March 24, 2017

March 2, 2016

+Bruno’s Conflict of Interest Is Now Public

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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Wow.  Just wow.

[1] Posted by Jackie on 3-2-2016 at 04:18 PM · [top]

The sauce thickens.

[2] Posted by michaelc on 3-2-2016 at 05:45 PM · [top]

As in the old saying, “what goes around, comes around.”

[3] Posted by Jim the Puritan on 3-2-2016 at 06:40 PM · [top]

So the diocese, through its bishop, has a previously undisclosed $5.3 million debt.  On top of everything else, this shouldn’t give LA Episcopalians much confidence in what happens to their offerings.

[4] Posted by Katherine on 3-2-2016 at 07:44 PM · [top]

Well, Katherine (#4), technically it’s just the debt of the corp sole’s subsidiary, the LLC. I’m not privy to the details any more than the rest of us, but I imagine that since it is a commercial property in the middle of Anaheim, there is some kind of rental income that helps to make (or perhaps covers) the mortgage payments; the land itself then secures the debt. If the LLC defaults, it loses the land, and there are probably no other assets for the bank to proceed against. Unless the corp sole has guaranteed the debt—but if that is the case, then +Bruno really has a motive to keep its financial status under wraps!

That said, the idea of a bishop using his corp sole to speculate in real estate is simply anathema to the proper running of a diocese. (The description of the function of the corp sole on the Diocese’s Website does not inspire confidence that anyone is concerned about how the bishop runs it.) One has to ask: where is the Standing Committee in all this? The Diocesan Council?

[5] Posted by A. S. Haley on 3-3-2016 at 01:07 AM · [top]

What about any legal actions that may be brought against the LLC?  Would the corp sole be liable for any damages assessed against the LLC since it owns the LLC?

[6] Posted by Daniel on 3-3-2016 at 07:31 AM · [top]

Mr Haley, I have one quibble with your analysis.  I don’t think there is any risk that the Diocese could lose its tax-exempt status because of UBTI, or even come under the Service’s scrutiny.  A large amount of UBTI in a tax-exempt organization is merely a warning flag for the Service that the non-profit might be a sham.  There is no chance that the Service would suspect the the Diocese of L.A. is not organized and running primarily as a religious organization for religious purposes, (our opinions aside).  Think of Trinity Wall Street.  The UBTI generated by that organization must be staggering, yet, no problems with the Service, as long as Trinity continues to pay its UBTI bill.

[7] Posted by reader on 3-3-2016 at 08:10 AM · [top]

Shouldn’t the disciplinary proceedings team also need access to the books? Has Bruno been asked for that information by the disciplinary officer?

[8] Posted by Undergroundpewster on 3-3-2016 at 08:55 AM · [top]

I wonder if the diocese has its liability insurance through Church Pension Group and if the diocese took out Fiduciary Liability coverage?

[9] Posted by The Little Myrmidon on 3-3-2016 at 09:21 AM · [top]

Thank you, Mr. Haley (#5).  It’s the ethics of the real estate speculation through a subsidiary kept quiet rather than any legal liability which should be of concern to the Diocese.  Although one wonders how the LLC got a large mortgage without some sort of backing from the corp sole.  Where did the $1 million down payment come from?  Since Bruno won’t release any information there’s no way to know.

[10] Posted by Katherine on 3-3-2016 at 09:56 AM · [top]

What do you mean when you report the disciplinary proceedings have bogged down?  Is the new PB not taking this seriously? I can understand why KJS would drag her feet as Bruno had as much to do with her elevation to PB as anybody.  I guess I am answering my own question, because no doubt Bruno was pulling strings in this latest election too.  Power corrupts absolutely doesn’t it?

[11] Posted by aacswfl1 on 3-3-2016 at 10:38 AM · [top]

The PB is handling the other situation, with the staff members who have been suspended.  Perhaps that suspension is part of the reason for the slow disciplinary process.  According to a recent statement the investigation following the suspensions will wind up this spring.

[12] Posted by Katherine on 3-3-2016 at 11:33 AM · [top]

Thank you all for your comments and insights. A few observations: reader(#7), it is the exempt status of the corp sole that I was primarily concerned about, and how its loss could then affect the Diocese that governs (but does not “own”) it. According to Canon XXX of the Diocese:

The Bishop of this Diocese shall be the incumbent of a Corporation Sole under the laws of the State of California by the title of “The Bishop of the Protestant Episcopal Church in Los Angeles (a corporation sole)”; for the administration of such temporalities and the management of such estate and property as may be granted or in any manner committed to the Bishop for the uses, purposes, or on behalf of this Church, that is to say, the Church known as “The National Church,” or any Diocese, Dioceses, or other subdivisions or institutions of the said Church; or any religious, benevolent, or educational objects connected therewith.

Notice that it does not exactly authorize free-wheeling real estate deals, but only such as are for “religious, benevolent or educational objects” connected with “the uses and purposes ... of this Church ...”. The only tax-exempt income of the corp sole comes from its plate collections when the bishop visits a parish, and perhaps also income from the “Episcopate Endowment Fund” (Canon XXVI). So the UBTI from real estate deals would presumably swamp its tax-exempt income, while its annual expenses can hardly be more than the bishop’s salary and expenses. At least Trinity Wall Street can point to an ongoing charitable giving program in the many millions, thanks to its endowment and properties; what can the LA Diocese’s corp sole cite as the reasons for its UBTI? (Apparently the corp sole in the past has made some contributions to the Mission Share Fund of the Diocese.) But the point of all this speculation is that it remains just that—speculation—until the corp sole makes its finances known. If only the Bishop is privy to what’s going on, then it’s all in the hands of the Bishop, and no one else can exercise fiduciary responsibility.

UP (#8), to date the charges brought against +Bruno that I know about do not involve fiscal mismanagement, but with these latest disclosures, they could well be broadened. And if they were, then yes—the disciplinary Board could demand disclosure of the corp sole finances; however, the Board’s proceedings are confidential until there is a trial (called a “hearing” in the new Title IV).

LM (#9), you can bet that the Diocese is insured six ways from Sunday, including for fiduciary liability. But the corp sole? We won’t know until it’s audited.

aacswfl1(#11), the disciplinary proceedings are still in the informal resolution phase—a conference panel will try to resolve matters confidentially and through back-and-forth negotiations. Only if that step fails, like the earlier mediation, could the matter then proceed to trial. My guess is that they are at least five or six months away from that phase. Katherine, the suspended staff at 815 are not connected with the Disciplinary Board. The PB, though, is on the Reference Panel that decides whether to go from the informal conference stage to the formal hearing.

[13] Posted by A. S. Haley on 3-3-2016 at 12:28 PM · [top]

I’ll just say this - if you are doing something in the shadows or in darkness, then you probably shouldn’t be doing it in the first place.

If Bruno isn’t coming forward with open books then there is every reason to believe he is hiding the truth.

And, in this case, the truth will likely NOT set him free.  Ha.  wink

[14] Posted by B. Hunter on 3-4-2016 at 11:59 AM · [top]

I know this an old thread but here are my two cents.

(1) The Borgias are certainly an appropriate comparison. I was also thinking of some parallels with Macbeth, with a little less blood.

(2) When considering this whole fiasco in Bruno’s diocese – including his relationship with the ACNA congregation – I also can’t help but think about Psalm 57:5 “They have laid a net for my feet, and I am bowed low; * they have dug a pit before me, but have fallen into it themselves.” (BCP, 664).

[15] Posted by The Rev. Father Brian Vander Wel on 3-14-2016 at 10:22 AM · [top]

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