Tiptoeing Through the Tulips: Lack of Oversight for ECUSA's Lawsuit Expenses

[N.B.: This is the fourth of a multi-part series entitled: "ECUSA and its Attorneys: a Runaway Train". The previous posts are the Introduction, Part I and Part II.]

Frank Kirkpatrick, professor of religion at Trinity College, wrote in a survey article in 2008 that "there were, as of December [2007], 55 [Episcopal Church] property disputes in one state or another of resolution around the country." (You may find a listing of those lawsuits in this post from August 2008, and see also the latest report from the American Anglican Council.) Of those fifty-five lawsuits, I estimate that ECUSA itself was a party to about half of them. Thus from the five lawsuits to which it was a party as Bishop Griswold ended his term in November 2006 (the Pawley's Island case in South Carolina, the three Los Angeles lawsuits, and a case involving St. James Church in Elmhurst, in the Diocese of Long Island), the number increased by five times in the first full year of Presiding Bishop Katharine Jefferts Schori's term.

Under Bishop Jefferts Schori, ECUSA did not just passively stand by as the property disputes emerged, and allow the diocese involved to carry the laboring oar. It aggressively prosecuted the cases in both California and Virginia, joined in filings in Connecticut, Georgia and New York (where it intervened as the DFMS against St. Andrew's, in Syracuse, and filed an amicus brief in this case in New York's highest court), became enmeshed in additional litigation in San Diego and Colorado, and threatened litigation against the dioceses of San Joaquin, Fort Worth and Quincy if they dared to withdraw from the Church. (The latter two threats were issued by the Presiding Bishop's Chancellor on his own initiative, as discussed in this earlier post.)

There are no records in the minutes of the Executive Council during this period to show that it was ever consulted before any of these multiple filings in the name of the Church took place; as quoted in the previous post, the Presiding Bishop held the view that only she personally, and neither the Council, nor even General Convention, had any authority over litigation. Thus she simply gave her Chancellor free rein -- and ECUSA's legal bills began to mount exponentially.

As we saw in the two previous posts, ECUSA's legal expenses exceeded a million dollars in each of 2006 and 2007 -- even though the former year was the last of a triennium (2004-2006) whose total for three years had been budgeted at $765,000, and the latter was the first year in a new triennium whose total for three years had been set at just $405,000. The current-year budget which the Executive Council adopted at its February 2008 meeting raised the amount allocated for legal expenses from the $135,000 which had been set in 2006 to just $450,000 (after it had already changed that same amount for 2007 to $800,000 the previous year). The Council thus appears to have continued to operate in the dark with regard to the mounting tsunami of legal bills which were the inevitable consequence of all the lawsuits authorized by the Presiding Bishop, acting on her own. What it saw instead was a need to reach out to provide additional assistance to the groups trying to "remain Episcopal" in the departing dioceses. At the close of its meeting in February, the Council had issued a statement, "Transformation and Hope", which contained the following paragraph:

We are deeply concerned for those who are members of The Episcopal Church but now find themselves in parishes or dioceses attempting to depart. To the members of The Episcopal Diocese of San Joaquin, know we stand with you. Your struggles and needs inform our prayers, deliberations, and plans. This is a new and unfamiliar landscape for all of us. We stand with you and commit ourselves to provide pastoral care, to aid in re-organization, and to support legal actions necessary to retain the assets of the diocese for ministry. We will hold clergy leaders accountable to their vows to uphold the doctrine, discipline and worship of this Church, and lay leadership accountable to the fiduciary responsibilities of the offices they hold. Up to $500,000 of income from trust funds will be made available in the calendar year 2008 to support the mission work of the Diocese of San Joaquin and similarly situated dioceses.

Note the description of the purpose of the $500,000 to be taken from trust fund income: "to support the mission work of the Diocese of San Joaquin and similarly situated dioceses." What was special about the Diocese of San Joaquin at this time was that its annual convention in December 2007 had voted overwhelmingly in favor of a constitutional amendment which would effectively remove it as a member of the unincorporated association of dioceses that comprises the Episcopal Church (USA). The only other dioceses that could be said to be "similarly situated" were those who were considering similar constitutional amendments: the Dioceses of Fort Worth, Quincy and Pittsburgh. Thus the need for "mission work" in just these four dioceses was a rhetorical fig leaf -- intended to provide legal cover for the fact that money left in trust to the Episcopal Church (DFMS) is generally earmarked for "the mission of the Church."

The Council's official statement could also be taken as a means of avoiding any response to the petition, with over 5,000 signers, circulated in the fall of 2007 by the American Anglican Council, requesting that ECUSA reveal how much money it had spent since 2004 on litigation against individuals and parishes. (There was little chance of the request's being granted, given that the Presiding Bishop had refused even to disclose the full amounts to the Executive Council itself.) In truth, it had no idea at this point of what the amount was, or what it was going to be by the end of the year. In the next paragraphs of its February statement, the Council showed that it was still operating on rosy assumptions:

Regarding the financial health of The Episcopal Church, we learned that in a time of economic recession, Episcopalians have demonstrated a renewed commitment to stewardship with an anticipated 4 percent increase in diocesan commitments and an excess of resources over expenses for 2007.

The budget approved for 2008 reflects these increases in diocesan commitments and for that we are grateful. Appropriations for block grants, covenant relationships and most other mission programs will continue at GC approved levels or higher in 2008. . . .

Attendance was declining -- the Church would later disclose that it had lost some 60,000 members between 2006 and 2008, the equivalent of the combined dioceses of Atlanta, Georgia, North Carolina, South Carolina and Upper South Carolina. But the Council remained steadfastly on the track set for it by 815, and refused to ask any hard questions about just how much was being spent on attorneys, and what the Church was receiving for all its money. Instead, it voted to "up the ante" in San Joaquin, as we shall see, and allocate accumulated trust funds in its charge for clergy salaries there in order to free up still more funds for litigation. (The money would go to pay for Bishop Lamb's local attorneys; the expenses of Goodwin Procter, as co-counsel on the case, would continue to be paid from the office of the Presiding Bishop.)

Thus it is fair to say that at this point, in February 2008, the entire Executive Council became complicit in an official conspiracy at the Church's highest levels. The conspiracy worked in this fashion:

1. At the head was the Presiding Bishop, who with her Chancellor decided whom to sue in the name of the "Church."

2. Next, the Chancellor was given free reign to "pile on" the Church's opponents -- to bring to bear against them as many legal resources at his disposal as he wished to employ. Although there was a nominal "budget" established for legal expenses, it served as a placeholder only, and acted as no kind of limit on his authority.

3. The Treasurer of the Church was left with the problem of finding the moneys needed to pay all the legal bills from accumulated trust funds, surpluses from past years (which were exhausted by 2007), and from other unrestricted sources.

4. To provide the local remnants with additional ammunition to harass their opponents, the Executive Council would duly rubber-stamp, based on the Treasurer's recommendations, the use of particular trust funds for "mission work" in the affected dioceses. The funds would be disbursed to relieve those dioceses of the burden of collecting pledges and donations to pay clergy salaries and ongoing parish expenses.

5. With the local moneys so collected, the remnant groups could pay their local attorneys to go after additional properties. The aim was to sell any church properties recovered -- the remnant groups were too small to have any use for them, or ability to keep them up -- and turn them into cash to fund more litigation (and later, to repay "litigation loans" from the Executive Council).

6. No sooner was money found by the Treasurer and appropriated by the Executive Council than it would be overspent before the year was over, and the cycle would begin all over again.

At their scheduled meeting in New York in September 2008, members of the Audit Committee began to show some concern over the propriety of using DFMS trust funds in this fashion. Here is an extract from their minutes on that occasion:

Ernie [Petrey] had questions regarding the funding approved by EC to help the Diocese of San Joaquin. He identified issues regarding the use of the term “income” in the Trust Funds Manual, regardless of the fund. A number of those funds came in prior to 1972, when the definition of income changed and it changed again after 1991. . . . He inquired, “If a document says you’ll use income for x, y and z is that interpreted to mean “return” or income?” . . . He questioned whether a) in the statement of unappreciated distribution in the trust funds [the amount] is $4.2 million or b) whether it is distributable. He observed there is no clear understanding that appreciation is not a factor and it is stated in the Trust Funds Book ‘we will not distribute appreciation.’ To spend it down contrary to that stated in the TF book is bad.

Kurt [Barnes -- the DFMS Treasurer] recalled that in 1997 there was an Attorney General-mandated review of the use of the trust funds. In 2005, Elsa Cumming (assistant in-house counsel at the time) was asked to review them also to make sure the language applied to the way the funds were being used. Each time there is a request of funds from a trust, counsel reviews it to make sure that EC has the authority and there is proper use of the funds. A memorandum is produced prior to the request being sent to EC. . . .

These were the questions to ask, but the discussion was occurring only among the six members of the Audit Committee, along with the staff and outside auditor members attending. What is disturbing, however, are indications that in-house counsel's review of the use of the trust funds in this manner may have been rather perfunctory, or perhaps even not professionally competent (bold emphasis added):

If at any point the corpus is below the original amount endowed, the trustee may have to cover the corpus; by accepting the trust, agreement is made to keep it intact. N[ot-]F[or-]P[rofit]s had to cover deficiencies in times past when the market was down. Donors never said anything about unrealized appreciation and this may be affected by [statute]. Additional conversation covered the nuances concerning pay-out rates, limits of fiduciary responsibility, possibilities of expending principal in a prudent manner and the importance of spending funds entrusted for the purpose.

Ernie . . . believes you can only spend income and, in that light, feels it necessary to look at the original language of the trusts. He is not convinced that any previous legal counsel, who may have had no experience with endowment funds, understood what it means. . . . We need to find out whether or not counsel reviewed the funds prior to approval by EC to spend for San Joaquin. Kurt confirmed that Elsa Cumming reviewed and provided a written opinion at the time.

Now the discussion reached the real heart of the matter: the Church's lack of an independent, outside counsel who could provide a competent and disinterested review of the actions taken and commitments being made in the name of the Church. Significantly, the member of the Audit Committee who puts his finger on the issue is the head of the Church's Property Task Force, established by the House of Bishops in response to the publication of the Chapman Memo (bold emphasis again added):

[Bishop] Stacy [Sauls] expressed his concern that the organization only has available to it 20 hours per week of legal counsel and is increasingly concerned that the church does not have a lawyer. The EC does not have counsel, even though the PB does have and, it seems, everyone assumes that the PB’s counsel is everyone else’s counsel. Kurt responded that there is a second person in the in-house counsel’s office, who also devotes 20 hours per week. Romey Mancini has replaced Elsa Cumming. He added that Chuck Robertson [the Presiding Bishop's Canon] is looking into independent counsel for the church and how that might be supported financially.

It is simply astonishing that a charitable organization as large as the Episcopal Church, after committing itself literally to dozens and dozens of lawsuits and millions of dollars in legal fees, finds itself asking how it might support the cost of independent counsel to review the appropriateness of the actions so taken. If any statement in the record could indicate the lock on ECUSA at this point enjoyed by its Chancellor and his law firm, it would surely be this last one.

The Executive Council of the Episcopal Church (USA) gathered in Helena, Montana for its third meeting of the year, a month after this meeting of the Audit Committee. From its minutes, it would seem as though the meeting occurred in a vacuum -- neither Bishop Sauls nor any other member of both groups appears to have brought the Committee's concerns to the full Council. No alarm appears to have been expressed at what had been spent over the previous nine months; there was no report from the Presiding Bishop about what she was doing on the legal front, or why. (Perhaps there was such a report in "executive session" -- one was noted as having taken place, but its subject is not disclosed. Nevertheless, the actions and resolutions of the Council afterward do not indicate that it had any concerns in this area -- and as noted in the previous post, the Presiding Bishop did not think the topic was within the jurisdiction of the Executive Council in any event.)

Consider this question: how long did the $500,000 voted by the Council for "Legal Assistance to Dioceses" in February 2008 last? The monthly operating statements tell the tale (although as explained below, they do not allow that amount to be tracked directly). By July 2008, the line item for "Title IV Expenses and Legal Assistance to Dioceses" had already passed the one-million-dollar mark. (The ongoing expenses of the trial of Bishop Charles Bennison in Philadelphia were putting another dent in the budget, on top of all the money being spent in intensive litigation in Virginia, San Joaquin and elsewhere.)

The monthly statement for September 2008, which the Council would have had before it in Helena, for the first time split into separate line items the amounts spent on "Title IV Expenses" and "Legal Assistance to Dioceses." As so split, the figures point up the meaninglessness of the budgeted numbers. For contrary to the February 2008 communiqué, the line item for "Legal Assistance to Dioceses" is shown as budgeted at only $100,000 (which was the original amount of this line item when the triennial budget was approved by GC 2006, before the Executive Council adjusted it upwards), instead of $500,000. Apparently, what the Executive Council voted on was simply to distribute accumulated income and appreciation which had already been booked, so no increase was made to the line item. Nevertheless, the year-to-date total expended is far over either amount, at $918,418! Meanwhile, the new line item for "Title IV" shows a budgeted amount for the year of $350,000 -- with a year-to-date expenditure (through the conclusion of Bishop Bennison's trial) of $534,977.

The explanation of what was going on can only be guessed at from a review of the minutes of the Helena meeting in October 2008. One would think that a considerable amount of time would have been devoted to such huge cost overruns -- where they were headed, and what alternatives existed to rein them in, if not contain them. But that was not the case. Instead, the Council spent most of its time on these matters discussing where further money could come from to fund an estimated $700,000 needed by the remnant "dioceses" for "mission work" in 2009! The proposal, again, was to use accumulated, unspent income and appreciation from certain specific trusts as the source of the needed funds; the Treasurer reported there was approximately $3 million of such money available. Along the way, the minutes make note of this fact (bold emphasis added):

The Executive Council authorized a draw of up to $500,000 to fund similar work in 2008. Through October, nearly $421,000 had been expended to support mission in the dioceses of San Joaquin, Fort Worth and Pittsburgh. These disbursements were reviewed and approved by legal counsel, who confirmed that the disbursements complied with the terms and conditions of the trusts.

But as just noted, the total shown on the September month-end statement for "Legal Assistance to Dioceses" stood already at $918,418. How, then, could the Treasurer make a report that the amount spent "through October" was only $421,000? The answer must be that the latter amount was included in the former, and hence that for reporting purposes, moneys spent by ECUSA on on ECUSA's attorneys were commingled with moneys given to dioceses to spend on their attorneys (or -- excuse me -- clergy salaries). But showing the expenditures without taking into account the sources (the accumulated trust moneys being disbursed) would, over time, exaggerate expenses in relation to revenues, and give a false picture of the financial state of the Church. The correction, however, was not made until the December year-end statement, which finally showed a line item in revenues for "Short-term Reserve Draw."

And the amount so finally shown? It was not $500,000 -- or any amount even in the neighborhood. No, the total short-term draw on funds needed to keep the Church able to pay its bills in 2008 pretty much exhausted the entire $3 million which the Treasurer had reported was "available" for reserve funding in 2009: it was just over $2.5 million. That left the Treasurer to find still more individual trusts with undistributed appreciation and income in order to fund the appropriation for "Legal Assistance to Dioceses" in 2009.

Why did so much have to be drawn from short-term reserves in 2008? Because legal expenses were out of control. As we saw above, the amount had already climbed over $900,000 by September 2008, and the December monthly statement shows a further $900,000 paid out in that month alone! The total spent on legal fees and assistance in calendar 2008 came to a whopping two million, sixty thousand, two hundred and eleven dollars. And that figure did not include the now separately budgeted "Title IV expenses," which in 2008 amounted to nearly another nine hundred thousand dollars all by themselves!

All told, the Church's legal bills, and its provision of legal assistance to dioceses, cost the Church in 2008 a total of $ 2,954,855 -- when at the beginning of the year it had revised its budget to establish a total of just $450,000 for those expenses -- or fifteen percent of the amount that was eventually spent. Obviously, the figures would have to be further revised for 2009, given the track record of the Church to date in this area. Shall we recap the figures? The original triennial budget established at GC 2006 allocated a total of $405,000 for the three years 2007-2009 to be spent on "Title IV expenses and Legal Assistance to Dioceses." But at the end of just two years of that budget, the actual figures spent were:

2007 - $1,304,137

2008 - $2,954,655

2-yr Total: $ 4,258,792

And even that, as we shall see, was not a final figure. Nor, because Goodwin Procter also discounted its fees as a pro bono contribution to the Church, does it even represent the full amount of legal work that was ordered to be done.

We are now at the point where General Convention 2009 is approaching, and Executive Council is striving mightily to come up with a proposed new triennial budget for adoption in Anaheim in July 2009. So what happened next? Stay tuned -- if you think what has been described to date is bad, you haven't really seen anything yet. With the next post, we will see how greatly "the plot thickens."