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The Business of Religion
Current Legal Issues Facing Religious Organizations
By Patrick Sternal
Religious organizations have played a significant role in American life since its founding, and while the religious makeup of the country has certainly changed since that time, religious organizations continue to play a part on the social and legal landscape. Churches, synagogues, temples, mosques, and other religious organizations are unique entities under the law because of their religious purposes and activities. Lawyers who represent religious organizations as well as those who volunteer on their boards and committees are often asked to provide counsel on any number of legal issues. While many of the same general principles of business and nonprofit law apply to religious organizations, lawyers who represent these organizations need to be aware of special protections and exceptions that apply to religious organizations, as well as the limitations on those protections and exceptions. Several situations reported in the past few years illustrate some of the particular legal issues that religious organizations face in their daily and long-term operations.

Reasonable Compensation
In November 2007, Senator Chuck Grassley issued letters to six religious organizations, identified generally in press accounts as "prosperity gospel televangelists." The letters were in response to reports the senator had received that the leaders of these organizations had been engaging in some extravagant spending, such as buying a private jet, driving a Rolls Royce or Bentley, or installing a $23,000 commode. Senator Grassley expressed concern that perhaps the tax-deductible contributions to these organizations were being misused to support luxury lifestyles. The senator requested information from these organizations regarding the compensation of pastors and other individuals associated with these churches. While most of these organizations have complied with the request for disclosure, a few have resisted the senator's demand for information, leaving it yet to be seen what steps the senator will take.

The Grassley inquest again brings into focus the public perception that some religious organizations are taking advantage of religious and a tax-exempt status in order to provide personal benefits to the individuals who are running them. Regardless of the accuracy of this perception as characterizing the religious community as a whole, religious organizations need to be aware that they are subject to the same rules regarding proper use of donations as other tax-exempt organizations. Although they may not be subject to the requirements of filing tax returns (Form 990), religious organizations that are tax-exempt under section 501(c)(3) of the Internal Revenue Code must comply with the laws regulating these organizations. This includes compliance with the tax code's strict prohibition against providing private benefits to individuals, especially to leaders who exercise control or influence over the organization.

When a church enters into an employment arrangement with its pastor, it should follow certain procedures so that the compensation meets the presumption of reasonableness provided for in tax regulations. These procedures involve seeing that compensation arrangements are approved, in advance, by an authorized body (the board or a committee) of the organization, composed entirely of individuals without a conflict of interest; that the authorized body relies upon appropriate data as to comparability in making its determination; and that the authorized body adequately documents the basis for its determination, concurrently with making the decision. (Treas. Reg. Sec. 53.4958-6.) Disinterested members are those who are not compensated by the church and are not related to the individual whose compensation is under consideration. It also should be noted that the IRS may rebut the presumption if it has sufficient evidence to show that the compensation was not reasonable.

Land Use
In the rural community of Chester Springs, Pennsylvania, the Adhi Parasakthi Charitable, Medical, Educational and Cultural Society (ACMEC) of North America, which has owned a 24.5-acre former dairy farm within the township since 2000, made plans to build a Hindu temple on the site. Accordingly, ACMEC applied to the local city council in 2008 for permission to build the 26,000-square-foot temple and 9,000-square-foot auxiliary support building. Upon consideration of the application, the township only approved a 5,000-square-foot temple, with 18 conditions and 23 specifications. The ACMEC has since filed suit against West Pikeland Township in federal district court, claiming the town's restriction is in violation of the First and Fourteenth Amendments and the Religious Land Use and Institutionalized Persons Act (RLUIPA).

RLUIPA is a federal law that provides that state and local governments are prohibited from applying land-use laws "in a manner that imposes a substantial burden on the religious exercise of a person, including a religious assembly or institution." 42 U.S.C. § 2000-cc(a)(1). ACMEC is claiming, in part, that the denial of its application for the 26,000-square-foot temple violates RLUIPA by placing a substantial burden on their religious practices, since the size of the temple was determined based on the fact that certain gods must be properly geographically oriented and at a distance from one another.

How good is ACMEC's RLUIPA claim? The issue is whether the township placed a "substantial burden on religious exercise." Courts have varied in their application of this standard. In Trinity Evangelical Lutheran Church v. City of Peoria, Illinois,07-cv-1029 (C.D. Ill. Mar. 31, 2009), the U.S. district court denied a motion for summary judgment on a similar RLUIPA claim. Trinity Evangelical Lutheran Church had purchased a historic building next to the church in 1989 with the intention of eventually expanding the church's facility into the adjacent property. Over the church's objection, the building was designated a city landmark by the city of Peoria in 2000. In 2006, the church filed a request to demolish the building in order to build a "Family Life Center" facility. The cost of renovation of the historic structure was estimated to be $1.1 million more than demolishing and rebuilding a new facility. The church filed suit against the city alleging that the restriction unreasonably limited and placed a substantial burden on religious exercise. The district court adopted the definition of a substantial burden from a Seventh Circuit case, Civil Liberties for Urban Believers v. City of Chicago, 342 F.3d 752 (7th Cir. 2003). In that case, the Seventh Circuit defined a substantial burden for RLUIPA purposes as "one that necessarily bears direct, primary and fundamental responsibility for rendering religious exercise—including the use of real property for the purpose thereof within the regulated jurisdiction generally—effectively impracticable." Under this standard, the district court found that, because it could continue its religious ministries even with the restriction on the building, Trinity failed to show that the claim rose to the level of a substantial burden under RLUIPA. It should be noted that, in this situation, the structure in question was an ancillary building and not the church's primary religious building, unlike the ACMEC's temple.

On the other hand, in 2004 Rocky Mountain Christian Church, located in Boulder County, Colorado, similarly applied for special use permits to expand their sanctuary and school to accommodate growing church ministries. Boulder County denied the permits and the church filed a suit against the county. A jury found that the county had placed a substantial burden and unreasonable limitations on the church in violation of RLUIPA in denying the church's special use application. In Rocky Mountain Christian Church v. Board of County Commissioners of Boulder County, Colorado, Civil Case No. 06-cv-00554-REB-BNB, a Colorado federal district judge upheld the jury's verdict and enjoined the county to issue the special use permit to the church in an order on March 30, 2009. In the same order, the court also upheld RLUIPA against an Establishment Clause challenge and a claim that the statute exceeds Congress's enforcement authority under section 5 of the Fourteenth Amendment. Boulder County's commissioners voted on May 1, 2009, to appeal the decision to the Tenth Circuit Court of Appeals.

Entity Structuring
It is generally recognized that religious organizations can incorporate under state laws, if they choose to do so. For most of their history, Virginia and West Virginia both had provisions in their constitutions prohibiting churches from incorporating. This provision originated in Thomas Jefferson's Virginia Statute for Religious Freedom, and appears to have been enacted to prevent the establishment of a state religion. A federal district court, however, found the Virginia law to be an unconstitutional nonneutral law in Falwell v. Miller, 203 F. Supp. 2d 624 (W.D. Va. 2002), and Virginia subsequently amended its laws in order to permit churches to form corporations.

It is important for religious organizations to realize that once an organization incorporates, it is subject to the corporate laws of the state in which it forms, within the limits of the Constitution. While individual state statutes generally grant broad leeway for religious organizations to operate corporations, the organization must adhere to the basic corporate formalities, including basic filing and notice requirements, in order to remain in good standing and maintain the liability shield provided by the corporate form.

In March of 2009, Connecticut Raised Bill 1098 was proposed in the Joint Committee on the Judiciary of the Connecticut Assembly. This bill would have required all Roman Catholic parishes incorporated in the state to be governed by a board of laypersons. It appears that the bill was proposed in response to the clergy sexual abuse cases and in particular to an especially egregious situation involving the embezzlement of over $1 million from a Connecticut Roman Catholic parish by its pastor. Raised Bill 1098 was promoted as way to promote accountability and local control for Catholic parishioners in Connecticut. Nevertheless, the bill was strongly opposed by Catholics in Connecticut and across the country, as well as by constitutional law professors of all stripes. Those who opposed the bill pointed out that it proposed to impose on Catholic churches a distinctly congregational form of governance, as opposed to the traditional Catholic hierarchical structure of governance by the local bishop. In addition, the bill singled out not just religious organizations, but even a particular denomination, for particular treatment under the law. Clearly this was an overreach by the legislature. The bill was subsequently tabled.

Practitioners who work with religious organizations also should be aware that in August 2008 the ABA promulgated the third edition of the Model Nonprofit Corporation Act(MNCA). While it has been adopted wholly in only a few states, the MNCA will be promoted to all states' legislatures and it is expected that many states will adopt the MNCA either in part or selectively. There are several portions of the MNCA that pertain specifically to religious corporations. In particular, section 1.60 of the MNCA states that, "[i]f religious doctrine or canon law governing the affairs of a nonprofit corporation is inconsistent with the provisions of this [act] on the same subject, the religious doctrine or canon law shall control to the extent required by the Constitution of the United States or the Constitution of [name of state] or both." This section is an express recognition of the constitutional protections that religious organizations enjoy. The MNCA also allows for officers and directors of religious corporations to rely on "religious authorities and ministers, priests, rabbis, imams, or other persons," unless they have knowledge that makes such reliance unwarranted. Also, it should be noted that the MNCA provides that a religious corporation may limit rights of members to demand financial information by the terms of its articles of incorporation or bylaws. This may be desirous for religious organizations that have broad congregational inclusion in membership that would make providing such information burdensome or costly. While most of these provisions are already implicit in most state laws and the Constitution, the MNCA makes them explicit law.

Property Ownership Disputes
It is not surprising that when disputes over doctrine and discipline arise in religious organizations, these organizations usually change their alliances and affiliations. These changes, often factious and contentious, may result in the organization losing members and/or assets. For example, St. James Parish, a local Episcopal church located in Newport Beach, California, disaffiliated itself from the Episcopal Diocese of Los Angeles in 2003 over the issue of the Episcopal Church's ordination of an openly gay bishop. Both the parish and the diocese claimed ownership of the building and property on which the church stands. The diocese sued the parish in order to take back the title to the property. In order to resolve the dispute, the Supreme Court of California asked in In re Episcopal Church Cases, 45 Cal. 4th 467, 87 Cal. Rptr. 3d 275 (Cal. 2009)(review of Orange Co. Superior Court), "[W]hich prevails—the fact that St. James Parish holds title to the property, or the fact that it is bound by the constitutions and canons of the Episcopal Church and the canons impress a trust in favor of the general church?" This question has been an ongoing legal issue for American courts, given the First Amendment law regarding free exercise and establishment of religion.

The Episcopal Church Cases decision is instructive for purposes of understanding how courts treat property disputes in the context of hierarchical religious organizations. The court based its decision on Jones v. Wolf, 443 U.S. 595 (1979), a U.S. Supreme Court case that held that church property disputes not involving questions of religious doctrine should be resolved on the basis of neutral principles of law. The California Supreme Court found that "St. James Parish agreed from the beginning of its existence to be part of a greater denominational church and to be bound by that greater church's governing instruments. Those instruments make clear that a local parish owns local church property in trust for the greater church and may use the property only so long as the local church remains a part of the greater church." The property was held to belong to the diocese. The parish has announced that it is appealing to the U.S. Supreme Court, but as of this writing, certiorari has not been granted. Courts in similar cases in Colorado, New York, and several other states have found in favor of the dioceses, while many cases are still in litigation.

Tort Liability
It is important to remember that churches can be liable for acts of negligence, as well as more serious breaches of duty. At one time there were legal protections available for charitable and religious organizations in the form of charitable immunity statutes. These have been all but abandoned for practical purposes. While some states may still have charitable immunity statutes on the books, for the most part, charitable immunity has been abolished or reduced to a minimal shield from liability for negligence against a religious or charitable organization. For example, the New Jersey Supreme Court in Hardwicke v. American Boychoir School, 902 A.2d 900 (N.J. 2006), held that the state's Charitable Immunity Act only bars claims based on simple negligence, and not those based on intentional, reckless, or grossly negligent conduct.

Clearly religious organizations can be liable for acts of negligence. In Dadd v. Mount Hope Church and International Outreach Ministries, No. 278861 (Mich. Ct. App. Apr. 9, 2009), a Michigan appellate court upheld the jury's negligence award to a woman who filed suit against her church and its pastor for injuries she suffered when, upon answering a call to the altar, she was "slain in the spirit" and collapsed to the floor, injuring herself. While the court agreed with the defendant that a church does not have a duty to provide an usher for every person who attends services, it was found that the church was aware of the possibility of injury to those who answered the altar call and normally had ushers in place to assist participants. The church had a duty in this situation to assist those who participate in the altar calls, and so the church's failure to do so in this situation was a breach of its duty of care.

Another area for potential liability exposure for religious organizations is defamation. It may be the case that officials or ministers of religious organizations may make statements that appear defamatory, but which are done in the context of the exercise of church discipline. Courts are generally wary to assert jurisdiction over claims arising out these situations, as it may involve inserting itself into the organization's internal governance, since part of a religious organization's internal governance involves determining who is fit to be a member. For example, in Westbrook v. Penley, 231 S.W.3d 389 (Tex. 2007), the Texas Supreme Court held that it "would unconstitutionally entangle the court in matters of church governance and impinge on the core religious function of church discipline" if it were to assert jurisdiction over a suit that involved a congregant charging her pastor with improperly disclosing confidential information he received during a counseling session. The court found that "the secular confidentiality interest Penley's professional-negligence claim advances fails to override the strong constitutional presumption that favors preserving the church's interest in managing its affairs."

This survey of recent developments has touched on several issues that affect religious organizations. Some of the issues discussed here, such as compensation and structuring, will likely be of immediate interest to all religious organizations and their lawyers, as they affect the day-to-day business of these organizations. Other issues will be of concern only when the time comes for, say, a new building development project or when a legal action is raised against the organization. There are many other legal issues not discussed here—such as taxes, fund-raising, and employment—that also are affected by the unique status of religious organizations. It is important for religious organizations and their legal counsel to be familiar with the protections under constitutional law and public policy and legal developments in the law relating to religious organizations in the United States, so that when the issues are raised, the rights of the religious organization can be asserted and defended.

The recently published Guide to Representing Religious Organizations is a project of the Religious Organizations Subcommittee of the Nonprofit Organization Committee of the ABA Section of Business Law. The Guide addresses critical issues and risk factors of concern for religious organizations ranging from formation and governance to taxes, fund-raising, employment issues, and property rights. It outlines the general requirements of applicable law and highlights areas in which religious organizations receive special consideration under the law. This book will assist lawyers who are asked to represent religious organizations as well as provide general information for religious leaders faced with a legal challenge.

Lisa Runquist, one of the executive editors and an author of the Guide, has also authored The ABC's of Nonprofits, and is co-editor of Nonprofit Resources.

To order any of these books, call the ABA Service Center at 800-285-2221, or order online at www.ababooks.org.

Sternal is an attorney at Runquist & Associates in Northridge, CA. His e-mail is patrick@runquist.com.

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