Contracts-Religious Corporation Sale of Property—“Outsiders” Tried To Take Over the Congregation—Congregation's Request for Approval To Sell Its Property Denied—By-laws Were Never Amended And Not Followed—They Were Deemed to be Abandoned

Petitioner congregation “A,” a religious corporation, sought judicial approval of the sale of its property (property) to a purchaser (purchaser). The sale price was $13 million. The petitioner was to retain “a long-term lease for office space in the building at $10 per year.” Three million dollars of the proceeds were to be used “as a reserve for the continued operation” of the congregation's activities, “to be controlled by petitioner's president, ['B'].” Approximately $10 million was to go to organization [“C”], for the construction of a new synagogue in Jerusalem.

The petitioner had filed an original petition and an amended petition. The petitions “contradict[ed] each other” as to how the sale was authorized by petitioner and contained “many unexplained inconsistencies.” They included different sets of unsigned and undated by-laws, “and sought to have the court approve the sale based on completely different theories.” “B” had verified both petitions as President and presiding clergyman, but he changed his title “in the amended petition to reflect petitioner's new theory of approval and new amended by-laws.”

The petitioner initially alleged that the sale had been “authorized and approved according to its by-laws by the 2012 board” and “members subsequently approved the sale and proposed distribution of proceeds at a membership meeting and the board re-confirmed the sale.” The by-laws attached to the initial petition had been certified in 1982 by “B”'s father. The 1982 by-laws provided for members and regular membership meetings. The first petition discussed petitioner's services “as a house of worship and continuation of such services.”

The court denied approval of the sale, dismissed the amended petition and made several findings of fact.

Two groups were competing for control of the petitioner. Each group claimed to be the “legitimate,” rightful board of trustees/directors . The first group was led by “B,” who claimed to be the petitioner's president and chairman of its board. “B” claimed that the board had been elected in 2012 (2012 board). “B”'s supporters asserted that they are members of petitioner, since they regularly use the premises “for the… study of the Talmud.” None of the alleged 2012 board members “or qualified voters live near the premises,…or attend the regular worship services held in the sanctuary and some had never been to the premises prior to attending the meeting” where they purportedly “elected to the board.”

The second group was led by “D.” “D” claimed to be the president and a member of the board of trustees that had been elected in 2016 (2016 board). The 2016 board was elected by people who claimed to be members of the petitioner, “because they attend the regular worship services on the Sabbath and Jewish holidays conducted by” Rabbi “E.”

The purchaser had intervened in the matter to support the petition for judicial approval of the sale. Objectors alleged that they were members of the petitioner “as congregants and regular attendees of petitioner's regular worship services” and they were “donors.” The objectors argued , inter alia, that the sale had not been legally authorized by a legitimate board; the board was not elected by lawful members of petitioner or qualified voters; “the legitimate members were not notified of the meeting;” and “the election and subsequent approval of the sale violate…the Religious Corporation Law (RCL) and are therefore void and invalid.” Some objectors, citing an appraisal that valued the property at approximately $42 million, argued that the $13 million sale price was “well below the market value of the property.”

The amended petition cited “recently found amended by-laws” which provided that the petitioner had no members and alleged that the 2012 board of directors had been elected by individuals from the petitioner's “community of interest which voted to approve the sale solely on an advisory basis since they were not required to do so.” The petitioner asserted that it had “ceased operating a house of worship many years ago” and had “spun off such services to a new, separate” religious entity [“F”]. The petitioner claimed that since 2000, it had leased the premises to a “private nursing home,” and that the lease was thereafter amended to permit a separate congregation “to continue to worship in the sanctuary space.”

Rabbi “E” asserted that he had been the rabbi for the petitioner for 35 years and that the synagogue held services “twice a day during week days and services on Friday evenings, Saturdays and all Jewish holidays.” Rabbi “E” claimed that the synagogue had “no membership dues and he is only aware of the members who pray in the synagogue.” Evidence indicated that Rabbi “E” was paid by petitioner and not “F.” Some congregants asserted that “they attended services held by petitioner,…they financially contributed to support petitioner's activities and…they were members of petitioner's synagogue.”

Although the sale had previously been approved by the NYS Attorney General's Office (AG), the AG asked the court “determine whether the sale…was properly approved and which individuals were proper members of petitioner's board and members of petitioner.” The intervenor purchaser had moved to strike the objections, or in the alternative, for an order approving the sale and placing the sale proceeds in escrow subject to the court's determination of how the proceeds should be distributed.

The court found that the sale was “null and void,” since “it was not properly approved by anyone with authority to act on petitioner's behalf.” The petition and amended petition were dismissed with prejudice; and the purported amended by-laws were held to be “null and void.” The court also held that 1982 by-laws “were technically in effect…at all relevant times since 1982 because such by-laws were never legally and properly amended, however since neither by-laws were followed over the years, the court deems them to have been abandoned for all relevant purposes.”

The court found further that the petitioner did “not cease to…operate a house of worship, it did not legally…split off all of its religious services” to another religious organization; and the petitioner “continued to…operate a house of worship in the sanctuary” at all relevant times; certain objectors and intervenors had standing to challenge the sale and distribution of the proceeds; and “at the time of the contract of sale, the authorization of such sale…,there was no legitimate board of trustees/directors in place which was authorized to act on petitioner's behalf.” Moreover, the petitioner's alleged 2012 board of Trustees/Directors, had not been legally “elected pursuant to the [RCL], nor according to either set of by-laws, and the 2012 board [was] not authorized to act on petitioner's behalf during the relevant times”; and the purported 2016 board of trustees was also not legally elected pursuant to the 1982 by-laws (which by-laws the court deemed abandoned). The court further held that the 2016 board was legally and properly elected pursuant to the RCL and the 2016 board was the legitimate board authorized to act on behalf of petitioner's behalf.

The court opined that the 2016 board was in “a better position to act on petitioner's behalf” because the members “regularly attended worship services on the Sabbath and holidays, prayed in the synagogue during the week and/or financially contributed to petitioner for many years prior to the election, including the year before the election as required; they were local residents who regularly used the facility and benefited most by petitioner's services; and they were most concerned with the success and continuation of petitioner's services to its members/congregants and the lower east side community….” Moreover, the Amended Certificate of Incorporation approved by the 2016 board and petitioner's members, was “legally valid and binding upon petitioner.”

Given the lack of valid by-laws, the court looked to the RCL for “guidance based on the totality of the circumstances, including the credible evidence, conduct of the parties in petitioner's daily operations and on the intent of the individuals involved.” The court determined that the petitioner's “purported amended by-laws” violated “the RCL by providing that the corporation has no members.” The “amended by-laws” were “unsigned, undated, uncertified,” did not state that they are amended by-laws and there was no supporting documents to provide details of their enactment. There was also no evidence that the petitioner followed “either set of by-laws for over thirty years, so that they were both deemed abandoned.”

The court was not convinced that the petitioner “no longer conducted regular worship services and that it split off and assigned such duties to the newly formed” congregation in 1993. No provision under RCL Art. 10 authorized “such a split of a religious corporation,” and the alleged new congregation's corporate documents did not mention the petitioner or that it was assuming the petitioner's religious responsibilities. The alleged new congregation's by-laws only required “eight Trustees to be elected annually, which violates the provisions of the RCL that require a minimum of nine Trustees, 1/3 of which must have expiring terms annually.” Moreover, if the petitioner no longer conducted services, “it could no longer be a religious corporation under Article 10” and it needed to “seek court approval to dissolve according to the provisions of the RCL.” The petitioner had also failed to amend its articles of incorporation which required religious services and “failed to provide sufficient verification or legitimate corporate documents” to show “that it no longer operated a house of worship and assigned such responsibilities to another entity.”

The court noted that Rabbi “E” had conducted regular worship services and the regular congregants had not been aware of the alleged separate entity, nor the sanctuary's alleged lease agreement. The “spin off” synagogue's name “was not prominently displayed in the synagogue, the congregants were not notified of the change, and, until after this litigation began, the name on the bulletin board remained” the original name of the congregation. Furthermore, the petition which had previously been submitted to obtain approval of the prior nursing home lease, included admissions that the petitioner was a religious organization that conducted a house of worship and that proceeds from the sale of the nursing home equipment would be used to refurbish the synagogue for the continuation of services at the congregation's premises. That petition did not mention any separate entity that would be conducting services and there was no information that a separate congregation “had any regular corporate activity over the years, including meetings, elections, religious services …” Thus, there was “no evidence that the day to day operation and control of the synagogue was ever transferred from petitioner to the [spin-off] entity.” Additionally, Rabbi “B” appeared to have “forgotten about the new entity as he failed to mention it in his original petition.”

The court held that objectors had standing to challenge the subject sale and distribution of proceeds. Non-Profit Corporation Law (NPCL) §511(b) “strictly defines persons entitled to appear at a hearing to challenge or object to the approval of a sale as a 'person interested' who is a 'member, officer, or creditor of the corporation'….”

The purchaser intervenor had argued, inter alia, that certain objectors were not “members, officers or creditors of petitioner; they do not pay any membership dues to petitioner; they have no connection to petitioner; they waived their rights to object by failing to do so at any of the prior meetings, timely notice of which was posted on the door to the sanctuary” and the petitioner no longer operated a house of worship and no longer had members according to its amended by-laws. The court noted that it is possible that certain objectors may claim to be members of the “spin-off” congregation, merely because they attend services in the sanctuary, but are not members of the petitioner. The purchaser also challenged the objectors' standing because the purchaser agreed to provide the congregation with adequate space in the new building, which would include parts of the old sanctuary and a temporary facility. Additionally, the purchaser contended that certain objectors were only really challenging the distribution of the sale proceeds because they believe “that ['B'] fraudulently solicited donations…” Since such “allegation is the subject of the Nassau County case and there has been no judgment in that case,” the objectors were not petitioner's creditors.

Certain objectors argued that they regularly attended worship services in the sanctuary, they made financial contributions to the petitioner and “the new location” would be “insufficient because the…residents have no way to get to services without using motorized vehicles on the Sabbath and holidays.” Objectors also asserted that “donor records refer to each donor as a member and assigned each of them a member number.”

Since the petitioner's amended by-laws stated that the petitioner had no members and such by-laws were invalid and abandoned and since the petitioner “maintained no approved set of guidelines to establish its membership,” the court held that objectors were members of the petitioner pursuant to RCL §195, regular since they attended petitioner's worship services and contribute financial support to petitioner. The court also held that “B” was not a legitimate member of the board and lacked authority to approve the sale since he had claimed to have served as a member of the board of trustees for over 20 years, “when he was only permitted to serve for three years.” At the time of the sale, “there was no legally functioning board, as the board did not have at least nine members, elected to three-year terms, with 1/3 having been substituted by newly-elected members of the board annually as required by the RCL.” Thus, neither “B” nor any board could approve the sale of the premises.

The court further explained that 2012 election violated the RCL, the petitioner's articles of incorporation and both by-laws. Although the petitioner claimed that it had no members, the 2012 board's records refer to members and membership meetings. The court held that “the 2012 board members were not members of the petitioner, they were not elected by qualified voters of petitioner, they were not elected at a duly noticed meeting according to the RCL, and the true members of petitioner were not properly notified of the election meeting or any subsequent meeting.” Moreover, the members of the 2012 board and individuals who elected them did not live near the synagogue and had not attended regular services on the Sabbath and holidays and had “no connection to petitioner prior to attending the meetings.” Some of such alleged members “had never even been to the synagogue prior to the election, some had no previous information about the sale, some were members of ['C'] or paid by ['C'] and one admitted that the board was elected solely to approve the sale.” Thus, “these individuals were outsiders who were solely brought in to vote for a board of trustees/directors to approve the sale and distribution of the sale proceeds and they had no affiliation with petitioner, nor any concern for local residents and congregants who regularly benefit from petitioner's religious services.”

Finally, the court held that the 2016 board of trustees had authority to act on petitioner's behalf, since that board had been properly elected pursuant to the RCL and it had “properly amended petitioner's articles of incorporation and filed it with the court.” Accordingly, the court, inter alia, denied approval of the contract of sale of the premises.

Comment: This case illustrates the types of disputes which are occurring throughout the country, among factions of religious congregations with respect to proposed sales of congregational properties.

Many congregations can no longer finance the ongoing costs of maintaining their properties. Older houses of worship have deteriorated and have significant structural problems. Furthermore, many congregations need the sale proceeds to further their religious missions.

Moreover, as many congregations' financial needs have increased, their memberships have decreased. Some purchasers agree to provide new places of worship within or adjacent to the new buildings that purchasers develop. Additionally, many places of worship are located in areas where real estate values have soared.

These cases often involve allegations that members did not receive proper notice. Many such cases involve disputes as to the identity of the “members” entitled to vote and whether there was compliance with an organization's governing documents. These problems are often compounded by the failure of religious organizations to consult with lawyers as to corporate compliance issues. As a result, these cases often require judges to analyze “sloppy, inadequate or inconsistent” internal corporate records, conflicting affidavits and various statutes such as New York's Religious Corporation Law and Not for Profit Corporation Law.

Matter of the Home of The Sages of Israel, 153111/2015, NYLJ 1202801142382, at *1 (Sup., NY, Decided Oct. 16, 2017), Edwards, J.

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John's University School of Law.