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.

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.

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).

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