enter into a contract with certain essential terms that were not agreed upon. An agreement to agree is not a binding contract. Therefore, the trial court erred in finding the parties had an enforceable agreement to transfer governance and control of the church to the district."
The court granted the church's request for a permanent injunction enjoining the district from transferring and managing the assets of the church.
What this means for churches
The governing documents of many denominations authorize affiliated churches to transfer governance responsibilities to a denominational agency. This case demonstrates that such a transfer may be legally unenforceable without unequivocal evidence of an acceptance by the denominational agency of the transfer. Freedom Church v. Central District Conference of Evangelical Free Church of America, 2007 WL 914038 (Iowa App. 2007).