Religious Institutions: August 2014

by Holland & Knight LLP


  • The IRS allegedly has a procedure in place for "signature authority" to initiate a church tax investigation or examination, subject to an independent moratorium on IRS investigations of tax-exempt entities during the pendency of Congress's probe of IRS audits of conservative nonprofits.
  • In Horisons Unltd. v. Santa Cruz-Monterey-Merced Managed Med. Care Comm'n, No. 1:14-cv-00123-LJO-MJS, 2014 WL 3342565 (E.D. Cal. July 2, 2014), the court granted in part the defendants' motion to dismiss the plaintiffs' antitrust and other claims arising from its inability to offer indigent healthcare.
  • In Diocese of Quincy v. Episcopal Church, No. 4-13-0901, 2014 WL 3672970 (Ill. App. 4 Dist. July 24, 2014), the court affirmed the trial court's finding under the "neutral principles of law" approach that title to funds totaling roughly $3.5 million and real property belongs to a diocese that chose to disaffiliate from the Episcopal Church, and does not belong to a church within the diocese that remained loyal to the denomination and re-created its own loyal diocese.

Timely Topics

If the Internal Revenue Service (IRS) had a moratorium on enforcing §501(c)(3) electioneering restrictions against churches and religious organizations, the IRS states that it has been lifted incident to the settlement and dismissal without prejudice of a case filed by the Freedom from Religion Foundation against the commissioner of the IRS. Now, the IRS allegedly has a procedure in place for "signature authority" to initiate a church tax investigation or examination, subject to an independent moratorium on IRS investigations of tax-exempt entities during the pendency of Congress's probe of IRS audits of conservative nonprofits. Settlement followed court action permitting Holy Cross Anglican Church and Father Patrick Malone to intervene in the case for the purpose of arguing that if the IRS has a policy of non-enforcement against churches and religious institutions, that policy is compelled by the Establishment Clause and other laws protecting religious liberty. Some infer that neither party preferred this line of argument. Regardless, in advance of the next campaign cycle, religious organizations are now on notice that the IRS will not exclude them from its general prohibition on participating in, or intervening in, a political campaign on behalf of a candidate for elective public office. Naturally, religious organizations have constitutional rights that must be reconciled with these limitations. Church-state counsel can assist.

Key Cases

Health Entities' Employee Benefit Plan Not a "Church Plan"

In Medina v. Catholic Health Initiatives, No. 13-cv-01249-REB-KLM, 2014 WL 3408690 (D. Colo. July 9, 2014), the court declared that the Catholic Health Initiatives (CHI) Retirement Plan (CHI Plan), an employee benefit plan, is not a "church plan" within the meaning of the Employment Retirement Income Security Act of 1974 (ERISA) because CHI is not a church as opposed to a church-associated organization. The court disregarded the determination letter of the IRS, concluding that the CHI Plan is a church plan. The court also decided that it need not consider legislative history supportive of the defendants because of the plain text of the statute. The court ordered the defendants to reform the CHI Plan to conform with ERISA.

Faith-Based Healthcare Provider States Partial Claim for Antitrust Violation

In Horisons Unltd. v. Santa Cruz-Monterey-Merced Managed Med. Care Comm'n, No. 1:14-cv-00123-LJO-MJS, 2014 WL 3342565 (E.D. Cal. July 2, 2014), the court granted in part the defendants' motion to dismiss the plaintiffs' antitrust and other claims arising from its inability to offer indigent healthcare. The plaintiffs Horisons Unlimited and Horisons Unlimited Health Care (Horizons) are non-denominational religious healthcare providers operating three clinics in Merced County, Calif., serving the "working poor" and Medi-Cal beneficiaries who do not qualify for public assistance. California's Department of Health Care Services requires most Medi-Cal beneficiaries to be assigned to and enrolled in a Medi-Cal managed care plan unless one is unavailable. In 2008, the county established the Central California Alliance for Health (Alliance) as the sole Medi-Cal managed care plan for the county. Alliance refused to temporarily credential any of Horisons' providers and threatened to terminate Horisons' contract with Alliance unless Horisons reduced its average annual number of patient visits. Horisons is threatened with bankruptcy. Horisons claims that, in contrast, Alliance permits its main competitor, Golden Valley Health Centers (Golden Valley), which has a seat on Alliance's board, to use temporarily credentialed professional providers who are similarly-situated to Horisons' professional providers without adverse consequences. Horisons sued, arguing that the county's establishing of Alliance as the sole Medi-Cal managed care plan is a combination in restraint of trade and a monopoly in violation of state and federal law and that defendants are conspiring with Golden Valley to monopolize the Medi-Cal healthcare provider market. The court denied the defendants' motion to dismiss the second of these claims with respect to the injunctive relief sought, but not damages. Horisons has leave to amend the first claim. The court also granted the defendants' motion to dismiss Horisons' due process (procedural and substantive), Cartwright Act, Unruh Civil Rights Act, mandamus, breach of contract, and free exercise of religion claim for lack of any allegations that Alliance prevented Horisons from engaging in any religious conduct mandated by Horisons' faith. The court ordered joinder of Golden Valley to the litigation.

Plaintiffs Who Did Not Donate or Seek Return of Their Donation or Receive a Refund Lacked Standing to Claim Diversion of Funds

In Kinney v. Catholic Diocese of Biloxi, Inc., No. 2012-CA-01782-SCT, 2014 WL 3513125 (Miss. July 17, 2014), the court ruled that not all former parishioners who brought an action against the diocese, bishop and pastor after the bishop fundraised to rebuild a church damaged by Hurricane Katrina, then closed it. A religious organization may not solicit funds for one reason and then divert them for another purpose. Nevertheless, the court dismissed the claims of the 115 plaintiffs who did not donate any money to the rebuilding effort. The court rejected their argument that they were the beneficiaries of a de facto charitable trust. Next, the court dismissed the claims of the 35 plaintiffs who received letters advising them of the change in plans but did not seek a refund. Last, the court dismissed the claims of the remaining four plaintiffs who donated, sought a refund and received it. The court ruled that only parishioners who donated funds to fix the church, then asked for a refund and were refused, would have standing to bring a claim for diversion and intentional misrepresentation. There were no such parishioners; thus the court affirmed the grant of summary judgment for the defendants.

Conviction of Pastor for Sexual Exploitation of Parishioners Upheld

In State v. Edouard, No. 12-1899, 2014 WL 3537034 (Iowa July 18, 2014), the court upheld the conviction of a pastor for violation of this statute: "Any sexual conduct with a patient or client or former patient or client within one year of the termination of the provision of mental health services by the counselor or therapist for the purpose of arousing or satisfying the sexual desires of the counselor or therapist or the patient or client or former patient or client." Iowa Code §709.14(2)(c). The court ruled that the statute is not limited to use of modern psychological principles and methods or counselors "licensed or registered by the state"; it was not error for the trial court to exclude expert testimony on the differences between "pastoral care" and "pastoral counseling"; the several emotionally troubled female parishioners with whom the defendant initiated sexual relationships were the defendant's "patients or clients" within the meaning of the statute; the statute did not unconstitutionally burden the defendant's "fundamental right to enter into sexual relationships"; and the statute and its application did not violate the Establishment Clause because it applies to all persons who provide or purport to provide mental health services.

Plaintiff States Claim Against Church for Volunteer's Misconduct

In Allen v. Zion Baptist Church of Braselton, No. A14A0079, 2014 WL 3377202 (Ga. App. July 11, 2014), the court refused to dismiss negligence claims by the parents of a minor child, who was sexually assaulted by a church volunteer. Shortly after beginning to attend the church, the 21-year-old volunteer completed a volunteer application to serve in the youth group and submitted two references. One was a forgery by a person who stated after the incident that she would never have recommended him because of suspicious conduct with her child. The church administrative assistant who received it felt there was "something not right" about him, but did not take further action on the application before the church invited him to volunteer with activities and the battery occurred. The court ruled, "As a general rule, a person who undertakes the control and supervision of a child, even without compensation, has the duty to use reasonable care to protect the child from injury." The court found that the church failed to exercise reasonable care to perform a background check that would have revealed problems.

Employment Law Claims Sustained Against School, But Not Board Members

In Nowaczyk v. Joliet Catholic Academy, No. 14 C 3710, 2014 WL 3642197 (N.D. Ill. July 23, 2014), the court dismissed the plaintiff's Title VII, Illinois Whistleblower Act, and breach of contract/promissory estoppel claims against the Congregation of the Third Order of St. Francis of Mary Immaculate (St. Francis) and Society of Mt. Carmel of Illinois (Mt. Carmel), both board members of Joliet Catholic Academy (Academy). But the court did not dismiss the claims against the Academy and its principal. The court ruled that the plaintiff's allegations do not plausibly suggest that St. Francis and Mt. Carmel controlled her employment with the Academy, were joint employers, or contracted with her for employment.

Disaffiliation Disputes Subject to "Neutral Principles of Law" Approach

In Diocese of Quincy v. Episcopal Church, No. 4-13-0901, 2014 WL 3672970 (Ill. App. 4 Dist. July 24, 2014), the court affirmed the trial court's finding under the "neutral principles of law" approach that title to funds totaling roughly $3.5 million and real property belongs to a diocese that chose to disaffiliate from the Episcopal Church, and does not belong to a church within the diocese that remained loyal to the denomination and re-created its own loyal diocese. After the church contacted the diocese's bank and asserted an interest in the funds, the bank froze the account. The diocese filed a complaint for declaratory relief, and the church counterclaimed. After the church found in favor of the diocese, the church appealed, claiming that the court should have deferred to its determination that the diocese had no power to withdraw from the denomination and as to who are the true diocesan leaders. The court determined that it was proper to apply a neutral principles of law approach as compared to a "deference approach" because the latter would require an unconstitutional determination about which is the highest judicatory authority. The court found that the bank's agreement was exclusively with the diocese, not the church; no member of the church had served as a director of the diocese; the trustees of the diocese have always operated independently of the church; and there was no evidence the church had generated any of the funds.

In Rector, Wardens and Vestrymen of St. Mary of the Angels' Parish v. Anglican Church in Am., No. B248112, B248929, B248931, 2014 WL 3611309 (Cal. App. 2 Dist. July 23, 2014), the court reversed the judgment of the trial court that it must defer to the ecclesiastical determination of the denomination from which St. Mary of the Angels' Parish (St. Mary's) sought to disaffiliate on the grounds that under a neutral principles of law approach the validity of the vote to disaffiliate could be evaluated based on governing documents alone. A majority of the members of St. Mary's voted to affiliate and reunify with the Roman Catholic Church. A minority wanted to remain with the Anglican Church in America (ACA). In the midst of this, the ACA took disciplinary action against the rector and priest, inhibited them from performing any ecclesiastical duties and ordered them to vacate the parish. When they did not and disaffiliation proceeded, three lawsuits followed subject to one dispositive question: who controls St. Mary's? The trial court stated that to answer this question, the court would have to decide a quintessentially religious controversy about who is the true rector of St. Mary's and who are the communicants in "good standing." The appeals court disagreed these determinations are necessary. According to the court, the dispositive issue "comes down to the validity of the August 2012 amendment to the articles of incorporation and bylaws. If the amendment was valid, then St. Mary's no longer is affiliated with the ACA... . If the amendment was not valid, then ... the Rector has jurisdiction over the church building... ."

Mixed Zoning Rulings for Religious Organizations

In Church of Our Savior v. City of Jacksonville Bch., No. 313-cv-1346-J-32JBT3, 2014 WL 3587494 (M.D. Fla. July 18, 2014), the court denied the defendant's motion to dismiss the plaintiff's claims that the defendant violated the Religious Land Use and Institutionalized Persons Act (RLUIPA) by refusing it a conditional use permit (CUP) and precluding it from building a church on private property in Jacksonville Beach after neighboring residents complained. The Planning and Development Department recommended the application twice – the second time after the church designated a children's play area as a park open to neighborhood children at the suggestion of staff. But the Planning Commission determined that the proposal "is not consistent with the character of the immediate vicinity" or the city's comprehensive plan and "changing the designation of the children's play area to a public park meant the proposed building would exceed the maximum of 35% lot coverage... ." The church alleged these violations of RLUIPA: (1) the land use restriction substantially burdens its religious exercise; (2) the city lacks a compelling reason to treat the church differently from parks, playgrounds and recreation centers permitted as of right in the zoning classification; (3) a private and public school received a CUP in the same classification and, thus, were treated more favorably than the church; (4) the city discriminated against the church on the basis of its denomination (Anglican) by denying its CUP application but granting the application of two churches of different denominations; and (5) the city unreasonably limits the locations where religious organizations can site as of right. The court declined to dismiss any of the claims, but several times expressed skepticism that the church could prove them. The court declined to enter sanctions against the city's attorneys for filing the motion to dismiss.

In Maum Meditation House of Truth v. Lake County, No. 13-cv-3794, 2014 WL 3514989 (N.D. Ill. July 16, 2014), the court granted Lake County's motion to dismiss the plaintiff's complaint alleging that the county's decision that the plaintiff needs a "change of use" permit to operate a meditation center in a personal residence violates the Illinois Religious Freedom Restoration Act, equal protection clause, due process clause, free speech clause, free association clause and "hybrid rights." The court ruled that the plaintiff failed to exhaust its administrative remedies beyond the Zoning Board of Appeals. Additionally, the court ruled that there is no substantial burden placed on an individual's free exercise of religion where a law or policy merely operates so as to make the practice of the individual's religious beliefs more expensive; no factual basis indicating that the defendant was intentionally treated any differently from any other individual or organization; no indication that the county's interpretation of the building code relates to the plaintiff's message; and no valid hybrid rights claim for lack of valid individual constitutional claims.

Religious Institutions in the News

A new executive order prohibits federal contractors from engaging in sexual orientation and gender identity discrimination with uncertain consequences for faith-based contractors.;

Closely held for-profit corporations which intend to drop contraceptive coverage in light of the Hobby Lobby decision must notify workers.

The U.S. Department of State's list of worst religious freedom offenders has grown to nine with the addition of Turkmenistan.

Rabbi David Saperstein will serve as U.S. ambassador for religious freedom.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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