Key point 10-18.3. There are several legal defenses available to a denominational agency that is sued as a result of the acts or obligations of affiliated clergy and churches. These include a lack of temporal control over clergy and churches; a lack of official notice of a minister’s prior wrongdoing in accordance with the denomination’s governing documents; lack of an agency relationship; the prohibition by the First Amendment of any attempt by the civil courts to impose liability on religious organizations in a way that would threaten or alter their polity; and elimination or modification of the principle of joint and several liability.
Key point. “Church plans” are exempt from ERISA coverage.
A federal court in Minnesota dismissed a lawsuit brought by several participants in a denominational pension plan citing ERISA violations and state law claims for breach of trust, breach of contract, breach of fiduciary duty, and consumer fraud. In 1939 a pension plan was established for the benefit of employees and retirees of a denominational publishing house (the “publisher”) that provided books and other materials to affiliated churches. The plan was terminated in 2010 at which time there were approximately 500 participants, of which 175 had already retired. A number of participants (the “plaintiffs”), on behalf of the entire plan, sued the publisher as well as the parent denomination. The plaintiffs claimed that as recently as 1999 the publisher was debt-free and had $18 million in reserves, and that it experienced financial difficulties beginning in 2002 that resulted in a severe drop in reserves and assets. The plaintiffs claimed that, despite these financial setbacks, the publisher continued to promote its retirement plan and repeatedly distributed written statements to employees promising benefits—despite knowing that the plan was severely underfunded. The plaintiffs sued the publishing house and parent denomination on several grounds under both ERISA and state law. The plaintiffs asserted that the impact on current employees and retirees has been catastrophic. Of the 500 participants, 175 have already retired, and of those, some are too old or sick to reenter the work force. All of them have lost most, and many all, of their expected retirement income.
The court concluded that the retirement plan was a “church plan” that was exempt from ERISA, and dismissed the plaintiffs’ ERISA claims. ERISA defines “church plans” 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” under section 501(c)(3) of the tax code. The definition of “church plan” further provides that an employee of a church or a convention or association of churches includes “an employee of an organization, whether a civil law corporation or otherwise, which is exempt from tax under [section 501(c)(3) of the tax code] and which is controlled by or associated with a church or a convention or association of churches.” 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 court concluded: “The court has thoroughly reviewed the applicable law and the arguments of counsel, and finds no support for plaintiffs’ position that a single employer benefit plan, established and maintained by an organization controlled by or associated with a church, is not a church plan as defined by ERISA. Rather, the court finds that the statutory language defining ‘church plan,’ as well as the applicable agency determinations and court decisions support a finding that the plan is a church plan.”
state law claims
The plaintiffs asserted that the parent denomination (the “national church”) was liable for the plaintiffs’ losses since the publisher was the “alter ego” of the national church.
Generally, one corporation cannot be liable for the acts and obligations of another corporation, even though there is some connection between the two. This is due to the fact that corporate status erects a “firewall” that prevents one corporation from being liable for the acts of the other. But under the so-called “alter ego” doctrine, one corporation can be liable for the acts of another if its control over the other is so dominant that the other has no independent existence apart from the dominant corporation and is nothing more than an alter ego, or extension, of it. The court observed:
Factors considered significant in the determination [of an alter ego relationship] include: insufficient capitalization for purposes of corporate undertaking, failure to observe corporate formalities … insolvency of debtor corporation at time of transaction in question, siphoning of funds by dominant shareholder, nonfunctioning of other officers and directors, absence of corporate records, and existence of corporation as merely facade for individual dealings.
In support of the alter ego theory, the plaintiffs cited the following evidence:
- the publisher’s original board consisted of three pastors ordained by the national church;
- the publisher’s articles of incorporation provide that the publisher is organized and operates exclusively for religious purposes and to assist the national church in carrying out its purposes;
- delegates of the national church’s convention elect the publisher’s board;
- the publisher’s articles of incorporation specify that in the event of its dissolution, any surplus property goes to the national church;
- the national church’s presiding bishop participates in nominating the publisher’s CEO;
- the publisher’s CEO has made statements to the effect that “we are the church, your partners in ministry.”
The court declined the national church’s motion to dismiss the plaintiffs’ alter ego claim. It observed:
The alter ego doctrine is designed to impose liability on the true defendant, rather than a corporate form. In doing so, the court is to analyze the “reality” of the corporate functions and to find injustice or fundamental unfairness. With this in mind, the court finds that plaintiffs have asserted sufficient factual allegations to support an alter ego theory. Plaintiffs’ theory is based on allegations that [the national church] is entwined in a close relationship with [the publisher] as evinced by its tight control of the publisher, the publisher’s misleading statements, which were known to the national church, and by the transfer of a revenue source worth $10 million [a denominational magazine] all while the publisher was underfunding its pension plan apparently due to financial distress. Plaintiffs have also alleged facts that raise questions as to the publisher’s solvency at the time of the termination and as to corporate siphoning ….
There are also allegations as to misconduct. Plaintiffs allege they were misled in two ways about the plan. First, they were misled into believing they would receive pensions. Plaintiffs were repeatedly given written statements that they would receive pension benefits when they retired. Second, the publisher’s CEO frequently described the publisher and the national church as partners, which implied that they would stand together, look after each other and their employees.
What This Means For Churches:
This case represents one of the few cases to recognize the viability of an alter ego claim against a national church organization on the basis of the acts and obligations of an affiliate. Most courts have concluded that the alter ego theory’s strict requirements generally are not met in cases involving national churches and their affiliated churches and agencies. One authority lists the following factors to consider in applying the alter ego doctrine:
The factors include whether: (1) the parent and subsidiary have common stock ownership; (2) the parent and subsidiary have common directors and officers; (3) the parent and subsidiary have common business departments; (4) the parent and subsidiary file consolidated financial statements and tax returns; (5) the parent finances the subsidiary; (6) the parent caused the incorporation of the subsidiary; (7) the subsidiary operates with grossly inadequate capital; (8) the parent pays the salaries and other expenses of the subsidiary; (9) the subsidiary receives no business except that given to it by the parent; (10) the parent uses the subsidiary’s property as its own; (11) the daily operations of the two corporations are not kept separate; and (12) the subsidiary does not observe the basic corporate formalities, such as keeping separate books and records and holding shareholder and board meetings. Fletcher Cyc. Corp. § 43.
Obviously, few if any churches or agencies would be deemed an “alter ego” of a national church under this analysis.
It must be stressed that the court did not find the national church liable on the basis of the alter ego theory for the publisher’s obligations. Rather, it rejected the national church’s request that the alter ego claim be dismissed. The court’s decision will allow the plaintiffs to pursue their alter ego claim in the trial court. Thorkelson v. Publishing House, 764 F.Supp.2d 1119 (D. Minn. 2011).
This Recent Development first appeared in Church Law and Tax Report, March/April 2012.