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Prepared by Fr. Jason Gray, November 24, 2005
Copyright © 2005 by Fr. Jason Gray
All rights reserved

Other persons are permitted to copy, distribute, or display this work with the following provisions:  Reproduction of this work must contain proper attribution to the author.  No reproduction of this work is allowed for commercial purposes.  This text may not be used to produce a derivative work, whether by altering, transforming, or building on this text.  Other permissions to copy, distribute, display, or reprint this work require the expressed permission of the author.  This document is cited as follows:

Gray, Jason A., Legal Protections of a Diocese and its Parishes; available from http://www.jgray.org/docs/piercing_veil.html; Internet; accessed 1 January 2006.

              

In our litigious society, there is always a danger that someone seeking financial damages from a diocese might try to acquire the assets of parishes or other institutions in the Diocese.   From my study and conversations thus far, there are several things we can do that would protect the assets of our parishes and institutions and prevent the legal argument of "piercing the corporate veil."

These observations will be divided into general observations about any juridic person subordinate to a diocese, and specific observations about specific juridic persons.

GENERAL OBSERVATIONS

First and foremost, the separate incorporation of the individual parishes and institutions of a diocese is paramount.   Insofar as possible, each separate civil corporation should be canonically established as a juridic person, and each juridic person should be civilly established as a separate corporation.   The separate incorporation is accomplished according to the requirements of state law.{1}   The status of a juridic person is conferred either by the law itself (for a parish as in canon 515 §3) or by a decree of the diocesan bishop (for a diocesan school or another diocesan entity as in canon 116 §2).   The clear separation, canonically and civilly, helps minimize any confusion or lack of clarity about the status of each parish or other entity in a diocese.

Secondly, the statutes of each institution (juridic person) should be carefully reviewed.   The circumstances that have exposed a company to the risk of piercing the corporate veil have included:   two corporation that share the same name; two corporations that have the same board of directors; two corporations with nearly identical statutes; two corporations that are under the ultimate authority of the same person; two corporations with co-mingled assets or whose assets are used for the same purpose.

The fundamental legal issues in a "piercing" case is the question of control.   The following principles should govern the incorporation and the statutes of a parish, a diocesan school, or another entity:{2}

Statutes

• Each independent public juridic person should have its own statutes (c. 117).   Those statutes should be unique and tailored to the juridic person.
• Cookie-cutter statutes may open the door to an argument that—in spite of the separate statutes—the juridic person is really controlled by the superior entity.   The greater the dominating control, the less the inferior juridic person is really thought of as separate and independent.
• Statutes for a civil corporation in a diocese should not hesitate to use canonical language and to make references to the Code of Canon Law.   Accurate canonical language will avoid the confusion that can arise when trying to translate civil terms into canonical terms and vice versa.   Public juridic persons must incorporate the contents of canons 1291-1294 on alienation into their statutes in virtue of canon 1295.
• Statutes should make an explicit claim of ownership of assets by the juridic person.   This is especially necessary if there may be doubt about who owns certain assets.   In any case, the ownership of a subordinate juridic person should not rest with the diocese or the diocesan bishop.

• In each diocese, state law must be examined to determine the requirements for a civilly valid act.
• In some states, one document may suffice for both the civil by-laws or statutes and the ecclesiastical statutes.   If two documents are necessary, both documents should incorporate the principles listed here.
• The ownership of assets should be carefully considered with respect to state law.   In some states, it may be best to hold the assets of the parish in trust on behalf of the parish.   In other states, the assets may be owned by the parish corporation.

• For the purposes of this section, the "board of directors" shall refer to those persons responsible especially under civil law for governing a corporation or juridic person.
• The "administrator" shall refer to the person who governs the temporal assets of the corporation or juridic person (c. 1279 §1) and who canonically represents the juridic person (c. 118).
• The "local level" shall refer to those persons who are members of the corporation or juridic person, or who work closely with it.   In any case, the "local level" shall never refer to the diocesan bishop, the vicar general, or any diocesan official.

• Control over the juridic person and its assets should, as much as possible, be independent from the diocesan bishop.   Even so, some actions should require the consent of the diocesan bishop as a check on local power.
• Any corporate action and any juridic act should, as much as possible, originate on the local level.   The action should generally begin with the free initiative of the local level and be circumscribed when necessary by the required consent of the higher level.
• Certain exceptional matters require that the statutes explicitly recognize the competence of the diocesan bishop to intervene.   Some of these circumstances include the ability to create,{3} suppress,{4} and tax{5} a public juridic person in accord with the norm of law.   The diocesan bishop has a role to play in certain acts of alienation as defined in cc. 1291-1294.   In some circumstances, the diocesan bishop may also need to retain the right to appoint and remove an administrator in accord with the norm of law.{6}   Any other prerogatives which must be retained by the diocesan bishop should also be explicitly included.
• The juridic person must acknowledge the competence of the diocesan bishop to intervene in religious matters of faith and morals (c. 392).   However, as much as possible, the prerogatives of the diocesan bishop to exercise direct control over corporate action or financial matters should be limited to what is absolutely essential.

• A majority of the members of the "board of directors" of a corporation should be local and drawn from the membership of the juridic person.
• The power to nominate members of the "board of directors" should rest, as much as possible, on the local level.   Nevertheless, the approval or confirmation of a nominated officer may rest with the diocesan level as a check on local power.   This approval could be in the form of a nihil obstat in which the approval of the officer is presumed unless a just cause is shown on the diocesan level to reject the candidate.
• The administrator of the corporation or juridic person should be a person on the local level.
• If it is possible, the nomination of the administrator should be left to the local level while the approval or confirmation may rest with the diocesan level.   This approval could also be in the form of a nihil obstat.
• In some cases, it is the right of the diocesan bishop in law to appoint the administrator.   In these cases, this prerogative cannot be eliminated, nor should it.
• As much as possible, the hiring of employees should be done on the local level.   If the diocese is involved in the hiring of an employee, the diocese may inherit a legal liability if a suit is later brought for negligent hiring or negligent supervision of an employee.   Even so, the diocese should consider with legal council what policies should govern the hiring of staff to avoid this liability.

• Statutes should clearly delineate the difference between acts of ordinary and extraordinary administration.{7}   Ordinary administration may be handled by the administrator on the local level.   Extraordinary administration requires the counsel or consent of additional persons.   The required counsel or consent could be on the local level and also on the diocesan level.
• An action is not considered invalid unless the statutes specifically threaten invalidity (c. 10).   Care should be taken when considering acts of extraordinary administration to determine which ones should be specifically declared invalid if the counsel or consent has not be performed.   In general, these should be reserved for only the most important transactions.
  

SPECIFIC OBSERVATIONS

I.    Parishes and Missions

Parishes should be separately incorporated and should have their own statutes which are tailored to their specific situation.   The general observations made above should be applied to a parish with the following adaptations:

Parish corporate structure

• The "board of directors" should have an "executive committee" on the local level that carries out the ordinary acts of administration for the parish.   Acts of extraordinary administration should be reserved to the full board.
• The executive committee should be composed of the pastor and two lay trustees who are nominated by the pastor from among the parishioners and who must be approved by the diocesan bishop.
• The board of directors should include the executive committee as well as the diocesan bishop and the vicar general, at least one of whom must give consent before any act of extraordinary administration are placed.   In some cases, this consent should be required for validity.
• The Apostolic See does not need to be listed among the corporate officers of the parish.   However it does play a role in certain acts of alienation (c. 1292 § 2).   A provision should be inserted into the statutes to recognize the required approval of the Apostolic See for large acts of alienation.
• According to this model, the majority of the board members are on the local level (three to two).   The two lay trustees are nominated by the pastor on the local level, but the pastor is appointed by the diocesan bishop (c. 523).   The prerogative of the diocesan bishop to appoint, transfer, and remove the pastor according to the code must not be compromised.   Although the pastor is appointed by the diocesan bishop, it can still be argued that the pastor is a "local" officer.   He serves locally and his primary focus is on the local needs of the parish.   He does not work out of the chancery, nor is he bound to act according to the mind of the bishop, like the vicar general (c. 480).
• If a different model is used, the local officers should still outnumber the diocesan officials.

• The statutes should require that any corporate action must originate from the executive committee which is chaired by the pastor.   Actions of the executive committee must require the consent of the pastor who is the administrator of the temporal assets of the parish (c. 532).   Some exceptions to this general rule will be listed below.
• In some matters, it is advantageous to have the executive committee act formally by voting.   Before the approval of the diocesan bishop is requested by the pastor for an act of extraordinary administration, it is helpful to hear the recommendation of the trustees.
• In other matters, it is advantageous to have the executive committee act informally by consensus.   The day to day business of the parish should not depend on frequent meetings of the executive committee.
• In a formal action, the pastor may be required to consult with the trustees, or he may be required to obtain the consent of one or both of the trustees.   If their consent is required, the two lay trustees should not be able to initiate an action independently from the pastor by outvoting him 2 to 1.   The statutes should indicate that no corporate action may be taken by the executive committee without the approval of the pastor.   On the other hand, if the pastor wants to initiate an action but is outvoted 2 to 1 by his trustees, the statutes must clarify if the pastor is allowed to take the action to the full board.   If this is permitted, the vicar general and the diocesan bishop could vote in favor and pass the action with a total vote of 3 to 2.
• In an information action, the statutes may allow the pastor to act independently within certain limits or with the "presumed consent" of the lay trustees.   The statutes may also allow the pastor to act independently in routine matters or when spending funds that have been budgeted.   When a meeting is required, the statutes might also certain business to be done through a telephone meeting or in writing.

• The statutes should specify that the diocesan bishop, vicar general, and pastor are members of the board of directors by office.   The lay trustees are members by appointment or by election.
• Each diocese will need to carefully study its state law to determine if trustees can be appointed or elected.   If trustees can be appointed, the pastor can be given the right of nomination while the diocesan bishop retains the right of approval.   The approval may be in the form of a nihil obstat.   If trustees must be elected because of requirements of state law, the election does not need to be a parish-wide election in which all parishioners are eligible to vote and eligible to be elected.   For example, the eligible candidates and eligible voters might be limited to a parish body such as the finance council or the pastoral council.   After candidates are nominated, the pastor may have the right of nihil obstat to reject a candidate he felt was unqualified before the vote is conducted.
• The length of the term for each officer should be specified, especially for the trustees.{8}   The statutes should specify the term of a trustee and the maximum number of terms a trustee may continuously serve.
• The manner in which an officer is removed should be specified, especially for the trustees.{9}   The statutes should make for some provision for the trustees to be removed for a grave cause either by an action of the pastor with the right of recourse to the diocesan bishop, or by an action of the diocesan bishop for a most grave cause.

• The rights and responsibilities of the two lay trustees should be clarified.
• The executive committee should meet on a regular basis.   The trustees should be informed of the financial status of the parish.   The trustees' signature on a financial report demonstrates that they were informed of the financial status of the parish and that they attest to the accuracy of the report (c. 1287).
• The trustees may be given the right to propose, to review, or perhaps even to approve the annual budget (c. 1284 §3).   The trustees may participate in the preparation of a financial report to the parish (c. 1287).
• At least the counsel of the trustees should be sought before undertaking any act of extraordinary administration.   The trustees should have the right to be fully informed about the proposed action before giving their recommendation (cf. c. 1292 §4).
• It would be appropriate for the pastor and parish trustees to be ex officio members of all major parochial bodies, such as the finance council and the pastoral council and school commission if they exist.   The trustees may be given the right to attend the meetings of other parochial bodies, although they may not want to be bound by attending every meeting that takes place in a parish.
• These parochial bodies (the finance council, pastoral council, school commission, etc.) are not separate juridic persons.   They should be described in the parish statutes, at least in a general way, even if they develop their own sets of rules of order for their meetings.

• The board of directors in the person of the diocesan bishop must reserve the right to initiate certain actions, even against the wishes of the executive committee.   Each of these actions is governed by requirements in canon law that must be observed by the diocesan bishop.   These must include the rights to the following actions:
  • To create and suppress a parish (c. 515 §2)
  • To appoint the pastor (c. 523)
  • To remove the pastor (c. 538 §1)
  • To impose a tax on the parish (c. 1263)
  • To order a special collection (c. 1266)
  • To order the administration of temporal goods through financial policies (c. 1276 §2)
  • To exercise vigilance over the parish (c. 1276 §1)
  • To receive an annual report (c. 1287 §1)
  • To intervene in the case of negligence (c. 1279 §1)
    
• The diocesan bishop always retains the right to intervene in matters of faith and morals.

• Some matters should be defined as acts of extraordinary administration.   These acts require the consent of the board of directors in the form of the approval of the diocesan bishop or the vicar general (c. 1281 §§1 and 2).
• Some matters that should be reserved as extraordinary administration include:
  • The expenditure of assets in excess of a defined amount.   (Certain large but regular expenses may be exempted, such as making payroll.)
  • The expenditure of assets in any amount when a standing debt will be incurred.
  • Borrowing money.
  • Buying or selling property.
  • Erecting or demolishing a building.
  • Establishing a foundation or other legal entity.
  • Enter into a contract on behalf of the parish.   (Certain agreements for ordinary and on-going services may be exempted, such as phone service contracts, lawn care, pest control, equipment service agreements, etc.)
  • Investing assets for the long term (c. 1284 §2 6º).
  • Accepting a gift burdened with modal obligations (c. 1267).
  • Initiating or contesting litigation (c. 1288).
    
• Only the most significant transactions should explicitly require the consent of the diocesan bishop for validity (c. 10).
• The financial transactions that are extraordinary administration should not be the same from parish to parish.

• Any parochial assets that are on deposit through a diocesan fund of any kind should still be considered assets of the parish.   These assets should be listed on parish reports.   Financial clarity is this matter of ownership is essential.
• The parish should have a right to withdraw those assets, although the normal limits on acts of extraordinary administration still apply.   The diocese has a right to maintain a reasonable oversight (c. 1276 §1).
• A "piercing" argument could be made if the diocese exercises a dominative control over the investment of parish assets through a mandatory diocesan fund.   This problem might be avoided if a diocese offers one or more pooled funds invested under the direction of the diocese, but also permits parishes to propose a separate investment of funds.   Even so, any manner of investment proposed by a parish requires the approval of the diocesan bishop (c. 1284 §2 6º).   The possibility of an investment separate from the diocese will help defend against any "piercing" argument.

• A mission is either a quasi parish (c. 516 §1) or another means of providing pastoral care (c. 516 §2).
• Missions should be separately incorporated.   A parish is a juridic person by the law itself (c. 515 §3).   However, a mission must be made a public juridic person by decree (c. 114 §1).
• A mission is generally treated like a parish.   However any exceptions to this rule must be spelled out in the statutes or the decree establishing the mission:
  • A mission may not have the same right to stability that a parish has.   Is the suppression of a mission different from that of a parish (c. 515 §§1 and 2)?
  • What happens to the assets of a mission when it is suppressed (c. 123)?

• Under the Illinois Religious Corporation Act, a parish is very easily incorporated as an individual and separate entity within a diocese.   The language of incorporation should be carefully studied to examine the parish-to-diocese relationship.
• It is particularly useful to note that a lay trustee is exempted from legal liability.   Illinois State law exempts any trustee who does not earn more than $5,000 from the parish (cf. 805 ILCS 110/47b).

Some other institutions may be at risk because they are not automatically separated by the code or by clear structures.   These institutions may include diocesan high schools, Newman centers, hospitals, cemeteries, and other diocesan institutions.   Other special consideration should be given to any pooled funds held by the diocese but which are set aside for a special purpose.

These institutions should be separately incorporated, erected as a juridic person, and should have their own statutes that are tailored to their specific situation.   The general observations made earlier should be applied to these institutions with some of the following adaptations.   The fundamental issue of diocesan control is at the heart of the matter.

Diocesan high schools

The following is one possible model for erecting a diocesan high school.

• A pastor's board should be composed of those pastors of the supporting parishes of the high school.   A supporting parish is any parish within a reasonable distance of the high school so that students from that parish may attend.   It is for the diocesan bishop to determine which parishes are supporting parishes for a high school.   Supporting parishes may be assessed for the support of the high school.
• The pastor's board selects persons on the local level to compose the school board.   While the pastors do not have the time (or sometimes the ability) to run the day to day details of a high school, the members of the school board should be chosen because of their knowledge and ability to help run the details of the high school.
• A self-selected portion of the pastor's board should sit on the school board.   These pastors may be called the pastor's executive committee.
• Certain decisions should rest with the pastor's board, including the approval of the budget, the hiring of the principal, and the approval of extraordinary expenditures.   A significant part of the duties of the pastor's board is financial oversight.   Because the local pastors have a responsibility for contributing to the high school, they have a natural interest in insuring its financial viability.
• The diocese should consider retaining control over the following actions for a high school:
  • Before hiring a principal, the diocesan school's office reviews the qualifications of the proposed principal and the diocesan bishop gives his approval or at least a nihil obstat.
  • The diocesan bishop confirms the election of the president of the pastor's board or at least gives a nihil obstat.
  • The diocesan bishop approves any changes to the statutes that govern a diocesan high school.
  • The diocesan school's office issues educational policies that govern every school in the diocese and which must be observed.
  • The diocesan school's office visits each school every year.
  • Each school must submit a financial report to the diocesan school's office.
  • All teachers' contracts are signed by one or more of the following:   the principal, the president of the pastor's board, and the diocesan bishop.
  • The diocesan bishop has the right to intervene in matters of faith and morals.
  • The decision to dissolve the high school should rest with the diocesan bishop, although the statutes could make provision for this action to be initiated by the pastors of the pastor's board.
  • Reasons should be given that could result in the removal of the president of the pastor's board or the principal from office.   The diocesan bishop should be able to exercise this prerogative in an exceptional case.
    
• Ordinary expenditures are approved by the principal.
• Extraordinary financial transactions should be clearly defined.   These transactions may require the approval of one or more of the following bodies depending on the size of the transaction:   the president of the pastor's board, the executive committee of the pastor's board, the full pastor's board, and the diocesan bishop.
• All transactions, including extraordinary transactions, should be initiated on the local level through the school board or the pastor's board.
• Ordinary transactions which are large, such as payroll, should be exempt from any required permission on the part of the diocese.
• A claim of ownership should be made, that the assets of the high school belong to the high school itself and not the diocese.
• The statutes must address what happens to the assets of a dissolved high school.   To avoid a piercing argument, the assets should not revert directly to the diocese, but might be dedicated to Catholic education in the diocese.   The pastor's board might recommend the division of assets, subject to the bishop's approval.

Any diocesan Newman centers, hospitals, and cemeteries should have their own board and statutes.   It is important to determine an appropriate way for decisions to be made on a local level regarding the selection of board members and the administration of financial assets.

Universitates rerum:   Pooled funds held by the diocese

Other special consideration should be given to any pooled funds held by the diocese but which are set aside for a special purpose.

The following factors should be considered:

• Does each fund have its own statutes and its own independent board of directors?
• Has it been established as a separate corporation and a public juridic person?
• It is probable that several diocesan officials are on the board, including the diocesan bishop and the vicar general.   However, are the majority of the members of the board independent from the bishop?
• Are the statutes and board of directors unique to the institution?   A cookie- cutter set of by-laws or a rubber-stamp board of directors exposes those funds to possible risk.
• Do the statutes make an explicit claim of ownership separate and independent from the diocese?
• Does each fund have a clear purpose?
• How easy is it to use some of the assets of each fund for another purpose?   The more the assets are unalterably dedicated to a fixed purpose, the less likely they are to be exposed by a "piercing" argument.
• Who selects the membership of each board?   If board members are selected in an independent manner rather than by appointment of the diocesan bishop, the fund would be more considered independent from the diocese.
• Who initiates corporate action?   The less the diocesan bishop has independent control over the funds, the less likely the fund would be considered independent.
• What actions are considered ordinary and extraordinary administration?
• In what ways is the fund accountable to the diocesan bishop and to other persons?
• What actions are reserved to the diocesan bishop?   Some items can and should include:
  • The approval of board members, or at least the right to give a nihil obstat.
  • The approval of extraordinary acts of alienation.
  • The suppression of the fund.
  • The removal of the administrator of the fund.
  • The right to receive an annual report.

• A priest's retirement fund
  • This fund may hold monies contributed from the parishes to help priests in their retirement.   Oversight could rest with the presbyteral council and individual priests of the diocese elected by their brother priests.   Extraordinary administration requiring the approval of the diocesan bishop could include changing the investment strategy of these funds or adjusting the table of benefits paid to retired priests.
• Parish investment fund
  • This fund may be composed of the surplus assets of many parishes which can be loaned to other parishes in need.   Those investing may receive a greater interest rate than most banks while those borrowing may receive a lower rate than otherwise available.   Oversight should rest with the presbyteral council, individual pastors elected from their brother pastors.   This fund should be closely monitored by the diocesan finance council.   Extraordinary administration could include changing the interest rates for funds on deposit or funds on loan.   These assets are the property of the contributing parishes.
  • This kind of fund will likely have more assets than the cumulative sum of all the deposits and loans of each parish, because the interest received on a loan should be slightly higher than the interest paid on deposit.   This margin is necessary because the monies in the fund will never be fully loaned out, and the investment of the liquid assets may incur some administrative expenses.   One may ask who owns whatever surplus remains beyond the deposits and loans of each parish?   Nevertheless, a "piercing" argument is avoided if the funds themselves are entirely separated from the diocese.   If the surplus becomes too large, the interest rates should be modified to pay more on deposits and charge less on loans, thus returning the surplus to the parishes.
• Endowment fund
  • This fund may be composed of pooled funds from various institutions invested in the stock market using a conservative investment strategy.   Oversight should rest with the presbyteral council, the diocesan education commission and the finance council.   These assets are the property of the contributing schools and institutions.   Any financial expenses for the administration of this fund should be borne by the institutions contributing to the fund.   There should be no surplus owned by the diocese.   In this way, 100% of the funds belong to the contributing parishes and institutions.

{1} The code directs administrators of temporal goods to protect those goods by civilly valid methods (c. 1284 §2 2º).

{2} For the purposes of this essay, all the juridic persons described will be presumed to be public.   Public juridic persons are more closely governed by ecclesiastical authority in a diocese and act more directly in the name of the Church (c. 116 § 1).   Private juridic persons in a diocese tend to be more independent from diocesan control and are not likely to be the target of a "piercing" argument.

{3} A public juridic person is always created by some act of the competent ecclesiastical authority (c. 116 §1).   The juridic personality is either conferred by the law itself at the time the entity is erected by competent ecclesiastical authority, or by the decree of the competent ecclesiastical authority (c. 116 §2).

{4} A public juridic person may be suppressed by competent ecclesiastical authority, or by inactivity for one hundred years (c. 120 §1).   It is appropriate for the statutes to address reasons that might lead to dissolution.   Nevertheless, the public juridic person may not dissolve itself; it may recommend to competent ecclesiastical authority that it be suppressed.

{5} The diocesan bishop has the right to tax a public juridic person, in proportion to its income, for the needs of the diocese after consulting with the diocesan finance council and the presbyteral council (c. 1263).

{6} The ordinary retains the right to intervene in the case of the negligence of an administrator (c. 1279 §1).   The ordinary also has the right to appoint a temporary administrator of a public juridic person when no administrator is provided by law (c. 1279 § 2).   In general, the ecclesiastical authority that erects an office has the right to provide for that office (c. 148).   Unless otherwise specified, the diocesan bishop freely appoints persons to ecclesiastical offices in his diocese (c. 157).   In general, the one who appoints a person to an office has the power to remove that person (c. 193 §3).   The circumstances of the juridic person must be weighed when determining if the diocesan bishop can or should retain the right to appoint or remove the administrator.

{7} Administrators invalidly place acts that exceed the limits and the manner of ordinary administration unless a faculty from the ordinary has been obtained.   The acts of extraordinary administration are to be defined in the statutes (c. 1281 §§1 and 2).

{8} It may be sufficient to cite a few canons.   The bishop, vicar general and the pastor are appointed for an indefinite period of time unless, in the case of a pastor, he serves only for a term (cc. 477 §1 and 522).

{9} It may be sufficient to cite a few canons.   The diocesan bishop loses office when the Holy Father accepts his resignation, transfers him or removes him in accord with the norm of law (cc. 184 §1 and 401).   The vicar general loses office when removed by the diocesan bishop (c. 477 §1).   The pastor loses office when the diocesan bishop transfers or removes him or when he accepts his resignation in accord with the norm of law (c. 538 §1).   A diocese whose pastors have terms should also add the loss of office by the lapse of a term (c. 522).