Friday, August 27, 2010

Leading the Church into Lawsuits - Pt. II

In this series of posts, we are examining the relationship between the Episcopal Church (USA), its two most recent Presiding Bishops, and their counsel of record, i.e., David Booth Beers, Mary E. Kostel, and the Washington, D. C. offices of the law firm of Goodwin Procter. (Note at the outset that Mr. Beers is no longer a partner in the firm, but remains "of counsel" to it, while Ms. Kostel is also no longer with the firm, but is a consultant on the staff of the Presiding Bishop. Nevertheless, at the time their respective attorney-client relationships were established with ECUSA itself, both were members of the firm.)

In the first post of the series, we established the ethical framework and requirements for that relationship, given that both attorneys are members of the District of Columbia Bar, and hence governed by its Rules of Professional Conduct (which are very similar, and in most cases identical, to the Model Rules of the American Bar Association). One of the essential results of that examination was that in order to represent both an organization and an officer of that organization, an attorney must have the "informed consent", in writing, of both parties. Just to recap what that means, here is a portion of the definition of "informed consent", taken from the D.C. Rules:
The lawyer must make reasonable efforts to ensure that the client or other person possesses information reasonably adequate to make an informed decision. Ordinarily, this will require communication that includes a disclosure of the facts and circumstances giving rise to the situation, any explanation reasonably necessary to inform the client or other person of the material advantages and disadvantages of the proposed course of conduct and a discussion of the client’s or other person’s options and alternatives. In some circumstances it may be appropriate for a lawyer to advise a client or other person to seek the advice of other counsel. . . . In determining whether the information and explanation provided are reasonably adequate, relevant factors include whether the client or other person is experienced in legal matters generally and in making decisions of the type involved, and whether the client or other person is independently represented by other counsel in giving the consent. . . . In all circumstances, the client’s consent must be not only informed but also uncoerced by the lawyer or by any other person acting on the lawyer’s behalf.
In the second post of this series, we began examining the historical record of the attorney-client relationships, as a preliminary to making an evaluation of the conflicts of interest between the organization (ECUSA) and the officer client (the Presiding Bishop) that could have arisen in the course of their dual representation. To that end, we saw how the line items for legal services varied over the three triennial budgets for ECUSA established under the leadership of Presiding Bishop Frank T. Griswold, III. (These were the budgets for the periods 2001-2003, 2004-2006, and -- submitted to General Convention by Bishop Griswold, but then implemented by his successor -- 2007-2009.)

In particular, we saw how the proposed budgets for each three-year period went from $420,000.00, to $765,000.00, and then, rather strangely, given the trend in litigation to that point, back to just $405,000 for the period 2007-2009. In the next few posts, we shall take a much closer look at how the events of that triennium made the latter estimate hopelessly inadequate, and how many interim adjustments and borrowings were required to fill the gaps -- each made by the Church's Executive Council, without any participation from General Convention (in 2009). The framework will then be established for our final post(s) of the series, in which we address the ultimate questions of who exactly benefited from these adjustments and changes, and who was harmed by them. These are the very questions which, as a matter of fiduciary duty to its constituents, the Church ought to be raising under the current circumstances -- but which it is not.

When we left off with our consideration of the budgetary record, we were at the beginning of 2007, when the bad financial news for calendar 2006 was just beginning to arrive, and when the Executive Council met in February to adjust the budget for 2007. Significantly, what was taking place on the legal front at this time was that the really heavy-duty litigation in Virginia was just getting under way -- the Diocese of Virginia and ECUSA separately filed eleven separate lawsuits against the CANA parishes in late January-early February 2007 (for details, see this post). This was an abrupt turnaround in strategy, as the parishes in Virginia all attested, and no one appears to have notified the Executive Council of the impact such a move would have on the 2007 budget. From testimony given later in the litigation, it seems that the Presiding Bishop and her Chancellor decided on the move themselves. Bishop Jefferts Schori testified, in the course of her videotaped deposition, as follows:
1 Q. Did you not tell Bishop Lee to pull out
2 of negotiations with the II congregations?
3 A. I told Bishop Lee that I could not
4 support negotiations for sale if the
5 congregations intended to set up as other parts
6 of the Anglican Communion.

. . .
21 Q. So do you view this current litigation
22 as a means for you to validate the notion of
[page 63]
1 territorial integrity?
2 A. I understand it as a means to preserve
3 assets of the Episcopal Church for the ministry
4 and the mission of the Episcopal Church.

. . .
[page 83]
17 Q. What did you tell Bishop Lee?
18 A. I told him that the National Church had
19 an interest both in the financial compensation
20 and that another branch of the Anglican Communion
21 not be set up in our territory for reasons of
22 mission strategy.
We thus have the Presiding Bishop of ECUSA taking it on her own to devise and then direct the implementation of a "national mission strategy" that precludes any diocese in the Church from selling church property to any body that plans to use it to worship as part of another denomination within the Anglican Communion. This policy, please note, was not developed and then fleshed out by General Convention, or even the Executive Council. And it had huge consequences for the budget of the Episcopal Church (USA), as we shall see. In the next passage from her Virginia deposition, the Presiding Bishop tells us exactly and forthrightly that the entire matter of what lawsuits are to be instituted in the name of the Church, and how much money is to be spent on them, is completely within her sole discretion (I have added the italics, but they probably are superfluous; the entire testimony is simply amazing):
13 Q. You instructed the Episcopal Church to
14 intervene [in the Virginia litigation]; did you not?
15 A. To join that litigation.
16 Q. You, yourself?
17 A. Yes.
18 Q. And you also instructed the lawyers for
19 the Episcopal Church to file suit, a separate
20 suit against the 11 congregations; did you not?
21 A. That has been our practice, that is what
22 we did.
[page 85]
1 Q. On your instruction?
2 A. Uh-huh.
3 Q. And you have been approving payment for
4 the legal bills that have been incurred in the
5 litigation, have you not?
6 A. I actually don't see the bills, but,
7 yes, they are approved by my office.
8 Q. Who in your office approves them?
9 A. I believe -- no, actually, I can't tell
10 you. I am not the sure whether it is the
11 treasurer or the canon who has just retired, who
12 had been doing that.
13 Q. Did the General Convention authorize the
14 Episcopal Church to intervene in the 57-9
15 proceedings?
16 A. That is not a duty of the general
17 Episcopal Church.
18 Q. So the answer is no?
19 A. Correct.
20 Q. Did the General Convention authorize the
21 Episcopal Church to file suit against the CANA
22 congregation?
[page 86]
1 A. That is not a duty of the General
2 Convention.
3 Q. Is it a duty of the Executive Council?
4 A. No.
5 Q. That is your duty?
6 A. It is.
7 Q. So it is your view that you are the
8 authority to initiate litigation, without the
9 formal approval of the General Convention?
10 A. Yes.
11 Q. And it is your view that you have the
12 authority to incur substantial legal expenses in
13 litigation without the approval of the General
14 Convention?
15 A. Yes. The General Convention has
16 provided some funds in its budget to be used as
17 necessary.
The last statement, as we have already seen, is an egregious exaggeration of what was actually done in General Convention 2006. The budget for the triennium 2007-2009 had been prepared and presented to the Convention by the Executive Council, acting under Presiding Bishop Griswold, before Katharine Jefferts Schori was even elected. She obviously had no input into what was provided "to be used as necessary" in that budget.

Moreover, as we have also seen, the amounts provided in the budget by General Convention for the period 2007-2009 were lower by far than the previous three years, and even lower than Bishop Griswold's initial budget (2001-2003). (See the recap above.) One could hardly say that General Convention had been apprised of, let alone that it budgeted for, the institution of eleven separate lawsuits at once in the courts of Virginia. But within just two months of her taking office, the Presiding Bishop -- without advising the Executive Council, and without receiving any budgetary authority, committed the Church to a massive cost overrun in litigation expenses simply by instructing her Chancellor to proceed.

And, because the Presiding Bishop does not concern herself with approving the legal bills, but leaves that function to a subordinate in her office, the Presiding Bishop left it entirely to her own Chancellor to choose his own law firm to carry out her instructions, and to decide just what, and how much, legal work needed to be done. (As we shall see in a later post, the hook for this blank check was an offer to discount the future fees as a pro bono gift to the Church.)

Now, it should be apparent even to a lay reader at this point that something is seriously wrong in this sequence of events, and in the Presiding Bishop's sworn testimony, as quoted above. She testified to a clear understanding that it was her duty, and hers alone, to decide on what litigation should be brought in the name of ECUSA, and how much money should be spent on that litigation. But she was just barely three months into her office when she came to such an understanding, and acted on it without consulting any other branch of the Church! The conclusion seems inescapable: she could only have gained such an understanding of her duties based on legal advice given to her by her Chancellor, David Booth Beers.

The absence of any "informed consent" (as defined in the quotation above) of the organizational client here (in whose name the suits were filed) is glaring and blatant. Despite what she may think, the Presiding Bishop is not the "Protestant Episcopal Church in the United States of America." She is, properly speaking, not even an officer of that organization, which is made up of unincorporated dioceses. The Constitution of ECUSA provides for a Presiding Bishop of the House of Bishops -- hence her title. But it makes no provision for that officer to be the President or Chief Executive Officer of ECUSA itself. A CEO would have the ability to command the organization's members, and she admitted in her deposition that she had no such authority (page 84, lines 1-5).

There is a comment on Rule 1.7 of the D.C. Bar's Model Rules of Professional Conduct which would appear to be directly in point (I have added the emphasis):
[24] If representation otherwise appropriate under the preceding paragraphs seeks a result that is likely ultimately to have a material adverse effect on the financial condition of the organization client, such representation is prohibited by Rule 1.7(b)(3). . . . Obviously, however, a lawyer should exercise restraint and sensitivity in determining whether to undertake such representation in a case of that type, particularly if the organization client does not realistically have the option to discharge the lawyer as counsel to the organization client.
Now, let us turn to the details of the material adverse effect on ECUSA of Chancellor Beers's decision to have his own law firm carry out the instructions of the Presiding Bishop in the organization's name. Let us begin with what then was called the "Audit Committee of the Executive Council", whose primary function was to ensure that the moneys of the DFMS (see this previous post for an explanation of that organization's role in these matters) spent on Church purposes were accounted for in such a way as to ensure that the required annual independent audit could be certified without any reservations or qualifications. At its meeting held in New York in September 2007, the Audit Committee held a "short discussion" about how to characterize legal expenses as a line item in the budget, and commented on the amounts accruing, but otherwise showed no knowledge or awareness of the Virginia litigation in particular, or how much would have to be spent on it (italics added):
Reviewing the statement of operations for 8/31/07, Alpha [Conteh, the DFMS's Controller] stated they are essentially as expected at this time of year. Question arose about the title, “Property protection for mission,” and comment made that it may wiser to re-title the line to show that it is a legal expense. Some folks have inquired about the source for funding the legal expenses specific to helping dioceses having property disputes. Consensus was that the line should be called what it is. Del [Glover] and [Bishop] Stacy [Sauls] will take this back to A[dministration] & F[inance] where the request originated about the line’s title. Short discussion followed regarding budget accruals for anticipated legal expenses. Prior to 2007, expenses have been met by using short-term reserves.
(These minutes were downloaded sometime ago from the Audit Committee's home page. But with its recent transformation into this body, the minutes of the former group no longer appear online.) At the next meeting of the Audit Committee, in December 2007, there was this intriguing disclosure, which showed how a deliberate decision was made not to share with the full Executive Council the information about the ballooning costs of litigation (italics again added):
Attempt was made and was unsuccessful to contact Bishop Sauls by phone so that he could participate in the discussion about legal expenses for property protection. During an executive session of the Executive Council (EC) a discussion was held in regard to the amount of funds spent on legal fees in property issues. The PB and chairs of two committees of EC (Administration & Finance and National Concerns) discussed this, deciding, for a variety of reasons, not to share the amount with EC.
This disclosure prompted a response from the DFMS's Treasurer attending the meeting -- Kurt Barnes:
Kurt assured A&F that if he didn’t know what the exact number was spent on legal fees he would not sign the audit report. Kurt has initiated a review of all the legal bills that have come in; Jose Gonzalez is making the review. Bills come in either to in-house counsel, Suzanne Baille, or to the PB’s Canon. They are reviewed and identified by subject matter and presented for payment. Kurt and Suzanne complete a similar review and the dollar amounts are coded appropriately for entry. Kurt has asked what bills might exist that do not go through accounts payable. Discussion covered this issue as well as the difference in reporting ‘fees’ and ‘expenses,’ which is an inclusive number apart from the fees – travel, administrative, pro bono services, etc.

Acknowledging that this is a sensitive issue, opinion was expressed that there should be a body, either of EC or EC and Staff, that should know exactly what the fees and expenses are. Without such oversight an environment of distrust is inevitably created. It was agreed that Audit needs to ask EC with confidence and conviction to take care how they deal with the matter; Audit wants to support EC and has fiduciary responsibility for accuracy.
This is precisely why the Model Rules require that an organizational client's informed consent must be obtained in advance of legal counsel's representing both an organization and an individual in that organization. But as these disclosures at the time reveal, there was no kind of consent, let alone informed consent, obtained from independent members of ECUSA in advance of undertaking the eleven Virginia lawsuits.

Is it any wonder, given the foregoing, that at the end of 2007, the official year-end audited financial statements of the DFMS contained the following note by the auditor? (P. 19; bold emphasis added.)
The Society is subject to various claims and legal proceedings that arise in the course of ordinary business activities. The Society is not aware of any pending litigation which will have a material adverse effect on the consolidated financial statements.
By the end of calendar 2007, the $500,000 which the Executive Council had added the previous February to the budget for "Property protection for Mission" had experienced an overrun of $402,921, totalling $902,921 for the year. Similarly, "Title IV Expenses", whose budget had been tripled from $100,000 to $300,000, still came in more than $100,000 over that revised figure. For the second year in a row, the Episcopal Church had spent more than a million dollars on legal fees and expenses relating to litigation and the trials and depositions of bishops, while budgeting much less. The trend was upward -- from $1,179,167 in calendar 2006 (as shown in the previous post) to $1,304,137 in calendar 2007. And the end was by no means in sight.

Since there is a limit to how much can be absorbed in any one post, I shall conclude this one at this point, as of the end of calendar 2007. In the next post, we will begin with the events of 2008.


  1. Obviously, they don't teach "Following the Law" in seminary.

  2. Despite serving on the Vestry of my home parish in Mississippi for three years, I still know little about the type of financial and legal matters you are dealing with here. Nevertheless, I am finding your investigation of this issue very impressive. It makes riveting reading!

    It certainly seems that there is some underhand dealing going on. However, I would really like to know if any laws are being broken here, or is it just a question of not following internal ECUSA rules and regulations?

    Also, are the rules of the Bar Association mandatory for its members, or are they merely of an advisory nature?

    Overall, I suppose, I would like to understand more about the possible consequences of what has been happening, for the parties involved.

  3. Topper, thank you for that comment, and those questions. I hope that more will become clear to laypersons such as yourself as the series proceeds, and lays out the complete sequence of events.

    What is at issue here is not the breaking of any laws, but whether the conduct of the Church's litigation chiefly by a law firm with whom the Presiding Bishop's Chancellor is associated is in accordance with the ethical standards of the Bar to which the attorneys belong. If a court is presented with sufficient facts to establish a violation of those standards, it could disqualify the attorneys and their law firm from proceeding further with the case, and ECUSA would have to find itself a new law firm. It would be up to the bar association's appropriate committee to decide whether any ethical violations committed were sufficient to impose personal sanctions on the attorneys.

    From the client standpoint, what is at issue is whether the Presiding Bishop has faithfully carried out her fiduciary duties -- which she says determine her litigation policies -- to her constituents, by spending the money entrusted to the Church without any independent oversight or checks on what she claims as her authority. Among her other fiduciary duties is a full and open disclosure of the facts to those entrusted with the responsibility for the Church's compliance with audit standards, and as we saw in this post, there was a time, at least, when that was not happening. The remedies for any breaches of fiduciary duty lie with those who were harmed by the breaches, and those remedies could be pursued in both ecclesiastical and civil courts.

    But at this point, there is no one in the Church who is even asking the appropriate questions. I shall have much more to say about this sad situation after I am done with laying out the facts.

  4. AC - Thank you for your reply. I understand better now, and will continue to follow with interest.