Wednesday, March 2, 2016

Bishop Bruno Tries to Serve Two Masters

Under California law, a religious body or organization may create a unique form of corporation, called a corporation sole, whose principal purpose is to allow the parent organization (which may or may not itself be incorporated) to hold title to real property. A corporation sole is different from the usual variety of that entity: it has a single officer, director and shareholder, who are all one and the same person, called "the incumbent of the corp sole." The governing body makes the rules for who can be the incumbent. Typically it is that body's bishop or other spiritual leader.

Bishops may come and go, but corporations sole do not. Under law, their existence is perpetual -- and that is why they are a good vehicle for maintaining ownership of real property. And like any religious organization, they are not-for-profit, and pay no income taxes.

So it comes as a bit of a surprise to learn that Bishop J. Jon Bruno of the Episcopal Diocese of Los Angeles is at odds with his own Diocese over the disclosure of financial information concerning the corporation sole of which he is the incumbent. (In order to avoid a vote on an outside audit of his corp sole at the diocesan convention last December, Bishop Bruno promised to disclose its financial statements.)

Readers will remember that +Bruno and his corp sole became embroiled in litigation last summer over the bishop's plans to sell the valuable, near-oceanfront real estate of the congregation of St. James the Great, in Newport Beach, California -- after he won a lawsuit to recover that property from the ACNA congregation that voted to leave his Diocese. The original developer who gave the property to the Episcopal Diocese for the building of a local church had placed a restrictive covenant on it, which specified that if the property ever ceased to be used for church purposes, it would revert to the developer.

Bishop Bruno did not take kindly to that position, and brought suit against the developer (in a fine example of how not to treat a wealthy donor). He claimed that the restriction had been waived when the developer had agreed to allow a portion of the property to be used as a parking lot. The developer pointed out in response that it had specifically not waived the restriction as to the very parcel on which most of the church building proper is located.

While that lawsuit was waging, the parish of St. James and its popular vicar, the Rev. Canon Cindy Voorhees, brought suit themselves against the bishop, after earlier lodging a disciplinary complaint against him for misrepresenting his intentions in his dealings with them. The lawsuit sought to enforce the restrictive covenant against the bishop on behalf of the congregation. Lately, the disciplinary proceedings have bogged down after Bishop Bruno spurned any effort at conciliation.

So do you have the picture now? Bishop Bruno and his corp sole are prosecuting one lawsuit and defending another. His goal is the same in both suits: to be able to move forward with his planned sale of the St. James real estate to a friend who is a developer, and who reportedly has agreed to pay $15 million for the property if it is free and clear. (The parish contends the property is worth even more.)

But now the bishop tells his Diocese that despite his December promise to the convention, his lawyers have advised him that to release the requested financial information could harm his ability to conduct the lawsuits. And with that announcement, Bishop Bruno has all but admitted that he is embroiled in a rank conflict of interest with his own Diocese.

For if the disclosure of information to which the Diocese, as the governing body of the corp sole, is fully and legally entitled would harm the Bishop's own lawsuits, then for what diocesan purpose is he maintaining (and defending) the lawsuits? His own stake in the litigation should parallel that of his Diocese, since Bishop Bruno is a fiduciary with respect to that diocese. A fiduciary is one on whom the law places a duty of the highest faithfulness and care toward his beneficiary (in this case, the Diocese).

A fiduciary, among other things, is positively prohibited from engaging in transactions which conflict with his fiduciary duties. Nor can a fiduciary try to profit at his beneficiary's expense.

Thus if Bishop Bruno's legal pursuits prevent him from performing his fiduciary duties toward his Diocese, he should resign rather than continue to act in his own interest at their expense. Barring criminal behavior, breaches of ecclesiastical fiduciary duties are generally not cognizable in the civil courts. Such breaches (in the case of a bishop of the Church) must be handled by ECUSA's Disciplinary Board for Bishops -- which is already looking into similar charges against Bishop Bruno, as noted earlier.

Part of the information the St. James group has discovered from inspecting the public records is that in August 2015, the corp sole formed in Delaware a limited liability company called "Katella Howell LLC", which then purchased a one-half interest in a $6.3 million-dollar commercial property in Anaheim (in the Diocese of Los Angeles). More recently, however, public records show that Katella Howell (the names of two streets in Anaheim that are presumably near the property) LLC is now the owner of all of that property, which is subject to a $5.3 million mortgage. The timing of the transactions suggest that it was Bishop Bruno's intent to use part of the proceeds from the sale of the St. James parcels to fund his corp sole's subsidiary's commercial venture in Anaheim.

One would have to go back to the Borgias to find a church prelate who was so enamored of temporal things as to place his own business interests ahead of his religious duties. While the corp sole may be a non-profit, the LLC most certainly is not. And what business does a non-profit corp sole -- the legal holding entity of a religious organization -- have with a corporation organized for commercial profit that is unrelated to any church or charitable purpose? (If there is any such purpose to his investment, Bishop Bruno should have disclosed it to his Diocese by now.)

The proceeds from such an investment are generally characterized under tax law as "unrelated business income", which is taxable at regular corporate rates. A charitable organization that has too much "unrelated business income" in its mix runs the risk of having its charitable status reviewed, or even revoked, by the IRS.

If Bishop Bruno could jeopardize his Diocese's tax-exempt status through his corp sole activities, then he most certainly has a conflict of interest, even if matters have not progressed quite that far. He has a fiduciary obligation to make full and open disclosure of all those activities -- to all beneficiaries who could be affected by them. Both the Standing Committee and the vestry of St. James should see to it that Bishop Bruno does not have the last word in this matter.

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