Religious Institutions Update: September 2012

Timely Topics

A corporation is an artificial or fictional person, ordinarily distinct from both its individual members or shareholders and its subsidiaries and affiliates, even when owned by just one person. A key reason many organizations separately incorporate corporations is to use them to carry out distinct tasks and to avoid risking the assets of other entities. The corporate form is not to be disregarded except in limited circumstances, such as when the corporation is dominated and controlled in such a way that it is, in essence, merely an alter ego; when there is some sort of improper conduct in either the formation or the use of the corporate form; and when the improper conduct injures the claimant.

State laws differ about what circumstances justify "piercing the corporate veil." Examples of improper purposes include misleading or defrauding creditors, hiding assets, evading statutory requirements or making loans to officers. The less autonomous, separately financed and capitalized are the two entities involved, the more likely it is that they will be deemed the equivalent of a single corporation. Hence, courts have "pierced the corporate veil" and held a parent responsible for its subsidiary's debt when the subsidiary had no bank account, no assets, no capital and no employees, and when the subsidiary had entered into a contract with a creditor knowing that it had no ability to perform the contract.

Likewise, a corporate parent was liable for its subsidiary's breach of a lease when both corporations were controlled by the same person, the subsidiary operated out of the same facilities as the parent, the subsidiary's contracts were performed by the parent's employees, the subsidiary had never been capitalized, the subsidiary's financial obligations were paid by checks drawn on the parent's bank account and all the funds earned by the subsidiary were directly deposited into the parent's bank account. (As an additional example, see GTAS Assets Solutions, LLC v. African Methodist Episcopal Church discussed below.)

Corporate parents can also be liable for the acts of their subsidiaries under an agency theory, such as when the parent exercises control over its subsidiary to such an extent that the subsidiary manifests no separate corporate interests of its own and functions solely to achieve the purposes of the parent corporation.

In the context of certain employment laws, separately incorporated entities may also be deemed "joint employers" when they both exert significant control over the same employees; for example, in connection with authority to hire and fire the relevant employees, authority to promulgate work rules and assignments and to set the employees' conditions of employment, involvement in day-to-day employee supervision, and control of employee records.

As all of this demonstrates, the incorporation of a separate entity is just the first step in realizing the benefits of the corporate form. Counsel can assist you with putting in place additional policies and procedures to protect against disregard of the corporate form.

Key Cases

CCRC Denied Religious and Charitable Property Tax Exemption

In Franciscan Communities, Inc. v. Hamer, Case No. 2-11-0431, 2012 WL 3757206 (Ill.App. 2d Dist. Aug. 28, 2012), the court affirmed denial of a property tax exemption on religious and charitable grounds for a nonprofit continuing care retirement community associated with the Franciscan Sisters of Chicago Service Corporation, Inc., which is owned by the Franciscan Sisters of Chicago. The court deemed it undisputed that the facility is a means for the Roman Catholic Church and Sisters to carry out the mission of Christ's healing, but added that the facility was not necessary to the fulfillment of their religious mission. The Illinois Property Tax Code (35 ILCS 200/15-40(a)(1) (West 2006) provides, "Property used exclusively for ... religious purposes ... qualifies for exemption as long as it is not used with a view to profit." Property satisfies the exclusive-use requirement if it is "used primarily for the exempted purposes." The court stated as illustrative of a religious purpose (but not inclusive) "a use of such property by a religious society or body of persons as a stated place for public worship, Sunday schools and religious instruction."

In this case, the court held that medical care did not resemble these religious purposes and that the property was used primarily with a view to profit. The court rejected the petitioner's claim that constitutionally the courts cannot inquire into either its stated religious purpose in operating the facility or its stated use of the property as primarily religious; in addition, they could not and cannot deny the exemption on the basis that the facility is operated with a view to a profit because canon law requires the Sisters to be good stewards of their property and, following canon law, stewardship dictates a businesslike operation. In fact, the court held that to accept this argument precluding judicial review would itself constitute an Establishment Clause violation. The court observed that not all employees or residents were Catholic; religious icons or art were placed in common areas, but not residents' units; and no services were offered for free, but paid for by clients. It also found that the primary use of the facility was for upscale senior housing and care with an enhanced lifestyle. Primarily because of the last two factors, the court also denied that the facility qualified for a charitable property tax exemption. In addition, the court balanced against the charitable exemption a lack of evidence that the facility's highest compensated employees were paid salaries commensurate with other nonprofits. Last, the court rejected the petitioner's due process claim that the administrative law judge "evidenced a deep-seated antagonism" against it, bias against Catholicism and prejudice in favor of the intervenor school district and department of revenue.

First Amendment and RFRA Claims Dismissed under State Secrets Privilege

In Fazaga v. Federal Bureau of Investigation, Case No. 8:11-cv-00301-CJC(VBKx), 2012 WL 3327092 (C.D. Cal. Aug. 14, 2012), the court dismissed pursuant to the "state secrets privilege" the claims of three Muslim residents that the defendant conducted an indiscriminate "dragnet" investigation and gathered personal information about them and other innocent Muslim Americans in Southern California based on their religion in violation of, among other provisions, the Free Exercise Clause, Establishment Clause and Religious Freedom Restoration Act (RFRA). The court agreed with the government that three categories of information related to so-called Operation Flex were privileged under the Reynolds doctrine (United States v. Reynolds, 345 U.S. 1, 11 (1953)) and that release of the following information would compromise national security: (1) subject identification, (2) reasons for counterterrorism, and (3) sources and methods. It held that two reasons warranted terminating the case: (1) the privileged information gave the government a valid defense, and (2) even if the defense could be established without relying on privileged information, the privileged and nonprivileged information are inextricably intertwined, "such that litigating the instant case to judgment on the merits would present an unacceptable risk of disclosing state secrets."

Bondholder States Alter Ego Claim against Church and College

In GTAS Asset Solutions, LLC v. African Methodist Episcopal Church, Case No. 1:11-CV-1148-RWS, 2012 WL 3637452 (N.D. Ga. Aug. 22, 2012), the court ruled that there was a genuine issue of fact as to whether the African Methodist Episcopal Church (AME) and Morris Brown College (MBC) were alter egos of each other and, thus, whether AME can hold a lien on MBC's property.

The North Georgia Conferences of the African Methodist Episcopal Church of the United States of America founded MBC. MBC's purpose was to conduct an institution of higher learning "under Christian influence embodying the tenets and precepts" of the AME. Without receiving consideration in exchange, AME made numerous investments in MBC, for example, by taking out a $2.5 million line of credit for MBC, executing an Unconditional Guarantee of Payment and Performance on the line of credit, paying the salary of MBC's chief administrator, annually contributing over $500,000 to MBC and making a 2005 loan of $1 million to MBC not reflected as such on MBC's audited financial report. AME also paid off bond issuances to MBC totaling roughly $7 million using an attorney jointly representing MBC and AME. MBC did not list the payoff as a debt to AME and never made a payment to AME. AME did notice foreclosure on one of the MBC facilities, but quickly retracted it.

The plaintiff was a holding company for bonds which acquired the so-called "1996 bonds" benefiting MBC with a principal outstanding between $10.7–$13 million. U.S. Bank, as trustee for the plaintiff, filed suit against MBC for breach of its 1996 bond obligations. The bishop of the AME, chief administrator of MBC and a member of the holding company negotiated a forbearance agreement. In the process, the first two were allegedly "squirrely" about who owned the 2005 notes and purportedly never advised the plaintiff that AME owned them. The plaintiff allegedly did not learn that AME owned the 2005 notes until just before executing a subordination agreement in furtherance of the previously signed forbearance agreement. MBC again defaulted, whereupon the plaintiff sued AME, inter alia, to declare its liens superior to AME's and for fraud.

The court dismissed the plaintiff's fraud and conspiracy counts because of its actual notice that AME owned the 2005 notes before it executed the subordination agreement. But the court agreed with the plaintiff that there is an issue of fact as to whether AME's security interests in the 1970 or 2005 notes were extinguished because MBC did not list them as debts and never repaid them; whether AME "owns or controls" MBC for alter ego purposes"; whether AME abused the corporate form and took priority security interests over third-party creditors in an effort to shield MBC's assets from foreclosure to assure that the property remained with MBC and AME; and whether MBC was insolvent when AME purchased the notes.

Pastors State Claim for Breach of Contract against Their Former Churches

In Second Episcopal Dist. African Methodist Episcopal Church v. Prioleau, Case No. 11-CV-382, 2012 WL 3243190 (D.C. App. Aug. 9, 2012), the court ruled that the First Amendment does not bar a former pastor's breach of contract action against her church for failing to pay money the church admitted it owed her under the last of a series of year-long employment contracts. The court determined that resolving the former pastor's claims would not require the court to entangle itself in church doctrine and that the relief the pastor requested was exclusively monetary, not reinstatement, so that her case would have no effect on the church's appointment of a leader. Therefore, the court ruled it could decide the case employing a "neutral principles of law" analysis and remanded the case with a warning that the court should grant summary judgment if "it becomes apparent ... that this dispute does in fact turn on matters of doctrinal interpretation or church governance...."

In Crymes v. Grace Hope Presbyterian Church, Inc., Case No. 2011-CA-000746-MR, 2012 WL 3236290 (Ky. App. Aug. 10, 2012), the court ruled the same way, that a former pastor's claim for unpaid wages and benefits for work previously performed under an employment contract is not ecclesiastical and is reviewable by the court. The court explained, "[W]hile termination of a pastor constitutes an ecclesiastical matter, breach of contract claims for wages or benefits accrued during the pastor's term of employment and prior to his termination do not constitute ecclesiastical matters."

Church States Claim for Monetary Damages Due to Long Wait to Obtain Zoning Permit

In Israelite Church of God in Jesus Christ, Inc. v. City of Hackensack, Case No. 11-5960 (SRC), 2012 WL 3284054 (D.N.J. Aug. 10, 2012), the court denied the defendants' motion to dismiss the church's claims for violation of the Religious Land Use Institutionalized Persons Act (RLUIPA) and Free Exercise Clause against the city and city officials based on monetary damages that the church allegedly incurred in rent and other costs related to the almost four-year wait the church experienced in obtaining a zoning permit to use its property to train priests. The court ruled that the defendants failed: (1) to establish that events preceding approval of a zoning application cannot serve as the basis for an RLUIPA claim, or (2) to show that the church's claim never ripened into a viable claim with a decision on the merits to deny its application. For ripeness, the court applied a two-part test: (1) whether the locality's action had inflicted an immediate injury on the plaintiffs, and (2) whether the existing record clearly defined the plaintiffs' injury. The court ruled that the church alleged immediate injury by claiming that it had no certificate of occupancy and, for years, could not use a building it paid substantial money to rent. In addition, the court considered the record as well developed as it could be to support the claim. The court observed, "The idea that municipalities can escape the strictures of RLUIPA just by running applicants in infinite circles appears quite inconsistent with Congress' intent."

Receptionists' Associational ADA Claim against Church Dismissed

In Magnus v. St. Mark United Methodist Church, Case No. 11-3767, 2012 WL 3194633 (7^th Cir. Aug. 8, 2012), the court granted summary judgment to the church against the claim of its former receptionist and secretary that the church terminated her based on unfounded assumptions concerning her association with her mentally disabled daughter in alleged violation of the Americans with Disabilities Act (ADA). On summary judgment, the church presented evidence that it terminated her because of her unsatisfactory work performance and refusal to work weekends. The court observed that the church's requirement that she work weekends might have given her a wage and hour claim but not an ADA claim, as the ADA does not protect employees who cannot meet the attendance requirements of her job and does not require employers to reasonably accommodate employees who do not themselves have a disability. Her comparator had to work weekends as well. The court recognized that it had outlined three types of association discrimination claims: expense, disability by association and distraction claims. The plaintiff brought a distraction claim which "contemplates a scenario, for example, where an employee is fired because she is a bit inattentive on the job due to her child's or spouse's disability that requires her attention, but not so inattentive that she needs an accommodation to perform to her employer's satisfaction."

Employee Terminated for Missing Work for Religious Reasons Entitled to Unemployment Benefits

In Nyaboga v. Evangelical Lutheran Good Samaritan Society, Case No. A11-2067, 2012 WL 3641017 (Minn. App. Aug. 27, 2012), the court ruled that denying unemployment insurance benefits to a Seventh-day Adventist who was a registered nurse violated her free exercise rights. The plaintiff had a history of tardiness and absences, leading the unemployment law judge to conclude that her termination was justified and that she was ineligible for unemployment benefits. But the court of appeals ruled that the conduct that triggered the plaintiff's discharge was an absence for religious reasons on Saturday; therefore, denying her benefits did violate the Free Exercise Clause.

Religious Institutions in the News

A new report shows that multi-site churches are growing at a more rapid clip than megachurches. See http://www.washingtonpost.com/national/on-faith/report-shows-5000-multisite-churches/2012/08/21/711c9aa6-ebd0-11e1-866f-60a00f604425_story.html

A complaint has been filed with the IRS claiming that the Missouri Baptist Convention violated federal tax law by allegedly endorsing two candidates for public office. See http://www.au.org/files/pdf_documents/missouri%20baptist%20convention%20
complaint%208.23.pdf