Posting for

Thursday, August 6, 1998

by: Bert Rush

brush@firstam.com

COMPETENCY AND CAPACITY/AUTHORITY/LEGAL ENTITIES

Sometimes when dealing with a corporation, partnership, LLC--it's hard to tell if you're really dealing with the person (or all the persons) authorized to bind the legal entity. Likewise, it may be hard to tell if you're really dealing with a legal entity--or just a namestyle ("d/b/a").

This problem is most frequently encountered with church and other non-profit organizations--because typically they are formed without investors or substantial assets, so they may begin operating without bylaws or any other written agreement providing a statement of purpose and rules of conduct for their operations. Only when such an organization acquires assets does a question arise as to who has authority to act.

In Des Plaines, Illinois, First American issued an owner's policy in the amount of $300,000 to an incorporated Baptist church--taking title from an (apparently) unicorporated predecessor Baptist church having some of the same members. We relied on a written "Resolution of Trustees"--in which persons representing themselves to be members and trustees of the predecessor church said the conveyance was OK. Now the state association of Baptist churches has claimed it has superior title to the CIQ (church in question). This is still being investigated--and may work out fine--but you can see how these things happen.

This claim should cause us to wonder how a court would decide such a dispute. Coincidentally, there's a recent decision from an Illinois Court of Appeals to provide an example. The case is Apostolic New Life Church of Elgin v. Dominguez (1997) 686 N.E.2d 1187, 227 Ill.Dec. 31. It's a long story--because the Court really struggled with the case--but here's what happened.

In 1979 a small group of individuals began meeting at a personal residence in Elgin, IL, as a Bible study group. Twice during the 1980's this group voted to affiliate with the Apostolica Assembly De La Fe En Cristo Jesus ("Apostolic Assembly") which had offices in California. Also twice in this period the group voted to terminate its affiliation with the Apostolic Assembly.

In August 1988 this group incorporated as the Apostolic New Life Church of Elgin ("New Life Church")--with a constitution and bylaws. It named Leobardo Bustos as its pastor, and looked for property to purchase for its church.

In February 1989 the New Life Church purchased a church property in Elgin for $140,000, paying about $50,000 down and giving a mortgage for $90,000. Three members personally guaranteed the loan. A representative from Iglesia Apostolica De La Fe En Cristo Jesus ("Iglesia Apostolica") was invited and attended church dedication ceremonies. Iglesia Apostolica has its offices in Mexico, and is described in the Court's decision as the "parent church of the Apostolic Missions in the United States."

In January 1990 the Iglesia Apostolica invited the New Life Church to join its "hierarchy," and the church members voted 42 to 0 to do so (with 3 abstentions). This vote was memorialized by a petition in which the New Life Church agreed to put itself under the "authority" of the Iglesia Apostolica. At about this time, and apparently at the direction of the Iglesia Apostolica, the New Life Church began calling itself the Mision Apostolica De La Fe En Cristo Jesus ("Mision Apostolica"). As new members joined they were given membership certificates from Mision Apostolica.

In February 1991 the petition for joinder was accepted by the Iglesia Apostolica, whereupon the Mision Apostolica (f/k/a New Life Church) received from Iglesia Apostolica baptism certificates, marriage certificates and letterhead bearing the name of Mision Apostolica. Thereafter all church business and activities were conducted under the name of Mision Apostolica--and so read the sign above the door.

Meanwhile, an organization known as Mision Apostolica De La Fe En Cristo Jesus ("Mision-USA")--with offices in Texas--filed an application for a certificate of authority to conduct affairs in Illinois, naming Rev. Bustos as its registered agent in IL. Mision-USA was the main U.S. subsidiary of Iglesia Apostolica.

In July 1991 Mision Apostolica requested help from Iglesia Apostolica to resolve some internal disputes. Rev. Bustos was called to a meeting in Mexico--and Iglesia Apostolica recommended that Bustos be replaced ("reassigned to another church"), but this was not done.

In March 1992 Rev. Bustos died. Iglesia Apostolica sent Rafael Rivera (from Mision-USA) to become the transitional pastor, and it directed that the church formally change its name to Mision Apostolica by transferring title to the church into the new name, among other things.

In April 1992 the members voted to transfer title to the church property and refinance the mortgage--into the name Mision Apostolica. When the refinancing lender required more formality, the members voted again (this time by a vote of 35 to 22) to approve the transfer, refinancing, and "dissolution" of New Life Church.

A number of members disagreed with the actions taken at these meetings.

They sent out a notice of a meeting to be held on October 17, 1992--but again they were out-voted as it was determined by the majority that New Life Church had affiliated with Iglesia Apostolica as Mision Apostolica in January 1990. Following this determination the congregation elected a board of directors (including Rev. Rivera) and, a few days later, Rev. Rivera filed an affidavit of dissolution for New Life Church (with the State), re-incorporated under the name of Mision Apostolica, and recorded a quitclaim deed purporting to convey the church property from New Life Church to Mision Apostolica.

Next, 33 church members met and voted to remove Rev. Rivera as pastor, to remove any and all directors "elected or appointed" by Rivera, to vacate all actions taken by Rivera, and to take necessary action (including legal) to carry out their vote.

In February 1993 the dissident group filed a lawsuit under the name of New Life Church to enjoin further possession and use of church property by Rev. Rivera and his followers, and for an accounting and repayment of funds used by defendants. Within weeks they also re-incorporated as New Life Church.

The trial court ruled in favor of the Rivera faction (Mision Apostolica) and against the faction calling itself New Life Church. The case was appealed and the Court of Appeal affirmed.

On appeal, the New Life Church faction raised a number of issues--but the Court of Appeal said there was only one issue: "Whether the decision of the majority of the members of an independent congregational church, incorporated as a religious corporation, to join with and transfer its property to a hierarhical church organization may be set aside because the joinder or union failed to comply with corporate merger law pertaining to joinder or union of churches."

The Court spent considerable time ruminating over what law should apply in this case, noting that due to first amendment limitations "civil courts have no authority to resolve church property disputes that turn on matters of church doctrine, practice, polity or administration." But, the Court concluded, in this case it could apply "neutral principles of law"--by looking at "church charters, constitutions and bylaws, deeds, state statutes, and other evidence to resolve the matter the same as it would a secular dispute."

Then the Court reeled off a list of Illinois statutes--Religious Corporation Act, General Not For Profit Corporation Act, Merger of Not For Profit Corporations Act, Religious Educational or Charitable Corporation Dissolution Act--and concluded none were controlling. Next the Court said there appeared to be no church charter, and the constitution and bylaws contain no authorization or prohibition against merger or dissolution of New Life Church--so that didn't help. Then the Court turned to the constitution and bylaws of the Iglesia Apostolica (the hierarchical "parent"), but found them "completely in Spanish"--so that was no help. At last the Court concluded that doubts arising from incompleteness of the record should be resolved against the appellant (New Life Church).

In the end the law of the case seemed to be "let the majority rule." The majority vote to dissolve New Life Church and merge its assets with Mision Apostolica was found consistent with--or at least not prohibited by--the "rules and usages" of New Life Church and Iglesia Apostolica. And the faction now calling itself New Life Church had submitted itself to the practices and protocols described above apparently without complaint--until they got out-voted. So the Court found no authority for reversal.

This kind of litigation can be very costly. Transactions involving property held in the name of a loosely-formed or poorly-documented organization should be handled with care. Likewise, the organization's source of title should be looked at carefully for evidence of any conditions which may have been attached to the vesting. Your nightmare is the case where a church benefactor (or family thereof) is now on the outs with church leadership--and wants property back.

And, as we've learned with the claim in Des Plaines, we should also be thinking about possible rights and interests of hierarchical organizations. Another of our claims involving church property in Suffolk County, NY, involves a "mother church"--with the added twist that under New York law a church must have court approval before it can sell real property (!).

Final thought: Don't let's think of this as solely a problem with churches. We had a claim in Walnut, CA (L.A. County) not so long ago involving a loan policy on a VFW facility. As best I recall, it cost about $30,000 to resolve that one....

Questions, comments, argument? Just press the "reply" button....