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A Note From the Editor

In the past month, since the attempted dismissal of Gregg Nescott from the Metropolitan Council and the suspension of the entire Special Commission by Metropolitan Herman (as well as Syosset's continuing refusal to release the Commission's report as unanimously recommended by the Metropolitan Council), has received several articles on how to initiate change. In the coming week, in anticipation of the upcoming Metropolitan Council meeting, we will present three of the best articles - each suggesting a different manner change could be initiated.

The second, by Mr. Robert Wachter, addresses change in the context of the law. We thank Mr. Wachter for sharing his thoughts with us.

6.4.07 New Series: Initiating Change

Caesar’s Decrees:

Fiduciary Duties in a Hierarchical Church

by Robert Wachter*

Many have written reflections about the Gospel and its implications on the current scandal that afflicts the Orthodox Church in America. Most writers have rightly focused on what Christ requires for the governance of his Church. This contribution will be different. This is an essay about the legal fiduciary standards the law imposes on officers and directors of hierarchical church organizations.

I. Overview

Church officers have fiduciary duties “to act in good faith, with honesty in fact, with loyalty, in the best interests if the corporation, and with the care of an ordinary, prudent person under similar circumstances.” Shepherd of the Valley Lutheran Church v. Hope Lutheran Church, 626 N.W.2d 436 (Minn. App. 2001). For the Orthodox Church in America, that means that the Metropolitan and members of the Metropolitan Council have legal obligations to the national Church. These obligations are not merely moral, aspirational, or idealistic targets for good stewardship. They are legal obligations – minimum standards of conduct. The consequence of failing to meet these standards is that an officer or director has a legal obligation to personally compensate the church for the damages resulting from the breach. “Officers and directors of a corporation are liable for damages to the corporation which result from a breach of their trust, a violation of authority or neglect of duty.” Word of Life Ministry, Inc. v. Porter, 778 So.2d 360 (Fla. App. 2001).

II. What is a Fiduciary?

What are these minimum standards? What are these duties? Courts in different jurisdictions have recognized several fiduciary duties that apply to officers and directors of religious corporations. These include:

(i) the duty of care,

(ii) the duty of loyalty,

(iii) the duty of good faith,

(iv) the duty to avoid conflicts of interest,

(v) the duty to disclose and account to the principal,

(vi) the duty to supervise, and

(vii) the duty to follow the organization’s charter documents.

Some of these duties have been expressly incorporated into Section 717 of the New York Not-For-Profit Corporation Law.

Duty of Care

The duty of care requires officers and directors to exercise reasonable skill and care in managing church affairs. This means that officers are directors must understand the principles and objectives of the organization, must understand what duties they are obligated to perform, and must make a good faith effort to perform those duties. The duty of care precludes church officers from withholding material information from other officers who are entitled to such information. Shepherd of the Valley Lutheran Church v. Hope Lutheran Church, 626 N.W.2d 436 (Minn. App. 2001) (withholding material information is “willful and reckless misconduct”). The duty of care also means that when one officer or director learns of a potential breach of duty by another officer or director, he has a duty to the church to rectify the breach. “The officers and directors of a corporation are jointly and severally liable for any willful neglect, mismanagement or misconduct of corporate affairs if they jointly participate in the breach of fiduciary duty or approve of, acquiesce in, or conceal a breach by a fellow officer or director.” Resolution Trust Corp. v. Block, 924 S.W.2d 354, 357 (Tenn. 1996); In re: Church of James the Less, 2005 Pa. Lexis 91 (2003), aff’d, 833 A.2d 319, aff’d in part, rev’d in part, 888 A.2d 795 (Pa. 2005).

Duty of Loyalty

The duty of loyalty precludes fiduciaries from profiting from a fiduciary relationship. This includes any benefits or profits which, although unrelated to the fiduciary position, came about because of an opportunity that the fiduciary position afforded. The duty of loyalty precludes such profits even in cases where there is no harm to the church. The duty of loyalty forbids misappropriating the organization’s resources for personal use, bribes and secret commissions.

Duty of Good Faith

The duty of good faith is related to the duty of care. This duty requires that officers and directors use their best judgment when making decisions for the organization. Decisions made in good faith and with reasonable care should be upheld if challenged even if they prove not to be the best decision in the light of later unfavorable developments. However, the board of directors must keep track of the information that the board considered in making decisions so that the organization can answer such charges when they arise.

Duty to Avoid Conflicts of Interest

The duty to avoid conflicts of interest requires that a fiduciary not put himself in a position where his personal interest and the duty to the organization conflict. The fiduciary must always put the church's interests first, subjugating personal preferences to the church’s interests. The fiduciary's subjective state of mind is irrelevant; that is, it does not matter whether the fiduciary had any ill-intent or dishonest intent.

Duty to Account to the Principal

When a fiduciary takes control of church property, there is a trust relationship between the fiduciary and the organization. The trust relationship requires the fiduciary to make full disclosure to the church regarding the management of the church’s property. The fiduciary must account for how the organization’s funds were collected, invested and spent. This duty includes the duty to maintain adequate records to provide such an accounting.

Duty to Supervise

Fiduciaries may delegate some responsibilities so long as the initial decision in choosing a delegate is well-founded and there is no basis for concern in relying on the delegate. However, fiduciaries are not absolved of the duty of care if they delegate their responsibilities. In such cases, the fiduciary has the ultimate responsibility to oversee and manage the activities of the delegate. Whenever a fiduciary delegates responsibility, the fiduciary must supervise and monitor the delegate’s conduct to ensure that the delegate does not breach a fiduciary duty.

Duty of Obedience to the Charter

The Orthodox Church in America is a religious corporation under New York law. There is a specific New York statute that recognizes unique status of the Orthodox Church in America and specifically requires that the OCA follow its own governing documents. Religious Corporation Law Article 5-C, Section 107. Courts have held that there is a breach of fiduciary duty when an officer or director of a church deliberately disregards the governing documents. “The knowing failure to follow the corporation’s own charter is a breach of their fiduciary duty of due care as a matter of law.” In re: Church of James the Less, 2005 Pa. Lexis 91 (2003), aff’d, 833 A.2d 319, aff’d in part, rev’d in part, 888 A.2d 795 (Pa. 2005).

III. Breaches of Fiduciary Duty

Many factual allegations have been made since the beginning of this crisis. The allegations relate to all seven fiduciary duties. These are just a few of the allegations and how they relate to fiduciary obligations:

There is an allegation that the audit committee warned Fr. Kondratick, Fr. Paul Kucynda, and Deacon Wheeler in 1993 of deficiencies in the church’s financial accounting. The committee flatly declared that “the lack of accounting policies cannot continue.” The failure to implement the audit committee’s recommendations, or even present the recommendations to the Metropolitan Council, was probably a breach of the duty of care.

Deacon Eric Wheeler alleged that he discovered in 1997 that church funds were deposited into a secret account that Metropolitan Theodosius controlled, and that both Metropolitan Theodosius and Fr. Kondratick warned him not to tell the Metropolitan Council. If this is true, both Metropolitan Theodosius and Fr. Kondratick breached the duty of good faith and the duty to account for church funds. They also breached the duty of due care by concealing one another’s actions. They may have also breached the duty of due care by intentionally disregarding the OCA Statute.

In September 1999 Metropolitan Theodosius fired Deacon Wheeler and Metropolitan Herman became the OCA’s acting treasurer. Metropolitan Herman claims that during the time he was treasurer, he was treasurer in “name only” and did not exercise any control or supervision over church accounts. Metropolitan Theodosius' decision to fire Deacon Wheeler may have breached the duty of good faith and the duty to avoid conflicts of interest. +Herman's admission that he did not oversee the church’s accounts after he became treasurer is tantamount to admitting he breached the duty to supervise.

The Administrative Committee, headed by Fr. Kondratick, dismissed John Kosey, the head of the audit committee, after Kosey notified the Metropolitan Council of Metropolitan Theodosius’ secret discretionary account. This dismissal may have been a breach of the duty of good faith.

Metropolitans Theodosius, Herman and Fr. Kondratick were the three key figures who had actual control over church funds during the time church funds disappeared. Their failure to account for the missing funds is a breach of the duty to account for the property that was entrusted to their control.

There are allegations that Fr. Kondratick received secret commissions from the sale of liturgical items the church purchased in Russia and sold in the U.S. If true, this was a breach of the duty of loyalty.

There are allegations that Metropolitan Herman disregarded the OCA Statute when he unilaterally made the decision to hire Proskauer Rose and assumed control over the Proskauer Rose investigation. This may have breached the duty of obedience to the OCA Statute and the duty to avoid conflicts of interest.
There are allegations that Fr. Kondratick shredded evidence that would have shown where the missing funds went. If true, this was a breach of the duty of good faith and the trust duty to account for church funds.

There are allegations that members of the Holy Synod and the Metropolitan Council were aware of many of these breaches over the years, yet did nothing to stop criminal activity or rectify ongoing financial mismanagement. If true, members of the Metropolitan Council may have committed a breach of the duty of care by failing to take appropriate action.

And these are just the tip of the iceberg.

IV. Fiduciary Obligations in Hierarchical Churches

Some believe that because the Orthodox Church in America is a hierarchical Church, the law does not impose such obligations on its officers and directors. But this is not true. Although governing authorities are more deferential to religious corporations than other types of non-profit organizations such as schools and charities, the law governs all nonprofit corporations, including hierarchical nonprofit religious corporations. The New York Religious Corporation Law was enacted "to provide for an orderly method for the administration of the property and temporalities dedicated to the use of religious groups and to preserve them from exploitation by those who might divert them from the true beneficiaries of the trust." Morris v. Scribner, 69 N.Y.2d 418, 423, 508 N.E.2d 136 (1987).

Although it seems natural that church officers and directors should not enjoy legal immunity if they engage in misconduct, there is a practical issue of who is a position to initiate and prosecute a claim for breach of fiduciary duty. The answer depends in part on the structure of the church and what the church’s governing documents say.

Does the church have members? If so, the members may have standing to bring suit to enforce a fiduciary duty.

Does the organization have a board of directors? If so, board members have the right, even a fiduciary duty, to take action if they discover a potential breach of fiduciary duty. In a worst case scenario where neither members nor the board of directors is willing or able to take corrective action, the state attorney general may intervene, but such intervention is very rare.

In the case of the Orthodox Church in America, the OCA Statute expressly provides that the Metropolitan Council is the body in the church that is responsible for examining financial reports, allocating funds, maintaining an inventory of church property, and initiating, prosecuting and defending all legal matters affecting the interest of the church. OCA Statute, Article V, Section 4. Members of the Metropolitan Council have the legal responsibility to manage the national church’s legal and financial affairs.

V. The Establishment Clause and the Abstention Doctrine

In the United States there is a judicial abstention doctrine that precludes government intervention in a church’s internal affairs when a dispute involves church doctrine. The Constitution directs that religious bodies are to be left free to decide church matters for themselves, uninhibited by state interference. First Presbyterian Church of Schenectady v. United Presbyterian Church, 62 N.Y.2d 110 (1984). Under the abstention doctrine, courts are especially deferential to hierarchical churches that have their own rules, regulations and tribunals for internal discipline and government.

The leading case is the United States Supreme Court’s decision in Serbian Orthodox Diocese v. Milivojevich, 426 U.S. 696 (1976), where the Court applied the abstention doctrine and refused to review whether the Serbian Orthodox Church properly followed its own constitution and penal code when it removed and defrocked one of its bishops. The defrocked bishop filed suit against the church. The Illinois Supreme Court invalidated the defrocking on the ground that it was arbitrary and inconsistent with the Church’s governing documents -- which were confusing and internally inconsistent. The United States Supreme Court reversed the Illinois Supreme Court on the ground that the removal and defrocking were pursuant to an ecclesiastical trial, and second-guessing the decision would require the court to resolve issues of religious law, which would violate the Establishment Clause.

Although the Supreme Court has ruled that courts must refrain from resolving disputes over religious law and church membership, they may retain jurisdiction if a dispute can be resolved by “neutral principles” that do not involve questions of church doctrine. Jones v. Wolf, 443 U.S. 595, 604 (1979). Under the neutral-principles approach, the court objectively examines pertinent church charters, constitutions and bylaws, deeds, state statutes, and other evidence and resolves the matter the same as it would a secular dispute. St. Mark Coptic Orthodox Church v. Tanios, 572 N.E.2d 283 (Ill. App. 1991). The “neutral principles” doctrine allows courts to resolve church disputes over financial mismanagement, misappropriation of property, and breach of fiduciary duty if the court can resolve the dispute without inquiring about religious doctrine. Libhart v. Copeland, 949 S.W.2d 783 (Tex.App. 1997) (civil courts may intervene “where there is fraud, oppression, or bad faith, or property or civil rights are invaded, or the proceedings in question are violative of the laws of the association, or the law of the land, or are illegal”); Murphy v. Green, 794 So. 2d 325, 330 (Ala. 2000) (affirming a judgement that defendants improperly converted church funds in violation of church's "purpose" clause); Word of Life Ministry, Inc. v. Porter, 778 So.2d 360 (Fla. App. 2001).

The State of New York adopted the “neutral principles” analysis in 1984 in the case First Presbyterian Church of Schenectady v. United Presbyterian Church, 62 N.Y.2d 110 (1984). In that case, the New York court retained jurisdiction to resolve a property dispute between competing factions of the Presbyterian Church. Even though the court acknowledged that the Presbyterian Church was hierarchical, the court intervened and adjudicated the case based on property deeds, the terms of the local church charter, state statutes governing the holding of church property, and the provisions in the church’s constitution concerning the ownership and control of church property. Since 1984, a number of New York courts have invoked the neutral principles analysis to resolve church disputes related to the management and control of church property. See, e.g., Premiere Eglise Baptiste Haitienne De Manhattan v. Joseph, 831 N.Y.S.2d 362 (1996); Archdiocese of Ethiopian Orthodox Church v. Yesehaq, 232 AD2d 332 (1996); Trustees of the Diocese of Albany v. Trinity Episcopal Church, 684 N.Y.S.2d 76 (1999); Malankara Archdiocese of Syrian Orthodox Church in North America v. Thomas, 33 AD3d 887, 824 N.Y.S.2d 101 (2nd Dept. 2006); Park Slope Jewish Center v. Stern, 491 N.Y.S.2d 958 (1985).

VI. The Role of the Metropolitan Council

Everyone who serves the church in a fiduciary capacity, whether as Metropolitan, Bishop, Priest, Metropolitan Council Member, Diocesan Council Member or Parish Council Member should be aware of the legal duties that accompany the position. The OCA Statute was structured in a way that put great responsibility on the Metropolitan Council to manage the legal affairs of the church. The responsibility to manage legal matters requires that Metropolitan Council members fully understand the fiduciary relationship, take appropriate action when there are accusations of a breach or potential breach of fiduciary duty, and make reasonable efforts to prevent ongoing or future breaches.

It is time for the Metropolitan Council to assume a more active role to resolve the ongoing crisis --at least with respect to the areas that within its competence under the OCA Statute.

The Metropolitan Council should pass a resolution that requires the Metropolitan to relinquish his control over the Special Committee’s investigation. This is a matter within the competence of the Metropolitan Council as a body -- not the Metropolitan as an individual. The Metropolitan Council should also pass a resolution requiring the Metropolitan to recuse himself from voting on any matter related to the Special Commission’s investigation. There is an obvious and unavoidable conflict of interest in allowing the Metropolitan to control the scope of an investigation into his own potential misconduct.

If the Metropolitan declares a motion for such a resolution out of order, Metropolitan Council members should immediately consult with a New York attorney to determine whether to initiate a lawsuit in the civil courts. If they decide to proceed with a lawsuit, they should carefully draft the complaint to focus on the well-established black-letter law of fiduciary duties, and avoid remedies or claims that would require the court to consider ecclesiastical issues.

It is not necessary that a majority of the Metropolitan Council agree to file a suit. Section 720 of the New York Not-For-Profit Corporation Law permits a single director to file an action requiring another officer or director “to account for his official conduct in . . . the neglect of, or failure to perform, or other violation of his duties in the management and disposition of corporate assets committed to his charge.” Not-For-Profit Corporation Law, Section 720(a)(1)(A).

Some will object that resorting to the civil courts is not the proper Orthodox way. Of course they are right. The proper Orthodox way is the way of Christ, the way of the Cross, the way of truth, the way of confession, the way of humility, the way of repentance, the way of reconciliation. If everyone in authority was committed to follow the Orthodox way, the scandal never would have escalated to where it is now.

Some will object that the Metropolitan Council should defer to the Holy Synod before initiating any legal action. However, the Holy Synod is not charged with the duty to take the lead on financial or legal matters affecting the national church, and has never shown any inclination to assume this role. The Holy Synod is the “supreme canonical authority” in the Church and has a clearly defined role in that capacity. See OCA Statute Article II. The Metropolitan Council is the “permanent executive body” and has its own clearly defined role. OCA Statute Article V. These respective roles effectively put the burden to initiate legal action on the Metropolitan Council.

VII. Conclusion

The truth is obvious: The Metropolitan is at the center of the allegations of financial misconduct and is not in any position to manage or suspend the Special Commission’s investigation. He should have never had control over the Proskauer Rose investigation in the first place. His position puts him in an irreconcilable conflict of interest.

The Metropolitan Council needs to take a stand, needs to assert its authority, needs to stand up for the truth, and should not be afraid to seek relief in the civil courts if necessary. Most claims for breach of fiduciary duty have nothing to do with the Orthodox faith or Orthodox polity. To be fair, a few might. Some are borderline Orthodox-polity issues of who has authority in a hierarchical church. For example, standing alone, it probably would not be enough for the Metropolitan Council to file suit solely on the grounds that the Metropolitan violated the OCA Statute on one or more occasions, especially if the Metropolitan can cite canons to support his position. If that was the only issue, the court would likely take one look at the canons and say “This is an issue of ecclesiastical governance – resolve it in your own courts.”

But this case involves more than a decade of financial mismanagement, corruption and criminal activity that have nothing to do with the Orthodox faith or Orthodox polity. There should be no conflict between the stewardship standards of the Gospel and the minimum requirements for a fiduciary under the civil law. It is difficult to imagine a priest or bishop arguing in court that the Orthodox canons protect the right to engage in financial misconduct and other illegal behavior.

A properly drafted complaint should be able to avoid the religious issues that might tempt the courts to exercise the abstention doctrine. The Constitution does not and should not protect the right to misappropriate funds, the right to pay bribes, the right to shred documents, the right to maintain secret accounts, the right to receive secret commissions, or the right to delegate financial functions without any oversight.

Would anyone in the Church argue otherwise?


*The author is a member of the California and Hawaii bars (inactive), and an adjunct professor in the law department at Ewha Women’s University in Seoul, Korea.

On Wednesday:

In the third part of the series, Initiating Change, we examine the role of the hierarchy in initiating change.


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