Religious Institutions Update: December 2011

Timely Topics

A “fraudulent conveyance” connotes to the layperson an intentional effort to defraud someone, but in bankruptcy law this is just one type of fraudulent conveyance. Another type, sometimes referred to as constructive fraud, involves a transfer for less than “reasonably equivalent value” or, in other words, a “gift.” In bankruptcy proceedings, a trustee is chosen to administer the debtor’s estate and, to the extent feasible, to “avoid” transfers of the debtor’s assets out of the estate that place assets beyond the creditors’ reach. A trustee may ordinarily avoid contributions to a religious institution received from an insolvent debtor for less than full value even if the religious institution did nothing wrong and the institution spent the donation years before.

Because a trustee’s demand for repayment never seems to come at a good time, Congress unanimously adopted the Religious Liberty and Charitable Donation Protection Act (the “Act”) in June 1998 to protect debtors’ contributions to qualified religious or charitable organizations under Chapters 7 and 13. The Act provides a safe haven whereby a debtor’s contribution is not subject to the Code’s fraudulent transfer provisions as long as the contribution was not made with actual intent to hinder, delay or defraud a creditor and either (1) the amount of a contribution does not exceed 15 percent of the debtor’s gross annual income for the year in which the contribution is made, or (2) the contribution was consistent with the debtor’s normal charitable giving practices. 11 U.S.C. § 548(a)(2)(A)–(B).

Trustees occasionally try to circumvent the Act and extend the statute of limitations on their avoidance efforts under state fraudulent transfer law, but there is authority for the proposition that the Act preempts state law to the extent that it avoids a transfer that would be protected under the Act. See, e.g., Cedar Bayou Baptist Church v. Gregory-Edwards, Inc., 987 S.W.2d 156 (Tex. App. 14th Dist. 1999). A religious institution that (1) learns or suspects a donor is insolvent, (2) receives unprecedented large donations from a donor, or
(3) receives a demand from a trustee in bankruptcy to disgorge donated funds should consult with legal counsel to decide how best to proceed under the circumstances to protect the institution.

Key Cases

Although a Teacher Was Not a Minister, She Failed to State Age and Religious Discrimination Claims Against Parochial School

In Braun v. St. Pius X Parish, Case No. 09-CV-779-GKF-TLW, 2011 WL 5086362 (N.D. Okla. Oct. 25, 2011), Principal Matthew Verecke recommended to Father Michael Knipe that a 63-year-old fifth grade teacher named Martha Lou Braun not be renewed. Father Knipe approved that recommendation. Ms. Braun then sued Mr. Verecke, Father Knipe, the school and the parish that operated the school for age and religious discrimination, and for violation of Oklahoma public policy. On the one hand, the court denied the defendants’ motion for summary judgment based on the ministerial exception doctrine. The court ruled that the defendants failed to articulate specific ministerial responsibilities of the teacher. For one thing, she was Episcopalian, rather than Catholic. Furthermore, the court found that she taught secular subjects, not religion. On the other hand, the court granted the defendants’ motion for summary judgment as to Braun’s claim of age and religious discrimination, because Ms. Braun failed to overcome the defendants’ non-pretextual reasons for terminating her, and because Title VII allows religious educational institutions to discriminate based upon religious grounds. The court disagreed with the teacher that the school was not in fact religious, because (1) the parish operated the school, (2) Father Knipe supervised the school, (3) students were required to receive religious instruction and engage in daily prayer, and (4) the student handbook referred to it as “first and foremost a Catholic school.”

Campus Police Act Delegating Authority to Private Religious College Is Constitutional

In State v. Yencer, Case No. 365PA10, 2011 WL 5508999 (N.C. Nov. 10, 2011), the defendant, who was charged with driving while impaired, argued that her arrest by an officer of a private liberal arts college’s campus police was an invalid delegation of police power to a religious college, in violation of the Establishment Clause. The North Carolina General Assembly enacted the Campus Police Act (the “Act”) to provide police protection at “institutions of higher education” and to ensure “this protection is not denied to students, faculty, and staff at private, nonprofit institutions of higher education originally established by or affiliated with religious denominations.”

The court judged the validity of the Act under the modified Lemon test. First, it was undisputed that the Act has a “secular legislative purpose.” Turning to the principal effect of the statute, the court ruled that the Act did not establish religion because the institution was not pervasively religious. It observed that the college (1) admits students regardless of their religious beliefs, (2) does not require them to attend religious services, (3) requires students to take just one of 32 courses in religion, (4) does not require faculty to have a religious affiliation or to attend religious services, but only to work in harmony with the college’s statement of purpose, (5) requires just 24 of 44 elected trustees to be members of PC-USA churches, and (6) requires the president of the college to be a Christian who is a member of a PC-USA church.

Last, the court held that the Act does not result in excessive entanglement between church and state, because the officers’ enforcement of the secular law is statutorily separated from the school’s religious affiliation. The Act grants only limited supervisory powers to the college, while ultimate control of the police power remains in the hands of the state. Consequently, the court held that the Act does not offend the Establishment Clause and that the defendant failed to demonstrate her arrest and conviction for driving while impaired were influenced by any consideration other than secular enforcement of a criminal statute.

Homeless Ministries Have Standing to Challenge Dallas Food Establishment Ordinance

In Big Hart Ministries Ass’n, Inc. v. City of Dallas, Case No. 3:07-CV-0216-P, 2011 WL 5346109 (N.D. Tex. Nov. 4, 2011), the court ruled that various parachurch ministries have standing to challenge the City of Dallas’s Food Establishments Ordinance. The Ordinance allows “church, civic or other charitable organization” to distribute food to homeless individuals at approved locations subject to various requirements including, inter alia, portable toilets, equipment for waste and wastewater, and hand washing facilities for servers. The court ruled that a jury could reasonably conclude the ordinance substantially burdens the plaintiffs’ free exercise of religion, because (1) they could not seek out homeless people in the communities’ streets and feed them there, (2) some homeless people would not go to the pre-approved locations, (3) the plaintiffs lacked the financial means to purchase, store or transport a port-a-potty to feeding locations, and (4) the plaintiffs were able to feed far fewer people than they did before the ordinance was enacted.

Church Business Manager Not Entitled to Worker’s Compensation

In Parish v. Highland Park Baptist Church, Case No. E2010-01977-WC-R3-WC, 2011 WL 4928739 (Tenn. Workers Compl. Panel Oct. 18, 2011), the Supreme Court of Tennessee, Special Workers’ Compensation Appeals Panel, ruled that a church business manager and personnel director who was injured when thrown from a horse on the premises of the church-operated summer camp for inner-city children was not within the course and scope of his employment at the time and, thus, was not entitled to worker’s compensation. The business manager claimed he supervised the camp directors, procured insurance for the camp and was checking the safety of newly acquired horses for children to ride when the accident occurred. The camp directors claimed they were responsible for training and evaluating the horses. The business manager’s job description made no reference to maintaining safety at the camp or evaluating horses. The church’s senior pastor testified that he considered the horses the directors’ responsibility and, in any event, they were not to be ridden by campers. The appeals panel deferred to the trial court’s credibility determinations, including its finding that the employee’s injury occurred in the course of a personal mission and, therefore, was not compensable.

Courts Rule Disassociating Congregations Not Entitled to Their Property

In Episcopal Church in the Diocese of Connecticut v. Gauss, 302 Conn. 408 (Conn. 2011); Rector, Wardens and Vestrymen of Christ Church in Savannah v. Bishop of the Episcopal Diocese of Ga., Inc., Case No. S10G1909, 2011 WL 5830140 (Ga. Nov. 21, 2011), and Presbytery of Greater Atlanta, Inc. v. Timberridge Presbyterian Church, Inc., No. S11G0587, 2011 WL 5830490 (Ga. Nov. 21, 2011), the courts ruled that under the neutral principles of law approach, disassociating congregations were not entitled to retain title to their real property, because the property was held in trust for the diocese. The courts in Gauss and Rector relied primarily on the so-called “Dennis Cannon,” which provides, “All real and personal property held by or for the benefit of any Parish, Mission or Congregation is held in trust for th[e] [Episcopal] Church and the Diocese thereof....” Both courts also observed the course of conduct of the churches.

In Gauss, the court observed that parish members had always acted heretofore as though the Episcopal Church held a trust interest in the property. Likewise, the court in Rector observed that Christ Church, the oldest church in Georgia, had “submitted to the authority of the parent church for all of its existence except for the Revolutionary War and subsequent interregnum when Christ Church was actively seeking a new parent church.” In Gauss, the court decided that the polity of the church should be immaterial to deciding future church property disputes; otherwise, hierarchical churches would have a natural advantage over others. It also rejected the relevance of what donors who gave substantial sums to the parish subjectively understood as to the congregation’s control over its property.

In Timberridge, the court relied on a variety of documents including the property trust provision in the Book of Church Order, stating that “[a]ll property held by or for a particular [local] church, whether legal title is lodged in a corporation, a trustee or trustees, or an unincorporated association ... is held in trust ... for the use and benefit of the” Presbyterian Church in the United States (PCUSA). The deeds of property at issue were to Timberridge and “its successors,” to Timberridge and its “heirs and assigns,” or simply to Timberridge, without any reference to a trust for the denomination. The court held the deeds of limited value in deciding which entity owned the property, as they did not either create a trust for the denomination or preclude the creation of one. But the court considered it material that the church formed a property subsidiary when the Book of Order required it.

The subsidiary’s Articles of Incorporation and Bylaws precluded any conflict with the Book of Order and, according to the court, precluded any member who refused to submit to the government of the PCUSA from continuing to function as a member of the subsidiary. The court ruled that, although the church had the right to leave the PCUSA with its property for eight years after the denomination was established in 1983, the church stayed. The church argued that it opted out of the property trust provision in the Book of Order via letter within four years after the establishment of the denomination, but the court disagreed on the grounds that the opt-out was ineffective by its own terms when the church was “subject to a similar provision of the Constitution of the church of which it was a part” before the formation of the PCUSA.

Denial of Church’s Demolition Permit Ruled Arbitrary and Capricious

In Presiding Bishop of the Church of Jesus Christ of Latter-Day Saints v. City of Albany, Case No. 0384-11, 2011 WL 5110048 (N.Y. Sup. Oct. 20, 2011), the court held that the City of Albany’s decision to deny a demolition permit to a church was arbitrary and capricious and lacked a rational basis in the administrative record. The city planning board found that the structure to be replaced was “intertwined with the fabric of the neighborhood and as such, the removal of said structure would have a negative impact on the character of the neighborhood.” But the court ruled that the record did not support the finding. The property was vacant and not listed in the historic registry. The court also disagreed with the planning board that “realistic alternatives to demolition exist,” inasmuch as the record established the existing structure could not meet the fiscal, programmatic and doctrinal needs of the church at a nearly identical cost and would be more expensive to operate.

Religious Institutions in the News

Workplace religious discrimination complaints have doubled over the last decade, resulting in roughly $10 million in settlements. See http://www.huffingtonpost.com/2011/11/25/workplace-religious-discrimination_n_1112313.html

A report says tithing and church spending at U.S. Protestant Churches have hit record lows. See http://www.huffingtonpost.com/2011/10/13/state-of-church-giving_n_1009948.html 

The National Cathedral reportedly needs “tens of millions” in earthquake repairs. See http://www.usatoday.com/news/religion/story/2011-10-04/Washington-National-Cathedral-earthquake-damage-repairs/50661688/1