We need first to establish how things were done in Merrie Olde England, before and after the days of Henry VIII. The post of the king's right-hand man, or Chancellor, evolved over time into two separate positions: the "Chancellor of the Exchequer", who was the person in charge of the royal revenues, and the Lord Chancellor, who sat as a judge on the king's behalf in special types of cases which did not fit into any of the formulae of the regular courts (typified by the King's Bench). Over time, the branch of the law which the Lord Chancellor administered came to be known as "equity", the art of applying justice when there was "no adequate remedy at law". In that role, the Lord Chancellor was described as "the keeper of the king's conscience" (just as his counterpart in the Exchequer was "the keeper of the king's purse").
This two-part division, between law and equity, remains in American courts today --- although depending on the size of the court and the number of judges, the same judge will often hear both types of cases. (One major difference is that courts hear cases in equity without a jury, while the parties may request a jury in cases at law.) And in that simple fact --- that American courts do not divide the judicial function between law and equity --- lies the germ of the problem which courts have traditionally faced in handling church property cases.
One of the most famous of the early Chancellors was Thomas à Becket, who after serving King Henry II for eight years in that post (back when it entailed both judicial and financial duties) then became Archbishop of Canterbury. (He was murdered at Canterbury by soldiers loyal to King Henry II in 1170.) As Chancellor, he had described himself as "the second man in England, without whose consent and advice no great thing was set on foot or accomplished." (See the reference in the link just given.) By the time Henry VIII proclaimed himself Supreme Head of the Church of England, the functions of the Lord Chancellor were primarily judicial, but he also presided over the House of Lords in Parliament, and was the keeper of the King's Great Seal. The eighth Henry's most famous Chancellor was, of course, Sir Thomas More, also martyred for his beliefs.
At English common law following the days of Henry VIII, there was considerable uncertainty as to the power of the Chancellor, acting with the powers of a court of equity (as opposed to acting on behalf of the King and his royal prerogative as head of the established State Church), to enforce the terms of a charitable trust with regard to church property, or with regard to gifts or bequests for religious organizations or purposes. As has been happening since time immemorial, people would leave gifts on their death for charitable purposes. When, after Henry established the State Church of England, a gift was left to "the Church" (which at the time of the will in question at first often meant the Church headed by the Pope), was it to be administered and enforced in a court of equity, in which the Lord Chancellor represented only the highest level of appeal, or was it to be administered under the Chancellor's authority directly, on behalf of the King as head of the Church to which the gift had been made? Sitting as an appellate court, the Lord Chancellor's powers were limited by the record of the case as heard and decided by the lower court of equity; but sitting as the King's representative, and administering trusts and bequests to the King's Church, the Chancellor's powers were virtually unfettered.
Over time, as society grew, the Chancellor left more and more power to the inferior courts of equity. This in turn led to a gradual fusing of the two sources of the Chancellor's powers to deal with charitable bequests. In the first half of the 19th century, the English courts developed the “implied trust” theory, pursuant to which a church accepts a gift or devise left to it, even if no specific terms of trust are expressed by the donor, “in trust”, the terms of which were implied so as to fulfill the charitable purposes of that particular church --- as established when it was founded. This inevitably led the English courts into evaluating which of two factions in church disputes adhered more closely to its “founding doctrines.” Their jurisdiction over such cases in equity derived from the Chancellor's judicial functions, but their assumption of power to decide questions of religious doctrine came from the Chancellor's exercise of the royal prerogative.
In early America, there was considerable resistance to the idea that courts in equity could enforce trusts on church property, because of the association of such jurisdiction in chancellery with the royal prerogative. Early cases in North Carolina and Ohio simply adopted the principle of majority rule with regard to splits among voluntary associations: the greater number of the members of the dividing group kept the property. In Vermont and New York, the courts specifically rejected the “implied trust” doctrine as it had developed in the chancellery courts.
This trend culminated in the 1872 United States Supreme Court decision of Watson v. Jones, 80 U.S. (13 Wall.) 679. There the Court emphatically rejected the appellants’ attempt to invoke the implied trust doctrine in favor of the local (pro-slavery) Presbyterian congregation. In an extended obiter dictum ("something said by the way, and not as part of the essential decision in the case"), Justice Miller for the Court described three different types of situations which American courts might encounter:
1. The first of these is when the property which is the subject of controversy has been, by the deed or will of the donor, or other instrument by which the property is held, by the express terms of the instrument devoted to the teaching, support, or spread of some specific form of religious doctrine or belief.He then proceeded to lay out the rules of decision which, according to the Supreme Court, would govern in each of the three cases. To illustrate the case of a gift in express terms to a church which held "a specific form of religious doctrine or belief", he chose the following example:
2. The second is when the property is held by a religious congregation which, by the nature of its organization, is strictly independent of other ecclesiastical associations, and so far as church government is concerned, owes no fealty or obligation to any higher authority.
3. The third is where the religious congregation or ecclesiastical body holding the property is but a subordinate member of some general church organization in which there are superior ecclesiastical tribunals with a general and ultimate power of control more or less complete, in some supreme [80 U.S. 679, 723] judicatory over the whole membership of that general organization.
A pious man building and dedicating a house of worship to the sole and exclusive use of those who believe in the doctrine of the Holy Trinity, and placing it under the control of a congregation which at the time holds the same belief, has a right to expect that the law will prevent that property from being used as a means of support and dissemination of the Unitarian doctrine, and as a place of Unitarian worship.
In the second class of cases (unless again the terms of the gift were so expressly controlling as to religious doctrine that the courts could decide the matter as in the example just given), courts should apply the ordinary law applicable to voluntary unincorporated associations --- including majority rule, if applicable:
The second class of cases which we have described has reference to the case of a church of a strictly congregational or independent organization, governed solely within itself, either by a majority of its members or by such other local organism as it may have instituted for the purpose of ecclesiastical government; and to property held by such a church, either by way of purchase or donation, with no other specific [80 U.S. 679, 725] trust attached to it in the hands of the church than that it is for the use of that congregation as a religious society.
In such cases where there is a schism which leads to a separation into distinct and conflicting bodies, the rights of such bodies to the use of the property must be determined by the ordinary principles which govern voluntary associations. If the principle of government in such cases is that the majority rules, then the numerical majority of members must control the right to the use of the property. If there be within the congregation officers in whom are vested the powers of such control, then those who adhere to the acknowledged organism by which the body is governed are entitled to the use of the property. The minority in choosing to separate themselves into a distinct body, and refusing to recognize the authority of the governing body, can claim no rights in the property from the fact that they had once been members of the church or congregation.
In the language immediately following this passage, Justice Miller spells out the implication of this rule --- the "implied trust" doctrine cannot be enforced in congregational situations:
This ruling admits of no inquiry into the existing religious opinions of those who comprise the legal or regular organization; for, if such was permitted, a very small minority, without any officers of the church among them, might be found to be the only faithful supporters of the religious dogmas of the founders of the church. There being no such trust imposed upon the property when purchased or given, the court will not imply one for the purpose of expelling from its use those who by regular succession and order constitute the church, because they may have changed in some respect their views of religious truth.And finally, in the third class of cases --- the hierarchical churches, in which there was a "highest judicatory" with the power finally to resolve all questions of religious doctrine, governance, and discipline --- the courts had no choice but to defer to whatever decision was made by that highest church judicatory. Otherwise, they would be drawn into an impermissible entanglement in such matters, contrary to the limitations on State involvement in religion imposed by the First Amendment (which, after all originated in a desire to be free from the domination of the king and his church):
But the third of these classes of cases is the one which is oftenest found in the courts, and which, with reference to the number and difficulty of the questions involved, and to other considerations, is every way the most important.
It is the case of property acquired in any of the usual modes for the general use of a religious congregation which is itself part of a large and general organization of some religious denomination, with which it is more or less intimately connected by religious views and ecclesiastical government.
The case before us is one of this class, growing out of a schism which has divided the congregation and its officers, and the presbytery and synod, and which appeals to the courts to determine the right to the use of the property so acquired. Here is no case of property devoted forever by the instrument which conveyed it, or by any specific declaration of its owner, to the support of any special religious dogmas, or any peculiar form of worship, but of property purchased for the use of a religious congregation, and so long as any existing religious congregation can be ascertained to be that congregation, or its regular and legitimate successor, it is entitled to the use of the property . . . .
Such a case called for an entirely different manner of proceeding:
. . . [I]n cases of this character we are bound to look at the fact that the local congregation is itself but a member of a much [80 U.S. 679, 727] larger and more important religious organization, and is under its government and control, and is bound by its orders and judgments. There are in the Presbyterian system of ecclesiastical government, in regular succession, the presbytery over the session or local church, the synod over the presbytery, and the General Assembly over all. These are called, in the language of the church organs, 'judicatories,' and they entertain appeals from the decisions of those below, and prescribe corrective measures in other cases.
In this class of cases we think the rule of action which should govern the civil courts, founded in a broad and sound view of the relations of church and state under our system of laws, and supported by a preponderating weight of judicial authority is, that, whenever the questions of discipline, or of faith, or ecclesiastical rule, custom, or law have been decided by the highest of these church judicatories to which the matter has been carried, the legal tribunals must accept such decisions as final, and as binding on them, in their application to the case before them.
Justice Miller freely admits that the rule he announces is different from that which the courts in England apply, but explains that the reason lies in the historical role there of the Lord Chancellor --- a role which has no counterpart here:
We concede at the outset that the doctrine of the English courts is otherwise. In the case of the Attorney-General v. Pearson, cited before, the proposition is laid down by Lord Eldon, and sustained by the peers, that it is the duty of the court in such cases to inquire and decide for itself, not only what was the nature and power of these church judicatories, but what is the true standard of faith in the church organization, and which of the contending parties before the court holds to this standard. . . . And we can very well understand how the Lord Chancellor of England, who is, in his office, in a large sense, the head and representative of [80 U.S. 679, 728] the Established Church, who controls very largely the church patronage, and whose judicial decision may be, and not unfrequently is, invoked in cases of heresy and ecclesiastical contumacy, should feel, even in dealing with a dissenting church, but little delicacy in grappling with the most abstruse problems of theological controversy, or in construing the instruments which those churches have adopted as their rules of government, or inquiring into their customs and usages. The dissenting church in England is not a free church in the sense in which we apply the term in this country, and it was much less free in Lord Eldon's time than now. . . .
In this country the full and free right to entertain any religious belief, to practice any religious principle, and to teach any religious doctrine which does not violate the laws of morality and property, and which does not infringe personal rights, is conceded to all. The law knows no heresy, and is committed to the support of no dogma, the establishment of no sect. The right to organize voluntary religious associations to assist in the expression and dissemination of [80 U.S. 679, 729] any religious doctrine, and to create tribunals for the decision of controverted questions of faith within the association, and for the ecclesiastical government of all the individual members, congregations, and officers within the general association, is unquestioned. All who unite themselves to such a body do so with an implied consent to this government, and are bound to submit to it. But it would be a vain consent and would lead to the total subversion of such religious bodies, if any one aggrieved by one of their decisions could appeal to the secular courts and have them reversed. It is of the essence of these religious unions, and of their right to establish tribunals for the decision of questions arising among themselves, that those decisions should be binding in all cases of ecclesiastical cognizance, subject only to such appeals as the organism itself provides for.
Nor do we see that justice would be likely to be promoted by submitting those decisions to review in the ordinary judicial tribunals. Each of these large and influential bodies (to mention no others, let reference be had to the Protestant Episcopal, the Methodist Episcopal, and the Presbyterian churches), has a body of constitutional and ecclesiastical law of its own, to be found in their written organic laws, their books of discipline, in their collections of precedents, in their usage and customs, which as to each constitute a system of ecclesiastical law and religious faith that tasks the ablest minds to become familiar with. It is not to be supposed that the judges of the civil courts can be as competent in the ecclesiastical law and religious faith of all these bodies as the ablest men in each are in reference to their own. It would therefore be an appeal from the more learned tribunal in the law which should decide the case, to one which is less so.
Being patient and thorough, Justice Miller reviews a number of State court cases (such as those mentioned earlier) which had already reached the conclusion that the "implied trust" doctrine impermissibly led secular courts to wade into the thickets of disputed religious doctrines. He then applied the rule he announced to the parties before the Court, who had joined the hierarchy of the Presbyterian Church, and so were subject to the findings of its highest judicatory, the General Assembly:
But we need pursue this subject no further. Whatever may have been the case before the Kentucky court, the appellants in the case presented to us have separated themselves wholly from the church organization to which they belonged when this controversy commenced. They now deny its authority, denounce its action, and refuse to abide by its judgments. They have first erected themselves into a new organization, and have since joined themselves to another totally different, if not hostile, to the one to which they belonged when the difficulty first began. Under any of the decisions which we have examined, the appellants, in their present position, have no right to the property, or to the use of it, which is the subject of this suit.Justice Miller then explained why the Court had held back its decision for over a year --- in the fond hope that, as Christians, the parties might settle their differences in accordance with the principles they professed to follow:
The novelty of the questions presented to this court for the first time, their intrinsic importance and far reaching influence, and the knowledge that the schism in which the case originated has divided the Presbyterian churches throughout Kentucky and Missouri, have seemed to us to justify the careful and laborious examination and discussion which we [80 U.S. 679, 735] have made of the principles which should govern the case. For the same reasons we have held it under advisement for a year; not uninfluenced by the hope, that since the civil commotion, which evidently lay at the foundation of the trouble, has passed away, that charity, which is so large an element in the faith of both parties, and which, by one of the apostles of that religion, is said to be the greatest of all the Christian virtues, would have brought about a reconciliation. But we have been disappointed. It is not for us to determine or apportion the moral responsibility which attaches to the parties for this result. We can only pronounce the judgment of the law as applicable to the case presented to us, and that requires us to affirm the decree of the Circuit Court as it stands.
As you can see from the foregoing exposition, the rejection of the implied trust doctrine was dictum to the actual holding in Watson, since the facts of the case required only application of a rule to the third class of cases, and the rule of deference which the Court adopted did not necessarily imply a rejection of the English rule. But Justice Miller went out of his way to explain why that rule could no longer be followed in American courts, and spent by far the greater part of his opinion justifying his explanation. Many State courts, however, including those in California, were not persuaded.
The California Supreme court applied the doctrine of an implied religious trust in Baker v. Ducker (1889) 79 Cal. 365, and solidly reaffirmed it in Wheelock v. First Presbyterian Church (1897) 119 Cal. 477. (You can find the official published versions for these and other California cases at this site, but I cannot provide individual links, because the site requires that you first agree to its terms, and then enter the citation of the case you want. Thus, to get the former case (Baker v. Ducker), in the citation blanks you would insert "79" for the Volume number, and "365" for the page, choose the series "Cal." and hit "Go".) In both cases, the Court held that a majority could not control the devolution of church property contrary to the implied terms on which its founders acquired it originally. Subsequently, the Court carried the doctrine over to a general charitable trust, as well (In re McDole’s Estate  215 Cal. 328), and the doctrine was actually codified in Corp. Code section 10206 (c), as enacted in 1947 (but repealed in 1980).
As in England, however, the implications of the implied trust doctrine entailed an unavoidable entanglement by the courts in evaluating degrees of faithfulness by groups of followers in adhering to religious doctrine. In consequence, the United States Supreme Court unanimously ruled the doctrine unconstitutional in 1969 (Presbyterian Church v. Mary E. B. Hull Presbyterian Church, 393 U.S. 440). It followed that decision ten years later with a 5-4 ruling in Jones v. Wolf (1979) 443 U.S. 595 that sanctioned a “neutral principles” form of analysis as a constitutional alternative in church property disputes --- even in ones involving a hierarchical church.
This ends my first installment of this series of posts on the evolution of church property law. I will take up Jones v. Wolf and later developments, in California and elsewhere, in the subsequent installments.