Predicting the Future of Church Plan Litigation

Ahh, the wonders of church plan litigation. I had the distinct pleasure at an ERISA litigation conference recently of listening to a leading plaintiffs’ lawyer and a leading defense lawyer, who were both representing parties on opposite sides in class actions concerning whether benefit plans were actually church plans for purposes of ERISA, square off over the issue. What came through to me loud and clear were two distinct visions of the world, almost ideological in a way. The defense lawyer insisted that decisions to that date ran his way, and so there was little more to say on the subject, while the plaintiffs’ lawyer explained why close analysis of the facts and legal issues demonstrates that the plaintiffs’ bar is on target.

In their competing certainties over their positions, the debate reminded me of nothing so much as the early years of excessive fee litigation, when the plaintiffs’ bar was largely unsuccessful and the defense bar was more than happy to trumpet the underlying weakness on both a theoretical and practical level of that theory of liability. Of course, time would eventually turn the tables, to a large extent, on that discussion, triggered by an interesting phenomenon, one which was obvious in advance to some of us and became clear in hindsight to the rest of us: that over time, as more and more judges were asked to look at the excessive fee theory, the defense position would begin to show cracks and plaintiffs would eventually begin succeeding to one degree or another with such claims.

Even when I was listening to the two lawyers debate the viability of church plan litigation, it was clear to me we were only at the outset of the legal discussion on this issue, and that the defense bar’s assumption of an impregnable position was unfounded, as well as inconsistent with the history of what had occurred with the excessive fee cases. It was clear that what was more likely to happen was that, as the cases involving the more questionable assertions of church plan status came before courts, the plaintiffs’ bar would begin obtaining traction, and the clearly marked out defense position on these types of cases would weaken.

While I was on trial for most of this month, which I am still digging out from, Mike Reilly wrote a nice piece on something that I see as the first step in this phenomenon starting to come to pass, which was a federal judge denying a motion to dismiss last month that was grounded on the defendant’s status as a church plan. What is most interesting about that decision is that, plank by plank, the judge addressed and rejected the key elements of the defense bar’s standard position on church plan litigation, namely that the claims run contrary to existing judicial decisions and to IRS letter rulings. As the court’s decision itself reflects, the judge specifically engaged those arguments and rejected them.

What does this one decision mean? One can make the argument that it is an outlier, that standing by itself it means nothing in the long run, and has meaning only to the resolution of the specific lawsuit and plan at issue. Past experience with excessive fee litigation, however, suggests to me that the decision is more likely to be the beginning of the end of broadly claiming church plan status for broad, otherwise secular business activities – particularly in the medical area – that have some linkage to religious organizations. History – as well as logic – suggests to me that, bit by bit, we will see plaintiffs’ lawyers and court decisions chip away at the use of church plan status, leading to, eventually, a number of victories in this regard for the plaintiffs’ bar. This will not mean the end of the church plan, but will instead eventually lead to only those plans that most closely fit the purpose, intent and idea of the church plan exemption being able to claim it, with all other plans forced to abandon the claim (either voluntarily or after being sued).