People Ex Rel. Deukmejian v. Worldwide Church of God, Inc.

Citations: 127 Cal. App. 3d 547; 178 Cal. Rptr. 913; 1981 Cal. App. LEXIS 2538Docket: Civ. 57321

Court: California Court of Appeal; December 9, 1981; California; State Appellate Court

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California attorneys Hillel Chodos, Rafael Chodos, Hugh John Gibson, and the New Jersey law firm Cohn Lifland appealed a superior court order denying their request for $100,000 in attorneys' fees related to a receivership case involving the Worldwide Church of God. The court affirmed the denial, noting that the receivership had been dissolved and the underlying action dismissed without any finding of wrongdoing by the Church. 

In 1978, members of the Church raised concerns about potential mismanagement, prompting Chodos to assist after the New Jersey firm contacted him. He concluded the members lacked standing to sue and brought the issue to Deputy Attorney General Lawrence Tapper, who oversaw charitable trusts. Chodos recommended compelling the Church to account for its assets and appoint independent trustees, as well as appointing a temporary receiver to protect the assets. Tapper deputized Chodos as a special deputy attorney general, allowing him to act on behalf of the state. 

Chodos and Tapper maintained that Chodos represented the state and not any private client, which was crucial for the authority granted to the receiver. However, their arrangement stipulated that Chodos’ fees would be paid from Church funds. They aimed to examine the Church's financial operations without interfering in its ecclesiastical matters, arguing that the Church's records were public and under court supervision. This stance raised constitutional concerns regarding the separation of church and state, particularly how the government could oversee church finances without meddling in religious practices.

On January 2, 1979, Chodos, retired Judge Steven Weisman, and Deputy Attorney General Tapper appeared before Judge Jerry Pacht, requesting the appointment of a receiver due to allegations of misappropriation of Church property and the undervalued sale of property in Texas. They claimed Church records were being destroyed. Subsequently, Chodos filed a complaint seeking the removal of Church directors, appointment of new ones, and injunctive relief. Judge Pacht appointed Judge Weisman as the receiver, granting him authority to seize Church funds, assets, and records, and prohibiting interference from the Church and its agents. 

On January 4, 1979, the Church sought to vacate the receiver's appointment. During a hearing, Chodos resigned as deputy receiver but remained as special deputy attorney general. Judge Foster denied the motion to vacate but temporarily limited the receiver's interference with the Church's daily operations. A confirmation hearing for the receivership began on January 10, 1979, where Judge Julius Title found no merit in the initial allegations but continued the receivership based on the potential for future misconduct findings. 

Judge Title issued orders allowing the receiver to take control of all Church assets, manage operations, employ necessary personnel, suspend or terminate employees (with exceptions for two), seize all Church records, and conduct an audit while reviewing allegations of financial misconduct. The records were to be accessible for Church employees and plaintiffs' representatives. The receiver also had discretion over compensation for certain employees and was tasked with applying for court relief if needed.

On February 21, 1979, the Church sought to terminate its receivership. Judge Title determined that the receivership's sole purpose was to audit Church funds, ordering its suspension and mandating the Attorney General to conduct an audit at state expense. This included requiring the Church to provide necessary resources, such as office space and access to its computerized data. Concurrently, the judge awarded the receiver and his attorney $250,000 in fees from Church funds but denied fees to Chodos. Following the Church's appeal of the injunctive order and previous receivership orders, Judge Title reinstated the receivership, citing the appeal as a sign of the Church's resistance. However, this reinstatement was put on hold after 900 Church members pledged over $3.4 million as security.

On July 7, 1980, new legislation (Senate Bill No. 1493) was enacted, limiting state power over religious corporations and reaffirming protections for religious practices under the First Amendment and California Constitution. Although not effective until June 1, 1981, the Attorney General interpreted this as a public policy shift and moved to dismiss the case. The Church demonstrated that the receivership had jeopardized its credit and severely reduced its monthly donations from $17 million to a minimal amount, leading to the cancellation of programs and layoffs, thereby harming its religious mission. The dismissal of the litigation was beneficial to the Church, as the receivership had caused significant damage. Chodos argued for payment exceptions based on a general rule that attorneys seek payment from clients; however, it was clarified that as a special deputy attorney general, his client was the State of California, which pays for the Attorney General's services, and there is no authority to recover fees from litigants in such cases.

The legal principles established in cases like People v. Central Pacific R.R. Co. and Grady v. Pacific Mut. Life Ins. Co. confirm that attorney fees may be awarded from a common fund when successful litigation preserves or creates that fund for multiple beneficiaries. The common fund doctrine allows for fee allocation among beneficiaries, as articulated in Winslow v. Harold G. Ferguson Corp. and reiterated in D'Amico v. Board of Medical Examiners and Serrano v. Priest. Additionally, the substantial benefit theory permits fee awards when a litigant achieves a significant benefit for others, as outlined in Serrano III and Woodland Hills Residents Assn. Inc. The benefit must be substantial, concrete, and conferred on an identifiable group. In the current case, no common fund was established, and evidence indicated that the receivership caused losses to the Church rather than benefits. The private attorney general exception under Code of Civil Procedure section 1021.5 was also not applicable, as the trial court did not find that a public right had been vindicated, thereby justifying fees. The trial court's assessment led to the termination of the receivership, concluding that neither the Church nor the public would benefit from its continuation.

Finding public benefit from events occurring under the receivership is challenging due to the Church’s clear evidence of negative financial and organizational effects caused by the receivership. The court views both the initial action and the receivership as constitutionally flawed and destined to fail. Consequently, the Church, as the prevailing party, should not bear the costs associated with this poorly conceived litigation, including receivership expenses and attorney fees for Chodos. The court affirmed the appealed order, with Roth, P.J., and Beach, J. concurring. A rehearing petition was denied on January 6, 1982, and the Supreme Court declined to hear the case on February 17, 1982; Kaus, J. did not participate. The Worldwide Church of God, established 45 years ago and incorporated under California's Nonprofit Corporation Law, is an evangelical Christian organization with a structured hierarchy. The primary officers involved in the complaint are Herbert W. Armstrong, Jr., the Church's founder and spiritual leader, and Stanley R. Rader, who has been closely associated with Armstrong and the Church in various capacities since 1957. During the receivership, Armstrong attempted to communicate with Church members about the legal actions against the Church, but the receiver intercepted his correspondence to prevent fundraising efforts that could undermine the receivership. Corporations Code section 9230 outlines the Attorney General's authority to examine religious corporations under specific conditions, including concerns about fraudulent activities and the misappropriation of assets.

Examinations conducted under this provision must respect the privileges outlined in Division 8 of the Evidence Code and maintain the confidentiality of membership lists, using them solely for examination purposes and related court proceedings. These examinations should not disrupt the corporation's normal operations or religious practices. The Attorney General is empowered to initiate actions on behalf of the state to enforce examination rights and may seek judicial confirmation that a corporation does not qualify as a religious corporation, resulting in a court order to cease its operations as such. Furthermore, the Attorney General can correct wrongful activities associated with specified conditions. The Attorney General's authority includes acting under Section 803 of the Code of Civil Procedure to determine a corporation's classification, initiating criminal procedures for violations, and representing state agencies concerning religious corporations. Additionally, if property has been solicited for a specific charitable purpose but misused, the Attorney General can enforce the charitable trust, provided notice is given to the corporation to rectify the misuse, and can permit the use of property for general corporate purposes if necessary. Lastly, Code of Civil Procedure section 1021.5 allows courts to award attorneys' fees to a successful party in public interest cases if certain conditions are met, including significant public benefit and the financial burden of enforcement.