Corporations Code Saves Church Property
The AME Zion Church of Palo Alto, Inc. was founded in 1918 and has occupied its sanctuary for over a half-century. In 2018, the Bishop of the Western Episcopal District of The African Method Episcopal Zion Church importuned the church's pastor into deeding the church to a corporation that the Bishop had formed. The corporation then borrowed, without the church's knowledge, several million dollars using the church's property as collateral. When the lenders filed notice of default and attempted to foreclose, the church filed for protection under Chapter 11 of the Bankruptcy Code and then sued the lenders.
Bankruptcy Judge Frederick E. Clement refused the lenders' motion to dismiss the church's claim, finding that irregularities in the deed put the lenders on notice of the existence of an ultra vires deed. Judge Clement cited Section 313 of the California Corporations Code which protects transferees and encumbrances when instruments are signed by two specified officers:
Subject to the provisions of subdivision (a) of Section 208, any note, mortgage, evidence of indebtedness, contract, share certificate, initial transaction statement or written statement, conveyance, or other instrument in writing, and any assignment or endorsement thereof, executed or entered into between any corporation and any other person, when signed by the chairperson of the board, the president or any vice president and the secretary, any assistant secretary, the chief financial officer or any assistant treasurer of such corporation, is not invalidated as to the corporation by any lack of authority of the signing officers in the absence of actual knowledge on the part of the other person that the signing officers had no authority to execute the same.
The deed at issue, in this case, was not signed by two officers as specified in Section 313.
There is one problem with Judge Clement's analysis, however. Section 313 if part of the General Corporation Law whereas the church was apparently a corporation formed under California's Religious Corporation Law (the opinion is not specific on this point). Judge Clement cites Saks v. Charity Mission Baptist Church, 90 Cal. App. 4th 1115 (2001). While that case does discuss Section 313, there is no need to apply Section 313 to religious corporations because the Religious Corporation Law includes an analogous rule in Section 9214.
The case is AME Zion Church of Palo Alto, Inc. v. Ame Zion W. Episcopal Dist. (In re Ame Zion W. Episcopal Dist.), 2021 Bankr. LEXIS 1177.