Appendix — Steele v. Industrial Development Board

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APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

Nos. 00-6646/6647/6648/6649

HAROLD E. STEELE; DON PETERSON; Rev. DAVID MAYNARD;

HARMON WRAY; Rev. TOM BAKER, JR.,

Plaintiffs-Appellees,

set, A

INDUSTRIAL DEVELOPMENT BOARD OF

METROPOLITAN GOVERNMENT NASHVILLE (00-6648);

METROPOLITAN GOVERNMENT OF NASHVILLE (00-6646);

DAVID LIPSCOMB UNIVERSITY (00-6647);

NATIONSBANK (00-6649);

NATIONSBANK/TENNESSEE (00-6649),

Defendants-Appellants.

Appeal from the United States District Court

for the Middle District of Tennessee at Nashville.

No. 91-00421

Aleta A. Trauger, District Judge.

Argued: February 1, 2002

Decided and Filed: August 14, 2002

Before: NORRIS and CLAY, Circuit Judges; SARGUS,

District Judge.”

SARGUS, D. J., delivered the opinion of the court, in

which NORRIS, J., joined. CLAY, J., delivered a separate

dissenting opinion.

* The Honorable Edmund A. Sargus, Jr., United States District Judge

for the Southern District of Ohio, sitting by designation.

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OPINION

SARGUS, District Judge. Defendants have appealed the

district court’s order granting summary judgment to Plaintiffs

and issuing a permanent injunction prohibiting the Industrial

Development Board (“Board”) and the Metropolitan

Government (“Metro”) from issuing additional tax-exempt

bonds to David Lipscomb University (“Lipscomb University’)

or bonds to any other pervasively sectarian institution. (J.A.

1027-28). Metro and Lipscomb University also appeal the

court’s denial of their separate motions for summary judgment.

For the reasons that follow, we REVERSE the district court’s

grant of summary judgment for plaintiffs and REVERSE the

district court’s denial of summary judgment as to Metro and

Lipscomb University.

I. BACKGROUND

The background of this case is well set forth by the district

court which described Lipscomb University and _ its

redevelopment project as follows:

_ David Lipscomb University, founded in 1891,

describes itself as a “liberal arts university.” It is

located in Nashville, Tennessee, and has an

enrollment of approximately 2,500 students. It is

affiliated with the Churches of Christ, and its primary

mission has been to integrate Christian faith and

practice with the pursuit of academic excellence.

During the early 1990s, Lipscomb undertook a major

redevelopment project on its campus. To finance the

project, Lipscomb sought a $15 million, low-interest

loan from the Industrial Development Board. The

Industrial Development Board approved the loan and

financed it by issuing tax-exempt industrial

development bonds worth $15 million.

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Steele v. Indus. Dev. Bd. of the Metro. Gov’t of Nashville and

Davidson County, 117 F. Supp.2d 693, 694 (M.D. Tenn. 2000).

The district court then described the bonds the Board

issued to Lipscomb University as those “typical of industrial

revenue bonds that are commonly issued for educational or

industrial purposes.” The Board issued the bonds pursuant to its

authority under state law for the financing of projects for “[a]ny

nonprofit educational institution in any manner related to or in

furtherance of the educational purposes of such institution,

including but not limited to classroom, laboratory, housing,

administrative, physical education, and medical research and

treatment facilities.” Tenn. Code Ann.§7-53-101(11)(A)(vii)

(1990 Supp.).

This case was filed in the district court on May 30, 1991,

challenging the validity of the Board’s action in issuing the

tax-exempt revenue bonds for the benefit of Lipscomb

University. The plaintiffs are state and local taxpayers residing

in the Nashville area. They contend that the issuance of

tax-exempt revenue bonds for Lipscomb University provides an

impermissible benefit to a pervasively sectarian institution,

thereby violating the Establishment Clause of the First

Amendment to the United States Constitution. Such aid, they

argue, has the impermissible effect of advancing religion

because a substantial portion of Lipscomb University’s

functions are subsumed in its religious mission. The plaintiff’ s

objected to the issuance of the bonds on this basis at public

hearings and meetings of the Board on April 16, 1990, May 30,

1990, and January 22, 1991. The decision was made to issue

the bonds, which is the basis of this case.

As to the ability of the plaintiffs to bring this suit, the

district court explained that the plaintiffs were found to have

standing to bring this suit as municipal taxpayers who have an

| interest in preventing their local government from subsidizing

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religious institutions. The plaintiffs argued that tax dollars were

being expended on behalf of a pervasively religious institution

because the tax base of the state and local governments was

reduced by the tax-exempt bonds. They asserted that, if

tax-exempt bonds had not been issued, Lipscomb University

would have financed all or part of the project through taxable

bonds, which would have provided significant revenue for the

city coffers.

The tax exempt bonds do not constitute an indebtedness of

either the Board or the Metropolitan Government. Neither the

Board nor the Metropolitan Government can be held liable to

pay any portion of the principal or interest on the bonds or any

costs incident to their issuance. TENN. CODE ANN. §

7-53-306 (1985). No state or local government tax revenues

have been or will be spent as a result of the issuance of the

bonds.

The district judge originally assigned to this case found

that, even if no tax money is spent, taxpayer status is proper

grounds for an Establishment Clause challenge to policies that

affect the city’s general revenue fund. Summary judgment was

denied on those grounds and, on interlocutory appeal, the Sixth

Circuit Court of Appeals upheld the district court’s decision as

to standing. Steele v. Indus. Dev. Bd. of the Metro. Gov't of

Nashville and Davidson County, 39 F.3d 1182 (6th Cir.1994)

(unpublished table decision), cert. denied, 515 U.S. 1121, 115

S.Ct. 2275, 132 L.Ed.2d 279 (1995).

With regard to the mechanics of the bonds at issue, the

district court’s decision again provides a thorough summary:

Under 26 U.S.C. §103 [Internal Revenue Code], gross

income does not include interest on any state or local

bonds that are both private activity bonds and

qualified under 26 U.S.C. § 141. See 26 U.S.C. _

§103(a)(b)(1) (1994). A private activity bond is

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defined, in relevant part, under 26 U.S.C. § 141 as any

bond that is part of an issue which meets the “private

loan financing test.” 26 U.S.C. § 141(a)(2) (1994).

The “private loan financing test” is met where “the

amount of the proceeds of the issue which are to be

used (directly or indirectly) to make or finance loans

... to persons other than governmental units exceeds

the lesser of (A) 5 percent of such proceeds, or (B)

5,000,000.” 26 U.S.C. § 141(c)(1) (1994).

In order for the interest on the bonds to be exempt

from federal taxation, the private activity bonds must

also be qualified under 26 U.S.C. § 141(e) (1994).

There are three criteria that a bond issuance must meet

under this section. First, the bond must fall within

one of the enumerated categories: “(A) an exempt

facility bond, (B) a qualified mortgage bond, (C) a

qualified veterans’ mortgage bond, (D) a qualified

small issue bond, (E) a qualified student loan bond,

(F) a qualified redevelopment bond, or (G) a qualified

501(c)(3) bond.” 26 U.S.C. § 141(e)(1) (1994).

Second, the bond issue must meet the volume cap

requirements of section 146. 26 U.S.C. § 141(e)(2)

(1994); see also 26 U.S.C. § 146 (1994). Finally, the

bond issue must meet the requirements of each

applicable subsection of section 147. 26 U.S.C. §

141(€)(3) (1994). Under the public approval

requirement of section 147(f), in order to be a

qualified bond a private activity bond must be

approved by both the governmental unit issuing the

bond and the governmental unit that has jurisdiction

over the area in which the facility receiving financing

through the bond proceeds is located. See 26 U.S.C.

§ 147(f)(2)(A) (1994).

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A bond that meets each of these criteria will be

designated as a qualified private activity bond under

26 U.S.C. § 103. Where the bonds issued are qualified

private activity bonds, the interest from the bonds will

be exempt from federal taxation. 26 U.S.C. § 103

(1994).

Steele, 117 F. Supp.2d at 698 (emphasis added).

In the instant case, the bonds were issued for the benefit of

Lipscomb University, a private educational institution. The

bonds were issued for the purpose of renovating facilities on

Lipscomb University’s campus. This meets the “private loan

financing test” of section 141(c) because the entire amount of

bond proceeds loaned to Lipscomb University exceeded the

statutory minimum loan amount. Therefore, the bonds may

be characterized as private activity bonds under 26 U.S.C.

§ 141(a) (1994). Further, the Loan Agreement between the

- Board and Lipscomb University specifically prohibits it from

using any bond-financed facilities for religious purposes.’ The

bonds in question meet the technical requirements of 26 U.S.C.

§ 103.

For the bonds to be qualified as tax exempt, they must also

meet the criteria under section 141(e). The bonds meet the first

criteria for being a qualified private activity bond under section

141(e)(1) because the bonds are qualified 501(c)(3) bonds,

' The Loan Agreement between Lipscomb University and the Board

does contain a restrictive use provision. Section 5.3 on “Special Covenants”

States:

(s) The Borrower will not use the Project or any part thereof for

sectarian instruction or as a place of religious worship or in

connection with any part of the program of a school or

department of divinity for any religious denomination or the

training of ministers, priests, rabbis or other similar persons in

the field of religion.

Steele, 117 F. Supp.2d at 727 citing Docket No. 13, attach. Ex. 12 at 18.

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which is one of the enumerated categories of bond types under

this section. See 26 U.S.C. § 141(e)(1) (1994). A qualified

501(c)(3) bond is defined in section 145(a) as a private activity

bond where “all property which is to be provided by the net

proceeds of the issue is to be owned by a 501(c)(3)

organization.” 26 U.S.C. § 145(a)(1) (1994). All of the

proceeds of the $15,000,000 bond issue were loaned to

Lipscomb University for use in building new facilities and in

renovating existing facilities. Lipscomb University is a

registered 501(c)(3) organization, thereby satisfying this

requirement.

The district court summarized the final requirement as to

pubic hearing and local approval as follows:

[A] private activity bond will not be a qualified bond

unless it meets the subsection’s public approval

requirement. 26 U.S.C. § 147(f) (1994). This require-

ment is satisfied where the bond issue has been both

(1) approved either by or on behalf of the govern-

mental unit that issued the bonds, and (2) approved by

each governmental unit that has jurisdiction over the

area where any facilities which are to be financed by

the bond proceeds are located. 26 U.S.C. § 147(f)(A)

(1994). In each case, the approval must be given by

either “the applicable elected representative of such

governmental unit after a public hearing following

reasonable notice” or by a voter referendum of the

governmental unit. 26 U.S.C. § 147(f)(B) (1994). The

elected representative may be an elected legislative

body of the governmental unit, “the chief elected

executive officer, the chief elected State legal officer

of the executive branch, or any other elected official

of such unit designated for the purposes of this

paragraph by such chief elected executive officer or

_

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| by State law.” 26 U.S.C. § 147(f)(2)(EM(i) (1994).

| Steele, 117 F. Supp.2d at 698.’

In this case, the bond issue was approved by the Industrial

Development Board as the governmental unit that issued the

bonds and by Mayor Bill Boner as the chief elected executive

officer of Metropolitan Government of Nashville and Davidson

County, the governmental unit in which the facilities of

Lipscomb University are located.

2 The “scope” of the governmental approval is addressed in federal

regulations, which state:

An issue is treated as approved if the governmental units ... have

approved either - (i) The issue ... not more than one year before

the date of issue, or (ii) A plan of financing for each facility

financed by the issue pursuant to which the issue in question is

timely issued (as required in paragraph (f)(3) of this section). In

either case, the scope of the approval is determined by the

information, as specified in paragraph (f)(2), contained in the

notice of hearing ... and the approval. (2) Information required.

A facility is within the scope of an approval if the notice of

hearing . . . and the approval contain - (i) A general, functional

description of the type and use of the facility to be financed . . .

(ii) The maximum aggregate face amount of obligations to be

issued with respect to the facility, (iii) The initial owner,

operator, or manager of the facility, (iv) The prospective

location of the facility by its street address or, if none, by a

general description designed to inform readers of its specific

location. ... An approval or notice of public hearing will not be

considered to be adequate if any of the items in subdivisions (i)

through (iv) of this subparagraph (2), with respect to the facility

to be financed, are unknown on the date of the approval or the

date of the public notice.

26 C.F.R.§ 5f.103-2(f) (1999).

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II. STANDARD OF REVIEW

This Court reviews the district court’s grant of summary

judgment de novo. See Gribcheck v. Runyon, 245 F.3d 547, 549

(6th Cir. 2001). The standards applicable to such review are

well established:

Summary judgment is appropriate where no genuine

issue of material fact exists so that the movant is

entitled to judgment as a matter of law. Fed.R.Civ.P.

56(c). The court determines whether “there are any

genuine factual issues that properly can be resolved

only by a finder of fact because they may reasonably

be resolved in favor of either party.” Anderson v.

Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct.

2505, 91 L.Ed.2d 202 (1986). Of course, “inferences

to be drawn from the underlying facts must be viewed

in the light most favorable to the party opposing the

motions.” Matsushita Elec. Indus. Co. v. Zenith Radio

Corp., 475 U.S. 574, 587-88, 106 S.Ct. 1348, 89

L.Ed.2d 538 (1986). The movant meets its initial

burden “by ‘showing’ - that is, pointing out to the

district court - that there is an absence of evidence to

support the nonmoving party’s case.” Celotex Corp.

v. Catrett, 477 U.S. 317, 324-25, 106 S.Ct. 2548, 91

L.Ed.2d 265 (1986). At that point, the non-movant

“must set forth specific facts showing that there is a

genuine issue for trial.” Fed.R.Civ.P. 56(e): Anderson,

477 US. at 250, 106 S.Ct. 2505.

Clayton v. Meijer, Inc., 281 F.3d 605, 609 (6th Cir. 2002)

(citation omitted).

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Ill. ANALYSIS

The issue presented in this appeal is whether the issuance

of tax exempt revenue bonds violates the Establishment Clause,

if the bonds are for the benefit of an institution found by the

district court to be pervasively sectarian.’ The issue has not

> In the following cases, the Supreme Court found government aid

programs constitutional: Mitchell v. Helms, 530 U.S. 793 (2000) (plurality)

(providing educational materials and equipment to religious schools upheld);

Agostini v. Felton, 521 U.S. 203 (1997) (allowing remedial public school

teachers and counselors to assist at religious school); Rosenberger v. Rector

and Visitors of Univ. of Virginia, 515 U.S. 819 ( 1995) (providing printing

facilities for all qualified student publications including religious publication

constitutional); Zobrest v. Catalina Foothills Sch. Dist., 509 U.S. 1 (1993)

(providing a sign language interpreter for deaf child in religious secondary

school not unconstitutional); Bowen v. Kendrick, 487 U.S. 589 (1988)

(funding for abstinence-based family planning programs offered by religious

social welfare agency found constitutional); Witters v. Washington Dept. of

Services for the Blind, 474 U.S. 481 (1986) (offering vocational education

scholarship to visually disabled seminarian not unconstitutional); Committee

for Pub. Educ. and Religious Liberty v. Regan, 444 U.S. 646 (1980)

(reimbursing religious school for performing state-mandated standardized

tests and record keeping); Wolman v. Walter, 433 U.S. 229 (1977)

(providing textbook loans, vocational training, diagnostic services,

religious school); Roemer v. Bd. of Pub. Works, 426 U.S. 736 (1976)

(subsidizing per-student to a religious college constitutional); Tilton v.

Richardson, 403 U.S. 672 (1971) (finding construction grants to religiously

affiliated college constitutional); Bd. of Educ. v. Allen, 392 U.S. 236 (1968)

(loaning of textbooks for religious school upheld); Everson v. Bd. of Educ.,

330 U.S. 1 (1947) (reimbursing parents for bus transportation costs to

religious school constitutional); Cochran v. Louisiana State Bd. of Educ.,

281 U.S. 370 (1930) (loaning textbooks to religious school constitutional);

Bradfield v. Roberts, 175 U.S. 291 (1899) (allowing federal funds to build

a Catholic hospital constitutional).

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been addressed by other Circuits or by the Supreme Court.‘

The First Amendment, applicable to the states through the

Fourteenth Amendment, provides that “Congress shall make no

law respecting an establishment of religion, or prohibiting the

free exercise thereof.” U.S. Const. amend. L The Supreme

Court has consistently held that the Establishment Clause,

prohibiting government establishment of religion, and the Free

Exercise Clause, prohibiting government restrictions of the free

exercise of religion, must function in harmony. Johnson v.

Economic Development Corp., 241 F.3d 501, 509 (6th Cir.

* Several state courts have addressed the precise issue; all have found

that the issuance of industrial revenue bonds is not tantamount to the giving

of direct aid to religious schools. Opinion of the Justices, 354 Mass. 779,

236 N.E.2d 523, 526, 27 (1968) (concluding that tax-exempt bond financing

is not a form of direct assistance to private or religious charitable

institutions, as there was no grant or appropriation of public money, no loan

of public credit, and the participants bore all costs of the program); Vermont

Educ. Bldgs. Financing Agency v. Mann, 247 A.2d 68, 72 (Vt. 1968) app.

' dism’d, 396 U.S. 801 (1969) (same); Nohrr v. Brevard County Educ.

Facilities Auth., 247 So.2d 304, 307-09 (Fla. 1971) (same); Cercle v. II.

Educ. Facilities Auth., 288 N.E.2d 399, 401 (Ill. 1972) (same); Calif. Educ.

Facilities Auth. v. Priest, 526 P.2d 513, 515,520 (Cal. 1974) (same); Minn.

Higher Educ. Facilities Auth. v. Hawk, 232 N.W.2d 106, 111(Minn. 1975);

Washington Higher Educ. Facilities Auth. v. Gardner, 699 P.2d 1240, 1243,

1245-46 (Wash. 1985) (holding that the tax exempt status did not create a

debt or a borrower-lender relationship between the state and the religiously

affiliated universities or the bondholders, the bond proceeds never entered

the public treasury, repayment did not pass through the public treasury, and

no state debt was created); Cortez v. Independence County, 698 S.W.2d

291, 292 (Ark. 1985) (concluding that the tax-exempt revenue bonds were

not a pledge of public money); Virginia College Bldg. Auth. v. Lynn, 538

S.E.2d 682, 698 (Va. 2000) (finding that the aid received from tax-exempt

revenue bonds does not involve usage of governmental funds in the

traditional sense in which the terms have been used). See also Durham v.

McLeod, 192 S.E.2d 202, 203-04 (S.C. 1972), app. dism’d for want of a

sub’! fed’l question, 413 U.S. 902 (1973) (finding that tax-free revenue

bonds satisfied solely by student loan payment were neither a state debt nor

public money or credit).

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2001) citing Everson v. Bd. of Educ., 330 U.S. 1, 16 (1947);

Walz v. Tax Comm’n, 397 U.S. 664, 669-70 (1970).

A. Pervasively Sectarian Test

The district court concluded that Lipscomb University is a

pervasively sectarian institution. The district court set forth the

law governing this analysis as follows:

The pervasively sectarian test is based on the line of

cases beginning with Tilton [v. Richardson, 403 U.S.

672 (1971)], and extending through Bowen v.

Kendrick, 487 U.S. 589 (1988). In Hunt v. McNair,

the Court found that “aid normally may be thought to

have a primary effect of advancing religion when it

flows to an institution in which religion is so

pervasive that a substantial portion of its functions are

subsumed in the religious mission or when it funds a

specifically religious activity in an otherwise

substantially secular setting.” 413 U.S. 734, 743

(1973). Thus, the rule under the pervasively sectarian

test, as stated in Roemer v. Board of Publ. Works of

| Maryland, 426 U.S. 736, 96 S. Ct. 2337, 49 L. Ed. 2d

| 179 (1976), is that “no state aid at all go to

| institutions that are so ‘pervasively sectarian’ that

secular activities cannot be separated from sectarian

ones... .” 426 US. at 755.

Steele, 117 F. Supp.2d at 707 (parallel citations omitted).

The district court made the following finding:

| The evidence presented in the depositions and

| literature of Lipscomb shows that, while Lipscomb

| may effectively teach a wide variety of secular

courses, the central mission of the school is to

inculcate and promote Churches of Christ doctrine as

the true word of God. Students are taught entirely by

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Churches of Christ members; are informed of the

importance of the Bible in all areas of their lives; are

expected to attend Bible courses and chapel on a

daily basis and surrounded by an environment

thoroughly saturated by Churches of Christ doctrine.

The school does not follow the Statement of

Principles on Academic Freedom of the AAUP, and

the section of the faculty handbook dealing with

research states that the primary aim of every instructor

Should be to give superior academic instruction,

emphasizing daily instruction in the Bible.

Lipscomb’s Board of Directors, which controls all

major decisions of the school, contains only members

of the Church of Christ. Christian education is one of

the three principal duties of the president of the

school. In this environment, the chance that religion

“would seep into the teaching of secular subjects,” as

discussed in Roemer, 426 U.S. at 751, 96 S. Ct. at

2347, seems inevitable.

Id, at 715 (internal citations omitted). Accordingly, the district

court found that Lipscomb University is a pervasively sectarian

institution.

The vitality of the pervasively sectarian test is questionable

in light of subsequent, more recent decisions from the Supreme

Court. In Mitchell v. Helms, 530 U.S. 793 (2000), six of nine

Justices rejected an Establishment Clause challenge to loans of

educational materials directly to parochial schools. Justice

Souter pointed out in his dissenting opinion that “[N]Jo one,

indeed, disputes . . . that the Roman Catholic schools which

made up the majority of the private schools participating, were

pervasively sectarian . . . .” In his plurality opinion, Justice

Thomas responded by stating that:

eee ee | RRR RRR R RR

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[T]he dissent is correct that there was a period of time

when this factor mattered, particularly if the

pervasively sectarian school was a primary or

| secondary school. But that period is one that the Court

should regret, and it is thankfully long past.”

Id. at 826. Justice Thomas went on to note that the pervasively

sectarian analysis, “born of bigotry, should be buried now.” Jd.

at 829.

Yet, Mitchell is a plurality opinion. Thus, the district court,

and this Court, are still bound by pre-Mitchell law with regard

to the pervasively sectarian doctrine. As the district court

correctly noted:

It is well settled that in a plurality opinion, “the

holding of the Court may be viewed as that position

taken by those Members who concurred in the

judgments on the narrowest grounds.” Coe v. Bell,

161 F.3d 320, 354 (6th Cir. 1998) (quoting Marks v.

United States, 430 U.S. 188, 193 (1977)); see also,

Lakewood v. Plain Dealer Publishing Co., 486 U.S.

750, 764, fn. 9 (1988); Reese v. City of Columbus, 71

F.3d 619, 625 (6th Cir. 1995). In Mitchell, there is no

single part of any opinion that commands the support

of a majority of the Court. As a result, the only

binding precedent of Mitchell is the holding. See Igor.

Kirman, Note, Standing Apart to be A Part: The |

Precendential Value of Supreme Court Concurring |

Opinions, 95 Colum. L. Rev. 2083, 2084-85 (1995);

Ken Kimura, A _ Legitimacy Model for the

Interpretation of Plurality Decisions, 77 Cornell L.

Rev. 593, 1596-98 (1992).

Steele, 117 F. Supp.2d at 706 (parallel citations omitted).

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Further, the Supreme Court has specifically stated that the

lower courts are to treat its prior cases as controlling until the

Supreme Court itself specifically overrules them. Agostini v.

Felton, 521 U.S. 203, 237 (1997). In reaffirming its prior

mandate the Court noted in Agostini that “if a precedent of this

Court has direct application in a case, yet appears to rest on

reasons rejected in some other line of decisions, the Court of

Appeals should follow the case which directly controls, leaving

to this Court the prerogative of overruling its own decisions.”

Id. citing Rodriguez de Quijas v. Shearson/American Express,

Inc., 490 U.S. 477, 484 (1989). It is for the Supreme Court, not

this Court, to jettison the pervasively sectarian test, which it has

not done.

Regardless of whether the pervasively sectarian test is still

the law, we conclude that, given the nature of the aid in

question, the issue of the bonds does not offend the

Establishment Clause.

B. Nature of the Institution Receiving the Aid

The precise type of aid at issue in this appeal is virtually

identical to the bonding mechanisms involved in Hunt y.

McNair, 413 U.S. 734 (1973). The Supreme Court described

the program as follows:

The “state aid” involved in this case is of a very

special sort. We have here no expenditure of public

funds, either by grant or loan, no reimbursement bya

State for expenditures made by a parochial school or

college, and no extending or committing of a State’s

credit. Rather, the only state aid consists, not of

financial assistance directly or indirectly which would

implicate public funds or credit, but the creation of an

instrumentality (the Authority) through which

educational institutions may borrow funds on the basis

of their own credit and the security of their own

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property upon more favorable interest terms than

otherwise would be available. The Supreme Court of

New Jersey characterized the assistance rendered an

educational institution under an act generally similar

to the South Carolina Act as merely being a

“governmental service.” The South Carolina Supreme

Court, in the opinion below, described the role of the

State as that of a “mere conduit.”

Hunt, 413 U.S. at 745 n7.

This passage would seem to indicate that a public body

could serve as a conduit to allow a pervasively sectarian

institution to receive the benefits of tax free bonds so long as

public funds were not expended. Rather than reach such

conclusion, however, the Supreme Court instead found that the

schools at issue were not, in fact, pervasively sectarian and

found it unnecessary to address the precise issue before this

Court. Since Hunt, the Supreme Court has not addressed the

issue.

More recently, in Johnson v. Economic Development

Corp., 241 F.3d 501 (6th Cir. 2001), this Court considered a

case involving facts similar to Hunt, supra. In Johnson, a

private Catholic school applied for and was granted an

industrial revenue bond from the Michigan Economic

Development Corporation, an agency of the State of Michigan.

This Court held that the school, although a Roman Catholic

institution, was not a pervasively sectarian institution. /d. at

515.

Because of this conclusion, the Court did not resolve the

question of whether the granting of an industrial revenue bond

to a pervasively sectarian institution is an unconstitutional form

of aid. The Johnson Court did note, however, that:

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[I]t is far from settled that the type of aid at issue in

this case is direct aid within the meaning of the

Establishment Clause jurisdiction.

Id. at 510.

Moreover, the Court also made the following

observation:

Plaintiff claims that the tax-exemption under the EDC

Act is the equivalent of a tax subsidy for purposes of

the Establishment Clause. . . . The Supreme Court

has expressly rejected the argument. “There is a

constitutionally significant difference between

Subsidies and tax exemptions.” Camps

Newfound/Owatonna, Inc. v. Town of Harrison, 520

U.S. 564, 590, & n.25 (citing Walz, 397 U.S. [664,]

690 [(1970)]). The difference between subsidies and

tax exemptions is that in giving tax exemptions “the

government does not transfer part of its revenue . . .

but simply abstains from demanding the [entity]

support the state.” Walz, 397 U.S. at 675. Therefore,

the benefit provided by the tax-exempt status of the

bonds does not amount to a cash subsidy.

Id. at 511-12 (parallel citations omitted).

Judge Nelson, in a concurring opinion, was even more

direct and concluded that conduit financing in the form of an

industrial revenue bond does not offend the Establishment

Clause, even if the benefitting institution is pervasively

sectarian. Id. at 518-19. He concluded that the type of aid in

question was no different than the indirect aid provided by

property tax exemptions available to religious institutions and

expressly approved by the Supreme Court in Walz, infra. Id. at

519.

18a _ -

In the case at bar, the Board provides pass-through or

conduit financing services to a wide variety of nonreligious and

religious nonprofit organizations. The Board has arranged tax

exempt financing, for example, for a number of colleges and

universities with and without a religious affiliation, as well as

for low-income housing projects, the Country Music Hall of

Fame, the Easter Seal Society, retirement centers, the Jewish

Community Center, the Young Mens Christian Association,

and Nashville Public Radio. (Cochran Aff. at 3-4; Pressnell

Aff. at 2 & Ex. B). Further, similar conduit financing has been

provided to a number of privately owned development

projects.’ Significantly, no claim is made that the Board ever

favored or disfavored one religion over another.

C. Nature of the Aid

Lipscomb University contends that the bonds represent

indirect aid of the type the Supreme Cout upheld in Walz v. Tax

Commission, 397 U.S. 664 (1970). The Walz Court held that a

Statute which provided a tax exemption for real estate owned by

religious organizations did not represent an unconstitutional

governmental attempt to establish, sponsor, or support religion.

In language pertinent to this appeal, the Supreme Court noted:

The grant of a tax exemption is not sponsorship since

the government does not transfer part of its revenues

to churches but simply abstains from demanding that

the church support the state.

Id. at 675. The Supreme Court concluded that “[t]here is no

genuine nexus between tax exemption and establishment of

religion.” Id.

5 The Court notes that Congress has acted to limit the number of bonds

issued by state and local government. The Tax Equity and Fiscal

Responsibility Act of 1982, Pub. L. No. 97-248, § 214, 96 Stat. 324, 466-68

(codified at I.R.C. § 103(b)(6)).

19a

financial benefit conferred by a religiously neutral tax does not

give rise to an Establishment Clause violation. In Mueller v.

Allen, 463 U.S. 388 (1983), the Court upheld a tax deduction

for amounts paid as school tuition, text books, and

transportation.° The Court acknowledged that “religious

institutions benefit very substantially from the allowance” of

this kind of tax deduction. Jd. at 396 n.5. The Court found that

both parents and parochial schools received a benefit, and the

assistance “ultimately has an economic effect comparable to

that of aid given directly to the schools attended by the

children.” Id. at 399. Irrespective of this benefit, the Court

acknowledged its decisions “consistently have recognized that

traditionally ‘[legislatures] have especially broad latitude in

- Creating classifications and distinctions in tax Statutes,’ Regan

v. Taxation With Representation of Wash., 461 U.S. 540, 547

(1983), in part because the ‘familiarity with local conditions’

enjoyed by legislators especially enables them to ‘achieve an

equitable distribution of the tax burden.’” Madden v. Kentucky,

309 U.S. 83, 88 (1940). Id. at 396. Thus, a religious school’s

receipt of indirect benefits through a tax deduction “does not

Subsequently, the Court made clear that an indirect

* The Court found significant that these deductions were among many

deductions allowed under Minnesota law. For example, the Court found

that:

Deductions for charitable contributions, allowed by Minnesota

law, Minn. Stat. § 290.21, subd. 3 (1982), include contributions

to religious institutions, and exemptions from property tax for

property used for charitable purposes under Minnesota law

include property used for wholly religious purposes, § 272.02.

In each case, it may be that religious institutions benefit very

substantially from the allowance of such deductions. The

Court’s holding in Walz v. Tax Comm'n, 397 U.S. 664 (1970),

indicates, however, that this does not require the conclusion that

such provisions of a State’s tax law violate the Establishment

Clause.

Mueller, 463 U.S. at 396 and n.5.

20a

|

require the conclusion that such provisions of a state’s tax law |

violate the Establishment Clause.” Id. at 396. As long as the tax |

benefit is neutrally available,’ the Establishment Clause is not :

violated. |

The only evidence of record is that similar bonds have

been issued to both religious and non-religious institutions in

a neutral manner. The financing in question has been made

available to colleges and universities in Metro, as well as

throughout Tennessee and the United States, and has been

provided to anumber of colleges and universities with different

kinds of religious affiliations, and those without any religious

affiliation.

In Mueller, the Supreme Court distinguished its holding in

Nyquist v. Committee for Public Education and Religious

Liberty, 413 U.S. 756 (1973). In Nyquist, the state legislation

at issue included a wide range of government financial

assistance in aid of private, predominately parochial education.

State money was directed for maintenance and repair of private

schools. In addition, the legislation provided for both direct

tuition grants and tax credits payable to parents whose children

attended private schools. In Mueller, the Court noted that the

outright grants in Nyquist were fundamentally different from

tax deductions given to all parents of public and private school

students for education related expenses. 463 U.S. at 396 n.6.

7 The Mueller court found that “[MJost importantly, the deduction is

available for educational expenses incurred by all parents, including those

whose children attend public schools and those whose children attend

nonsectarian private schools or sectarian private schools.” The Court

analogized to Widmar v. Vincent, 454 U.S. 263, 274 (1981), where it

“concluded that the State’s provision of a forum neutrally ‘available to a

broad class of nonreligious as well as religious speakers’ does not ‘confer

any imprimatur of state approval,’” The Court concluded that “here: ‘[the]

provision of benefits to so broad a spectrum of groups is an important index

of secular effect.’” Meuller, 463 U.S. at n.7.

We address the neutrality issue infra.

2la

Further, unlike the deductions approved in Mueller, the

deductions at issue in Nyquist were not based on actual

expenses incurred. Instead, the deductible amounts were

estimated and designed to equal the dollar amount of the direct

aid in the form of tuition grants available only to low income

families. Jd. The Court concluded that these grants did not take

the form of ordinary tax benefits and constituted direct aid to

religious schools.

In Hernandez v. Commissioner of Internal Revenue, 490

U.S. 680, 688 (1989), the Court held provisions of the Internal

Revenue Code permitting federal taxpayers to deduct gifts or

contributions made to a variety of charitable organizations,

including purely religious groups did not violate the

Establishment Clause. In Hernandez, members of the Church

of Scientology contended that the First Amendment prevented

the IRS from deeming obligatory payments for attendance of

“auditing sessions” as something other than a charitable

contribution. Jd. at 680. The IRS contended that a mandatory

payment to the church for auditing and training was not a gift,

but rather a quid pro quo payment for services received and

therefore not deductable. The Church of Scientology contended

that the disallowance of such payments as charitable deductions

violated the Establishment Clause, inter alia, by creating

excessive entanglement between church and state. The

Supreme Court found no excessive entanglement and, in

language pertinent to the issue before this Court, stated that

“routine regulatory interaction which involves no inquiries into

religious doctrine . . . no delegation of state power to a religious

body . . . and no ‘detailed monitoring and close administrative

contact’ between secular and religious bodies . . . does not of

itself violate the nonentanglement command.” Jd. at 696-97

(internal citations omitted).

Most recently, in Zelman v. Simmons-Harris, 536 U.S. at

—— (2002), the Supreme Court again distinguished its holding

22a

in Nyquist. The Zelman Court found that the school voucher

program in Ohio did not violate the Establishment Clause. The

Court found that the program was controlled by its holdings in

Mueller, Witters, and Zobrest. As to Nyquist the Court held:

To the extent the scope of Nyquist has remained an

open question in light of these later decisions, we now

hold that Nyquist does not govern neutral educational

assistance programs that, like the program here, offer

aid directly to a broad class of individual recipients

defined without regard to religion.

Zobrest, 536 U.S. at __.

In a concurring opinion in Zelman, Justice O’Connor

explained that a government program is not constitutionally

infirm solely because a sustantial benefit is conferred on a

religious organization. 536 U.S. at _._. (O’Connor, J.

concurrence). She explained:

Although $8.2 million is no small sum, it pales in

comparison to the amount of funds that federal, state,

and local governments already provide religious

institutions. Religious organizations may qualify for

exemptions from the federal corporate income tax, see

26 U.S.C. § 501(c)(3); the corporate income tax in

many States, see, e.g., Cal. Rev. & Tax.Code Ann. §

23701d (West 1992); and property taxes in all 50

States, see K. Turner, Property Tax Exemptions for

Nonprofits, 12-Oct. Probate and Property 25 (1998);

and clergy qualify for a federal tax break on income

used for housing expenses, 26 U.S.C. § 1402(a)(8). In

addition, the Federal Government provides

individuals, corporations, trusts, and estates a tax

deduction for charitable contributions to qualified

religious groups. See §§ 170, 642(c). Finally, the

Federal Government and certain state governments

23a

Provide tax credits for educational expenses, many of

which are spent on education at religious schools. See,

e.8.,8 25A (Hope tax credit); Minn.Stat. § 290.0674

(Supp.2001).

Most of these tax policies are well established, see,

e.g., Mueller v. Allen, 463 U.S. 388 (1983) (upholding

Minnesota tax deduction for educational expenses);

Walz v. Tax Comm’n of City of New York, 397 U.S.

664 (1970) (upholding an exemption for religious

organizations from New York Property tax), yet

confer a significant relative benefit on religious

institutions. The state property tax exemptions for

religious institutions alone amount to very large sums

annually.

Id. (parallel citations omitted).

Similar to the benefits at issue in Walz, Mueller,

Hernandez, and now, Zelman, the bonds at issue in this case are

analogous to an indirect financial benefit conferred by a

religiously neutral tax or deduction.

D. Method by Which the Aid is Issued

The method by which the tax exempt bonds are to be

issued to Lipscomb University is significant. Any institution

Seeking a tax exempt bond must arrange the financing by

locating exclusively private lenders of the funds. The purchaser

of a bond has recourse for repayment against Lipscomb

University only; the holder of a bond has no recourse against

the Board or Metro in the event of non-payment. No

government funds are involved in the entire transaction. The

interest paid to the bond holders by Lipscomb University is not

subject to federal, state or local income taxes. Since the bonds

are tax exempt, Lipscomb University reaps the benefit of a

lower interest rate than that paid to a lender paying income

24a

taxes on the interest received. Only by the potential loss of tax

revenue does the conduit financing involve any impact-on

public funds.

Initially, we note that a governmental body must issue the

bonds. While at first blush such fact would indicate

governmental endorsement of religion, the reason for the

issuance of the bonds by a governmental agency stems from the

simple fact that the Internal Revenue Code excludes from

income taxation only interest paid on industrial revenue bonds

issued and approved by a state or local governmental unit. 28

U.S.C. § 147()(2)(A). Such qualifying bonds need not finance

a governmental function (such as water or sewer lines), but may

be issued to promote a variety of purposes, including economic

development and higher education. Further, Tennessee law

requires such bonds serve the “furtherance of the educational

purposes of such institution, including but not limited to

classroom, laboratory, housing, administrative, physical

education, and medical research and treatment facilities.” Tenn.

Code Ann. §§ 7-53-101(11)(A){vii).

The federal government has continuously provided an

exemption for interest on bonds issued “by or on behalf of”

states and localities since the inception of a federal income tax

in 1913. Tariff Act of 1913, Pub. L. No. 63-16, ch. 16, 38 Stat.

114. Although states and localities first took advantage of this

exception by issuing general obligation bonds, they later issued

revenue bonds to help finance private business activities for the

ostensible purpose of promoting economic growth. Stuart C.

Johnson, Multi-Family Housing Bonds: Can the Tax Code

Provide an Efficient and Effective Low-Income Housing

Program, 5 Va. Tax. Rev. 497, 498-99 (1986) (citations

omitted). Congress provided for an exemption from income

taxation for industrial revenue bonds issued in connection with

a project intended to benefit a local economy. The Internal

Revenue Service explicitly legitimized this practice in 1954.

25a

Rev. Rul. 54-106, 1954-1 C.B. 28, 28-29.8 Such bonds have

been typically issued by a governmental authority, even though

such authority does not actually borrow the funds nor is such

authority liable for repayment. “A revenue bond is repaid solely

from the revenues generated by the facilities constructed with

bond proceeds. In the issuance of this type of bond, the political

subdivision acts solely as a conduit for issuing the bonds. It has

no obligation to use its tax revenues to finance any shortfall.”

Zimmerman, Limiting the Growth of Tax-Exempt Industrial

Development Bonds: An Economic Evaluations (1984) (Cong.

Research Serv. Rep. No. 84-37E).

In addition, by requiring local governmental authorities to

issue tax-exempt industrial revenue bonds, Congress delegated

to such governmental units an element of control over local

economic development. The revenue bonds serve as a means of

financing local preferences. See Clayton P. Gillette, Fiscal

Federalism and the Use of Municipal Bond Proceeds, 58

N.Y.U.L. Rev. 1030 (1983) (discussing Section 103 of the

Internal Revenue Code, which provides a federal tax exemption

for interest earned on state and municipal bonds).? For

* The Service classified as tax exempt those bonds issued by a

municipality to finance construction of privately used industrial plants,

“notwithstanding the purpose for which they were issued or the fact that the

Promise to pay is limited to the revenue to be derived from leasing the

Property to be acquired. . . . It is not necessary . . . that the obligation be a

general one, pledging the general credit of the municipality or the use of its

taxing power.”

* According to the Senate Committee on Finance, S. Rep. No. 494,

97th Cong., 2d Sess. 168 (1982), the public notice and approval

requirements were enacted to help eliminate inappropriate uses of

#x-exempt financing and to help restore the benefit of tax-exempt financing

for traditional governmental Purposes. While acknowledging that state and

26a

example, a local government might conclude that the issuance

of an industrial revenue bond to a new business could give a

competitive disadvantage to an existing business which had not

received such conduit financing and result in economic

displacement, rather than development.

It is clear from the record that industrial revenue bonds are

issued to a wide variety of businesses, schools, universities,

charities and other organizations. It is without question that a

religious organization may receive “general government

benefits” consistent with the Establishment Clause. Zobrest v.

Catalina Foothills Sch. Dist., 509 U.S. 1, 8 (1993). As the

Supreme Court noted in Widmer v. Vincent, 454 U.S. 263, 274,

275 (1981), “If the Establishment Clause barred the extension

of general benefits to religious groups ‘a church could not be

protected by the police and fire departments or have its public

sidewalk kept in repair’.” citing Roemer v. Bd. of Pub. Works.,

426 U.S. 736, 747 (1976). We conclude that the issuance of tax

exempt bonds on a neutral basis is the conference of a generally

available governmental benefit.

E. Primary Purpose and Effect of the Program

In her concurrence in Zelman, Justice O’ Connor reaffirmed

that the modified Lemon Test is still a central tool in analysis of

Establishment Clause cases noting:

As originally formulated, a statute passed this test

only if it had “a secular legislative purpose,” if its

“principal or primary effect” was one that “neither

public has an opportunity to comment on the use of tax-exempt financing for

particular facilities and (b) after that input, the elected representatives of the

governmental unit determine that there will be substantial public benefit

from issuing the bonds. H.R. Conf. Rep. No. 760, 97th Cong., 2d Sess. 518

(1982), 1982-2 C.B. 623-24. Based on this legislative history, Metro has

clearly fulfilled its obligation under 147 (f) to approve a bond issue that

meets the public criteria.

27a

advance[d] nor inhibit[ed] religion,” and if it did “not

foster an excessive government entanglement with

religion.” Lemon v. Kurtzman, 403 U.S. 602, 612-613

(1971) (internal quotation marks omitted). In Agostini

v. Felton, 521 U.S. 203, 218, 232-233 (1997), we

folded the entanglement inquiry into the primary

effect inquiry. This made sense because both inquiries

rely on the same evidence, see ibid. , and the degree of

entanglement has implications for whether a Statute

advances or inhibits religion, see Lynch v. Donnelly,

465 U.S. 668, 688 ( 1984) (O’CONNOR, J.,

concurring). The test today is basically the same as

that set forth in School Dist. of Abington Township v.

Schempp, 374 U.S. 203, 222 (1963) (citing Everson v.

Board of Ed. of Ewing, 330 U.S. 1 (1947); McGowan

v. Maryland, 366 U.S. 420, 442 (1961)), over 40 years

ago.

Zelman, 536 U.S. __ (2002) (O’Connor, J. concurring

opinion) (parallel citations omitted).

As to the primary purpose, industrial revenue bonds

advance a clear governmental, secular interest in promoting

economic and educational development. Such conduit

financing also promotes economic development though the

underwriting of job-producing construction projects at colleges

and universities. In turn, a more educated populace is better

positioned to generate new development and economic

opportunity. In a case involving industrial revenue bonds for a

private religious high school, this Court held in Johnson v.

Economic Development Corp., 241 F.3d at 512:

A state’s decision to assist businesses in their

Operation in order to create and maintain jobs -

regardless of the type of businesses - ‘evidences a

purpose that is both secular and understandable’,

28a

Mueller, 463 U.S. at 395. . . Michigan could conclude

that there is a strong public interest in promoting,

assisting, and retaining commercial enterprises, both

sectarian and non-sectarian.

As to the program’s primary effect, tax free revenue bonds

have neither the effect of advancing or inhibiting religion, or as

Justice O’Connor has “put it, of “endors[ing] or disapprov(ing]

. religion.’”” Zelman, 536 U.S. at __. (O’Connor, J.

concurrence) citing Lynch v. Donnelly, 465 U.S. at 691-92

(concurring opinion). Metro’s program, “as in Mueller, ‘[{ ] is

made available generally without regard to the

sectarian-nonsectarian, or public-nonpublic nature of the

institution benefitted.’” Zelman, 536 U.S. at____ citing Mueller,

474 US. at 487.

The effect of Metro’s program is economic and educational

development. Many states and local governments have used

industrial revenue bonds to entice new, or expanded

manufacturing, commercial, and educational projects. These

projects, privately owned, are not financed with direct

government funding, but are given preferential tax treatment

through conduit financing. Lipscomb University seeks the same

type of financing for the expansion of its facilities as could be

sought by Walmart, Sears, or educational institutions. The Loan

Agreement between the Board and Lipscomb University

specifically prohibits it from using any bond-financed facilities

for religious purposes. The projects Lipscomb University seeks

to finance would provide no less economic development than

a new store or a new manufacturing facility.

Further, as in the school funding program the Supreme

Court upheld in Zelman, Metro’s industrial revenue bond

program does not present the perception of endorsement to the

reasonable observer. “‘[T]he reasonable observer in the

endorsement inquiry must be deemed aware’ of the ‘history and

bg

29a

context’ underlying a challenged program.” Zelman, 536 U.S.

at ____ citing Good News Club v. Milford Central School, 533

U.S. 98, 119 (2001). As the Zelman Court Stated:

Any objective observer familiar with the full history

and context of the Ohio program would reasonablely

view it as one aspect of a broader undertaking to assist

poor children in failed schools, not as an endorsement

of religious schooling in general.

Zelman, 536 U.S. at__.

Similarly, in the instant case, the objective observer of

Metro’s industrial revenue bond program, knowing the history

and context of this program, would reasonably view it as one

aspect of a broader undertaking to finance economic

development, not as an endorsement of religious schooling in

general. Metro no more endorsed Lipscomb University than it

did Wal-Mart in issuing industrial revenue bonds.

IV. CONCLUSION

Because the proposed issuance of industrial revenue bonds

to Lipscomb University is part of a neutral program to benefit

education, including that provided by sectarian institutions, and

confers at best only an indirect benefit to the school, we hold

that the issuance of the bonds does not violate the First

Amendment.

In sum, the nature of the institution is not the relevant

inquiry in the special type of aid at issue in this appeal. The

nature of the aid conferred by the tax free revenue bonds is not

direct aid. Instead, it is analogous to an indirect financial

benefit conferred by a religiously neutral tax or charitable

deduction and is indistinguishable from that expressly approved

in Walz, supra. The funding vehicle is available on a neutral

basis. No government funds will be expended. Nor does any

holder of a bond have recourse against the Board or Metro in

30a

the event of non-payment. The benefit to be obtained by

Lipscomb University is the same provided to private companies

which create identical economic opportunities. The conduit

financing advances a clear governmental, secular interest in

promoting economic opportunity. Finally, the revenue bond

program does not present the perception of government

endorsement of religion.

Based on the foregoing, we REVERSE the district court

grant of summary judgment for plaintiffs and REVERSE both

the district court’s denial of summary judgment for Metro and

its denial of summary judgment to Lipscomb University.

ES Se eee a

3la

DISSENT

CLAY, Circuit Judge, dissenting. Because David

Lipscomb University (“Lipscomb”) _ is indisputably a

“pervasively sectarian” educational institution and because the

low-interest loan to Lipscomb through the issuance of the

tax-exempt bonds by the Industrial Development Board (“the

Board”) amounted to a direct economic benefit in violation of

the Establishment Clause of the First Amendment of the U.S.

Constitution, I would find that the district court did not err in

granting Plaintiffs’ cross-motion for Summary judgment,

denying the separate motions for summary judgment filed by

the Board and the Metropolitan Government (“Metro”) and

entering a permanent injunction prohibiting the Board and

Metro from issuing additional tax-exempt bonds to Lipscomb

or tax-exempt bonds to any pervasively sectarian institution.

As will be conclusively demonstrated below, Lipscomb fits

the profile of a pervasively sectarian educational institution by

imposing religious restrictions on Student admissions and

faculty and staff appointments; enforcing obedience to its

religious dogma, which is the “supreme purpose” of the

University; requiring daily Bible study and attendance at Chapel

as an integral part of its religious mission; and placing religious

limitations on how and what the faculty teach. The low-interest

loan of $15 million originated by the Board at Lipscomb’s

request constituted a direct economic benefit because it enabled

Lipscomb to advance its sectarian mission by funding

improvements to the University. Given its pervasively sectarian

character, the direct economic benefit to Lipscomb results in

excessive governmental entanglement with the religious

mission of the University in violation of the Establishment

Clause.

32a

BACKGROUND

Before addressing the substantive issues, it is helpful to

describe in detail the nature of Lipscomb, a private,

not-for-profit religious corporation affiliated with the Churches

of Christ, which was founded by David Lipscomb and James

Harding in 1891 and originally incorporated under the name of

“The Nashville Bible School.”' Characterizing itself as a “small

co-educational liberal arts university” with an enrollment of

approximately 2,500 students, Lipscomb states that “its primary

mission has been to integrate Christian faith and practice with

academic excellence.” Among the objectives of Lipscomb are

“[t]o provide the very best in a Christian liberal arts education

under the direction of Christian teachers in a distinctly

Christian environment .. . [t]o train future leaders in the church

... [and] .. . [t]o hold up Christ as the example to follow in

every field of activity.” (J.A. at 38, 1249.)

According to Lipscomb’s corporate charter and the bylaws

of the Board of Directors,

The corporation was organized for the purpose of

teaching the word of God and the various branches of

the useful knowledge, commonly taught in institutions

of learning for the following general purposes: the

support of any literary or scientific undertaking, as a

college or university with power to confer degrees, an

academy, a debating society lyceum, the establishment

of a library, the support of a historical society, the

promotion of painting, music and the fine arts, the

' This portrayal of Lipscomb is largely based upon its own publications

that date from the time that the Board approved Lipscomb’s request for a

loan financed by the issuance of $15 million in tax-exempt bonds. It should

be noted that for the purposes of deciding the issue on appeal, there is

nothing in the record to suggest that the current publications of Lipscomb

are materially different in any relevant respect.

33a

support of Board of Trade or Chamber of Commerce

or other objects of like nature, the support of public

worship, the building of churches and chapels and the

maintenance of missionary undertakings.

(J.A. at 805, 829-30). To this end, the bylaws of Lipscomb state

that “[t]he President, with the assistance of vice presidents and

principals, shall maintain a Christian college that shall

perpetuate the high Christian ideals inaugurated by Harding and

Lipscomb, the founders of David Lipscomb College, in which

the Bible is made the book of most importance.” (J.A. at

830-31.)

As noted in the President’s letter in the 1989-1990 edition

of the Student Handbook: “[W]e have a sincere interest in the

Spiritual values of each student and faculty staff member.

Lipscomb has been built on Christian ideas. Daily Bible study

and chapel provide direction but only you can make the

commitment to grow closer to God.” (J.A. at 293.) Lipscomb’s

Faculty Handbook also provides:

The mission of David Lipscomb University is to serve

its students so that they may master knowledge and

Skills appropriate to them and become Christlike in

attitude and behavior.

It must be kept firmly in the consciousness of all

connected with the institution - administration,

faculty, students, and patrons - that Lipscomb is a

Christian school. In the original appeal for support,

written by David Lipscomb, it was made clear that the

Bible was to be the foundation upon which all else

would center:

The supreme purpose of the school shall be

to teach the Bible as the revealed will of God

to man and as the only and sufficient rule of

34a

faith and practice, and to train those who

will attend in a pure Bible Christianity,

excluding from the faith all opinions and

philosophies of men, and from the work and

worship of the church of God all human

inventions and devices. Such other branches

of learning may be added as will aid in the

understanding and teaching of the Scriptures

and as will promote usefulness and good

citizenship among men.

(J.A. at 1627.) (emphasis in original.) The Faculty Handbook

continues by stating,

This purpose was further set forth in the deed

conveying the property on Spruce Street for the use

of the school as follows:

... that the property shall be used for maintaining

a school in which, in addition to other branches of

learning, the Bible as the recorded will of God and the

only standard of faith and practice in religion,

excluding all human systems and opinions and all

innovations, inventions, and devices of men from the

service and worship of God, shall be taught as a

regular daily study to all who shall attend said school

and for no other purpose inconsistent with this object.

The condition being herein inserted at the request of

the founders of the proposed Bible School, the same

is hereby declared fundamental and shall adhere to the

premises conveyed as an imperative restriction upon

their use so long as the same shall be owned by said

Bible School, or its Trustees, and to any and all

property which may be purchased with the proceeds

of said premises in case of sale or reinvestment, as

hereinafter provided.

35a

David Lipscomb University is not, therefore, merely

an institution which requires every student to take a

lesson in the Bible each day; this study is the

wellspring from which the university issued.

(J.A. at 1627-28.)

These ideas about the central importance of the Bible are

echoed throughout Lipscomb’s catalogues. For example, in the

university catalogue for 1988-1989, Lipscomb states:

The Bible has always been considered the most

important area of Study for all students at DLC [David

Lipscomb College]. The founders and those who have

followed them have held it to be important that every

Student study the Bible in aclass every day. Whatever

one’s major interest or life work, a thorough

knowledge of the biblical life principles is needed.

In daily classes the Bible is taught as the inspired

word of God. With the Bible itself as the text,

students are encouraged to apply the Bible principles

of right living to all aspects of personal and

professional life.

In view of the daily Bible classes, it can be said

that every Lipscomb graduate unofficially “majors in

Bible.” Those who formally major in Bible may give

Special emphasis in one of the following areas:

Biblical Languages, Missions, Preaching, Religious

Education, or Youth Ministry.

(J.A. at 41-42.) These points are reinforced in the 1990-1991

university catalogue:

The Daily Bible Requirement

The supreme purpose of David Lipscomb -

University is “to teach the Bible as the revealed will

36a

of God to man and as the only and sufficient rule of

faith and practice, and to train those who will attend

in a pure Bible Christianity.” To help fulfill this

purpose, each regular student must be enrolled in a

Bible class each school day and also attend daily

chapel services.

Every college or university has a right and even

an obligation to be unique and distinctive based upon

its individual purpose. Few, if any, other colleges

today require students to take regular daily classes in

Bible study. Students who choose to attend David

Lipscomb University should be interested and

supportive of the daily Bible requirement. The

university has no authority to suspend this

requirement for any student.

(J.A. at 1253.) Lipscomb’s 1990-91 catalogue further provides:

Although the daily Bible requirement is important

enough to be listed as a separate part of each student’s

academic program, it is also considered an integral

part of the general education program at David

Lipscomb College. No body of knowledge or study of

any kind is as important as the study of the Bible

itself.

(J.A. at 41, 1254.)

Accordingly, taking and passing a daily Bible class is a

“fundamental requirement for attendance” at Lipscomb. (J.A.

at 39-40.) As set forth in Lipscomb’s student bulletin for

1991-92:

The Bible has always been considered the most

important area of study for all students at David

Lipscomb University. The founders, and those who

have followed them, have held it to be important that

37a

every student study the Bible. Whatever their major

interest or life work, a thorough knowledge of Biblical

principles is needed.

In daily classes, Bible is taught as the inspired

word of God. Students are encouraged to apply the

Bible principles of right living to all aspects of

personal and professional life.

(J.A. at 836-37, 1260.) These ideas were continually expressed

in the editions of the Student Handbook from 1988 through

1992:

Because the Bible is the heart of Lipscomb’s

curriculum, every regular student Studies the Bible

every school day. Offerings in the Department of

Bible are arranged so that a student can, in four years,

have exposure to the entire Bible.

Any student who fails Bible is automatically

placed on probation for the Succeeding semester.

Probation must be removed by passing each Bible

course carried during the semester of probation.

Failure to meet this requirement means that the

student will be dropped at the end of the semester.

(J.A. at 303, 1189, 1212, 1235.) As explained by Dr. Joe Mac

Lynn, the head of Lipscomb’s Bible Department, each student

is required to have two credit hours of Bible each semester in

order to graduate from Lipscomb. (J.A. at 1504-5.) From 1988

until September 1992, approximately 100 undergraduate

students were on “Bible probation.” (J.A. at 834.) As noted in

the Student Handbooks, students who do not pass every Bible

course carried while on probation are Subject to dismissal from

the school.

38a

In addition to daily Bible study, Lipscomb also requires

every full-time student to attend chapel each school day. (J.A.

at 833.) As stated in Lipscomb’s Faculty Handbook:

Chapel

The heart of each day’s activities at David

Lipscomb University is the chapel service. It is here

that the entire Lipscomb family gains strength and

inspiration for the tasks of the day. Since attendance

at chapel is compulsory for all students, it is expected

that each faculty member will attend chapel

regularly. No arrangements should be made which

require regular chapel absences of one or more times

each week without prior written approval of the dean.

(J.A. at 1401.) (emphasis in original.) As set forth in the

editions of the Student Handbook from 1988 through 1992, a

student with eleven absences from chapel during a semester is

placed on “chapel probation.” (J.A. at 303, 1189-90, 1212-13,

1235-36.) From 1990 through 1992, an average of 40 to 60

students were on “chapel probation” each semester. (J.A. at

833, 1463.) The Student Handbooks also provide that “[i]f

flagrant disregard for chapel attendance persists, a student is

subject to immediate suspension.” (J.A. at 304.) In his

deposition, Dr. Dennis Loyd, the Dean of Students at

Lipscomb, testified that every full-time student “knows he goes

to chapel,” and that failure to do so results in dismissal. (J.A. at

1455-59.)

As stated in the bylaws of the Board of Directors, each

director at Lipscomb must be a member of the Churches of

Christ in good standing in the congregation. (J.A. at 110.) The

Board of Directors elects the president to be its chief executive

officer in charge of “its business and Christian education

affairs.” (J.A. at 115.) The bylaws also provide that “great care

should be exercised in the selection and development of [ ]

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teaching personnel.” (J.A. at 116.) Moreover, all personnel,

with the exception of employees of its services, building and

grounds departments, shall be members in good standing of the

Churches of Christ. (J.A. at 832.) Lipscomb also reserves the

right under Title VII of the Civil Rights Act of 1964 (as

amended) to discriminate, “where it is necessitated by the

specific religious tenets held by the institution.” (J.A. at 834,

1250.)

In addition, Lipscomb President Harold Hazelip

acknowledged in his deposition testimony that all of its faculty

must be members in good standing of the Churches of Christ,

end that leaving the church is grounds for termination of

employment. (J.A. at 1167, 1169.) In a letter to Nashville

Mayor Boner Opposing the bond issue, Norman Parks, the

former dean of Lipscomb, remarked:

No person can be employed at Lipscomb who is not a

member of the mainline Church of Christ. He cannot

be a premillennialist or believe that instrumental

music is acceptable for worship of God. He must

believe that a divorced person Cannot remarry and

continue in church. He must believe that a woman

cannot teach a class in religion to men.

(J.A. at 1142.) In this regard, Dr. Lynn, the head of Lipscomb’s

Bible Department, testified in his deposition that a divorced

teacher may be allowed to remain as a teacher at the university,

but “[a] person who divorces and remarries during the [ ]

employment relationship to [sic] the University would be

subject to discipline or to dismissal.” (J.A. at 1539.) According

to Dr. Susan Dennison Sinclair, she was informed by the

department chairman when she was hired as an adjunct

professor in the English Department for one semester in 1990

that “he would not be allowed to recommend me based on

various personal questions, one of them being the fact that my

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husband and I at that time were separated.” (J.A. at 1572.) Dr.

Sinclair also testified that the chairman of the English

Department informed her when she was hired that “there might

be some problems, with the requirements of the university” by

her failure to answer the question on the employment

application concerning drinking. (J.A. at 566-67.)

Lipscomb also imposes religious restrictions on how and

what the faculty teach. Specifically, Lipscomb admits that it

does not subscribe to the American Association of University

Professors’ (“AAUP”) Statement of Principles on Academic

Freedom.’ In contrast, Lipscomb’s Faculty Handbook states:

? The AAUP’s principles provide:

a. Teachers are entitled to full freedom in research and in the

publication of the results, subject to the adequate

performance of their other academic duties; but research for

pecuniary return should be based upon an understanding with

the authorities of the institution.

b. Teachers are entitled to freedom in the classroom in

discussing their subject, but they should be careful not to

introduce into their teaching controversial matter which has

no relation to their subject. Limitations of academic freedom

because of religious or other aims of the institution should be

clearly stated in writing at the time of the appointment.

c. College and university teachers are citizens, members of a

learned profession, and officers of an educational institution.

When they speak or write as citizens, they should be free

from institutional censorship or discipline, but their special

position in the community imposes special obligations. As

scholars and educational officers, they should remember that

the public may judge their profession and their institution by

their utterances. Hence they should at all times be accurate,

should exercise appropriate restraint, should show respect for

the opinions of others, and should make every effort to

indicate that they are not speaking for the institution.

(J.A. at 689.)

4la

In the final analysis, the worth of any educational

institution is determined by its faculty. It is of special

importance in the Christian university that every

teacher be first dedicated to Christ and His truth,

demonstrating those qualities of heart and life which

will inspire young people to love the Lord and strive

to please Him. This devotion must be accompanied by

sound scholarship, awareness of student needs, and a

determined desire to serve.

(J.A. at 1305.) Under the subheading of “Academic Freedom,”

the Faculty Handbook adds:

Each member of the Lipscomb faculty is

committed both by personal conviction and by

contract to the purposes and ideals of the institution as

set forth by the founders and Board of Directors.

Within this framework each teacher is free to pursue

and teach truth in his/her respective field of learning.

Since truth is consistent everywhere, this basic

commitment makes possible academic freedom

without the necessity of a formal Statement.

(J.A. at 1305.) According to Dr. Sinclair, who has had a long

association with Lipscomb in addition to teaching there, the

administration at Lipscomb directed members of the faculty to

teach certain religious doctrines or views in courses given in

the Biology and Physics Departments, where faculty members

are “instructed to teach creationism.” (J.A. at 1616-17.) In her

affidavit, Dr. Sinclair also stated:

5. Those who are not familiar with the church

of Christ have difficulty understanding the restrictive

nature of its beliefs. The Bible is taken very literally

and very restrictively. For example, women are not

allowed tohold any leadership positions of any kind.

Women are not allowed to speak in any worship

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service. Women are not allowed to lead singing, to

make announcements or to teach in any group where

men are present. Women are not allowed to go to

business meetings of the church. Women have no vote

in any meetings; women have no say in how the

money collected is spent. Women are taught to “be in

submission” at home and in the church.

6. In order to see how this doctrine affects

teaching and academic freedom at Lipscomb, I recall

a speech Hollis Todd, professor of the sociology

department at Lipscomb and an elder at my church

gave on November 22, 1992. (I took notes on it

because it was a few days after my discovery

deposition in the case of Steele v. Industrial

Development Board, et al. and I was thinking about

these issues.) He told how he required the students in

his David Lipscomb University sociology class called

“The Family” to answer a question on Ephesians 5.

The question was whether they accepted the doctrine

that a man must be “head” of the wife. He was

shocked and upset that one of his students had once

actually said she didn’t agree with the scripture. He

cited this incident as proof of “the rising tide of

immorality.” He did not state whether he graded the

student poorly.

(J.A. at 622.)

During the years from 1990 to1992, at the time of the

issuance of the bonds, more than 77% of the undergraduate

students at Lipscomb were members of the Churches of Christ.

(J.A. at 837, 1181.) According to the affidavit of W. Craig

Bledsoe, the Provost at Lipscomb since 1997, 78.97% of the

student body indicated that they were members of the Churches

of Christ in 1991, while 71.42% of the student body so

43a

indicated in 1997. (J.A. at 502.) Student applications for

admission to Lipscomb during these years “required a character

reference from a’minister, youth minister or leader at church,”

without specifying the denomination of the church or the

religion. (J.A. at 837.) As expressed in a brochure from

Lipscomb, “[o}]ne common thread that binds students together

is their commitment to Christ. At Lipscomb a student’s love for

the Lord is strengthened by this special association with other

Students, the majority of whom share the same spiritual

values.” (J.A. at 1635.) In his affidavit, Bledsoe also stated that

“there are numerous other religions represented in the student

body including, for example, Buddhism, Lutheran, Muslim,

Russian Orthodox, Hindu, Catholic, Mormon, Baptist, and

Nazarene.” (J.A. at 502). In his supplemental affidavit, Bledsoe

averred that “Lipscomb does not discriminate against students

on the basis of religion.” (J.A. at 775.) Nevertheless, Dr.

Sinclair testified in her deposition that students were pressured

to become members of the Churches of Christ, particularly

during chapel service. (J.A. at 1606-07.) Moreover, while

Lipscomb provided its students with a list of local churches in

the community, it only named those affiliated with the

Churches of Christ. (J.A. at 835-36.) Lipscomb also

acknowledges that it prohibits students from dancing,

consuming alcohol, using tobacco, among other things, because

it regards such conduct as being “un-Christian conduct.” (J.A.

at 308-309, 835, 1191-92, 1472-74.)

In response to recommendations made by the Southern

Association of Colleges and Schools, Lipscomb undertook a

major development project in the early 1990s to expand and

renovate its campus to accommodate an increase in

undergraduate enrollment to 3,000. To fund the project,

Lipscomb applied for a $15 million, low-interest loan from the

44a

Board.’ Lipscomb requested funding to construct and equip a

new library; renovate and convert the old library into

administrative offices; construct an intramural building (or

student activity center), an intramural field, four new tennis

courts, and a baseball stadium; construct an addition to the

Swang Business Center; make parking, landscaping and

walkway improvements; and acquire computer and fiber optic

equipment.

At a public meeting on April 10, 1990, the Board approved

Lipscomb’s request for the loan, which was financed by the

issuance of $15 million in tax-exempt industrial development

bonds, pursuant to the Board’s authority under Tenn. Code

Ann. § 7-53-101(11)(A)(vii). After another public hearing on

May 30, 1990, the Board formally approved the issuance of the

bonds. On May 31, 1990, Nashville Mayor Bill Boner approved

the issuance of the bonds, as required for tax-exempt status

> The Board is a public corporation created under the authority of

Tenn. Code Ann. § 7-53-101 - § 7-53-311. Metro approved the creation of

the Board by resolution as provided in Tenn. Code Ann. § 7-53-201. By

law, all amendments to the corporate charter of the Board must also be

approved by Metro. Tenn. Code Ann.§ 7-53-204 (1985). Under the statute,

the Board has the authority to enter into loan agreements with third parties;

it can sue and be sued; it can sell any of its properties; it can issue bonds and

borrow money from banks and other financial institutions by issuing notes.

Tenn. Code Ann. § 7-53-204. In addition, the Board has the authority to

issue tax-exempt revenue bonds for various public work projects, including

[aJny nonprofit educational institution in any manner related to

or in furtherance of the educational purposes of the institution,

including, but not limited to classroom, laboratory, housing,

administrative, physical education and medical research and

treatment facilities.

Tenn. Code Ann. § 7-53-101(11)(A)(vii(1990 Supp.). After the approval

and sale of the tax-exempt bonds under the statute, the municipal

governments that approve them are not liable for repayment of the debt.

Tenn. Code Ann.§ 7-53-306 (1985).

45a

under 26 U.S.C. § 147(f), thus certifying that the bonds served

a public purpose.

The tax-exempt bonds were then sold to private investors

(bondholders), and the proceeds from the bonds were loaned to

Lipscomb, pursuant to the loan documents. According to the

loan agreement, Lipscomb was not to use the project funds for

sectarian instruction or religious worship. Lipscomb is also

obligated to pay all sums due on the bonds. In January of 1991,

the bonds were replaced by revenue refunding bonds titled

“Educational Facilities Revenue Refunding Bonds, Series

1991.”

Defendant Sovran Bank, as trustee for the bondholders,

was assigned the loan documents. Sovran Bank provided the

Principal security for the bonds through a $15,969,453

irrevocable letter of credit for the account of Lipscomb to

Sovran Bank, N.A. as trustee for the bondholders. Additional

security was provided by a promissory note and loan agreement

entered into by Lipscomb and the Board.

Plaintiffs are state and local taxpayers residing in Davidson

County, Tennessee, who objected to the issuance of the bonds

at public hearings and meetings of the Board held on April 10,

April 16, and May 30, 1990.4 At the meetings, Plaintiffs or their

representatives complained that the issuance of the tax-exempt

bonds for Lipscomb provided governmental Support to a

pervasively sectarian institution in violation of the

Establishment Clause of the First Amendment of the U.S.

Constitution. On May 30, 1991, Plaintiffs, as municipal

taxpayers, commenced the instant action, challenging the

validity of the Board’s action in issuing tax-exempt revenue

bonds for the benefit of Lipscomb.

* The lead Plaintiff, Harold E. Steele, is no longer a party as a result

of his death on April 1, 1998.

46a

Eventually, on October 9, 1998, Metro and Lipscomb

separately moved for summary judgment, alleging that the

issuance of the tax-exempt revenue bonds did not violate the

Establishment Clause. In support of their respective motions for

summary judgment pursuant to Rule 56 of the Federal Rules of

Civil Procedure, both Metro and Lipscomb submitted separate

statements of the undisputed material facts on October 9, 1998

and October 16, 1998, respectively. Plaintiffs responded to

Defendants’ statements of the undisputed material facts and

filed documents in opposition to Defendants’ motions for

summary judgment. Plaintiffs also filed a statement of

additional undisputed material facts in opposition to

Defendants’ motions on November 9, 1998. Both Defendants

then responded to Plaintiffs’ statement of additional undisputed

material facts on November 20, 1998 and December 2, 1998,

respectively.

At oral argument on May 10, 2000, the district court

requested that Plaintiffs submit a cross-motion for summary

judgment. Pursuant to the district court’s order, Plaintiffs filed

a motion for summary judgment on May 30, 2000, alleging that

the issuance of the tax-exempt revenue bonds to Lipscomb

violated the Establishment Clause because Lipscomb is so

pervasively sectarian that a substantial portion of its functions

is subsumed in its religious mission, and that the $15 million

dollars in tax-exempt revenue bonds had the impermissible

effect of promoting religion as a matter of law. In support of

their motion for summary judgment, Plaintiffs submitted a

statement of the undisputed facts. Thereafter, on July 3, 2000,

Lipscomb submitted its verified response to Plaintiffs’

statement of undisputed material facts in support of their

motion for summary judgment.

On October 24, 2000, the district court entered a

memorandum and order granting Plaintiffs’ cross-motion for

summary judgment and denying Lipscomb and Metro’s

aero ee ce = << aeavaramcaes .

47a

respective motions for summary judgment. The district court

also issued a permanent injunction enjoining the Board and

Metro from issuing any additional tax-exempt revenue bonds

for the benefit of Lipscomb or any other pervasively sectarian

institution. The district court further awarded Plaintiffs’

nominal damages in the amount of $1.00 each and authorized

attorneys’ fees for Plaintiffs. Defendants then filed timely

notices of appeal. Subsequently, Defendants filed a motion to

stay further proceedings on the matter of attorneys’ fee pending

this appeal. On October 31, 2000, the district court granted the

motion to stay proceedings on the attomeys’ fee issue.

Metro also asked for a Stay of the permanent injunction

issued by the district court enjoining the Board and the Metro

from issuing any additional tax-exempt revenue bonds for the

benefit of Lipscomb or any other pervasively sectarian

institution. On July 13, 2001, the district court denied Metro’s

motion for a stay pending appeal. Thereafter, in a motion filed

on August 13, 2001, Metro appealed the district court’s denial

of its motion for a stay pending appeal. In an order entered on

September 25, 2001, this Court denied the motion for a stay

pending appeal.

DISCUSSION

At the outset, it should be noted that Plaintiffs challenge

only the constitutionality of the Tennessee statute as applied,

which authorized the Board to issue tax-exempt bonds to

Lipscomb or any other pervasively sectarian institution. Thus,

the issue squarely presented on appeal is whether the

low-interest loan by the Board to Lipscomb funded througi the

issuance of the tax-exempt bonds violates the Establishment

Clause because Lipscomb is a pervasively sectarian educational

institution and the loan amounts to direct state aid.

The point of departure for analyzing whether the

low-interest loan to Lipscomb through the issuance of the

rr

48a

tax-exempt bonds by the Board violated the Establishment

Clause is the test set forth in Lemon v. Kurtzman, 403 U.S. 602,

612-13 (1971), as refined by the Court in Agostini v. Felton,

521 U.S. 203, 232-33 (1997), which merged the excessive

government entanglement prong with the “primary effect”

analysis. As the majority opinion notes, the Lemon test, as

reformulated by Agostini, continues to have vitality. See

Zelman v. Simmons-Harris, 122 S. Ct. 2460, 2476 (2002)

(O’Connor, J. concurring opinion). In the present case, the

question before us concerns whether the governmental action

satisfies the “primary effect” test. Under this test, the Court in

Agostini stated that the governmental aid is permissible if “it

does not result in governmental indoctrination; define its

recipients by reference to religion; or create an excessive

entanglement.” Jd. at 234. In the matter before us, the specific

issue is whether the governmental aid results in excessive

entanglement. In assessing whether there is excessive

entanglement, the Court in Agostini stated that “we have looked

to ‘the character and purposes of the institutions that are

benefited, the nature of the aid that the State provides, and the

resulting relationship between the government and religious

authority.’” Id. at 232 (quoting Lemon, 403 U.S. at 615).

On appeal, Lipscomb first argues that the district court’s

grant of summary judgment in favor of Plaintiffs was erroneous

because it rested upon a finding that Lipscomb is a pervasively

sectarian educational institution. According to Lipscomb,

“whether an institution is ‘pervasively sectarian’ is no longer a

factor to be considered by the courts in these kinds of cases.”

Lipscomb’s Br. at 7. However, as the majority opinion

recognizes, the pervasively sectarian test has not been

abandoned. In Johnson v. Econ. Dev. Corp. of County of

Oakland, 241 F.3d 501, 510 n. 2 (6th Cir. 2001), this Court

pointed out:

49a

The principle expressed in Hunt y. McNair, 413 U.S.

734 (1973), that government aid in the form of tax

exempt revenue bonds of the type involved in this

case violates the Establishment Clause--when

Provided to pervasively sectarian institutions--has

not been disavowed, at least to my knowledge, by

any subsequent majority opinion of the Supreme

Court. Accord Agostini v. Felton, 521 U.S. 203, 233

(1997) (recognizing that under the Establishment

Clause, the court must consider “ ‘the character and

purposes of the institutions that are benefitted’ . =e

(e.g., whether the religious institutions were

‘predominantly religious’”)) (citing Hunt, 413 U.S. at

734-44).

241 F.3d at 510 n. 2 (parallel citations omitted.) Although the

majority notes that the Court questioned “[t]he vitality of the

pervasively sectarian test” in Mitchell v. Helms, 530 U.S. 793

(2000), we noted in Johnson that “it is Justice O’Connor’s

opinion [in Mitchell], which does not abolish the distinction

between ‘pervasively sectarian’ and ‘sectarian’ institutions and

which expressly declines to adopt Justice Thomas’ expansive

view, that is controlling upon this Court.” Jd.

Alternatively, Lipscomb claims that even if the pervasive

sectarian test remains relevant, the district court’s decision

must be vacated and remanded for an evidentiary hearing

because the court improperly “viewed ambiguous facts in a

light least favorable to the non-moving party” in granting

summary judgment in favor of Plaintiffs. Lipscomb’s Br. at 7,

n. 4. There is no merit to this claim because the district court

based its decision on the undisputed facts in the record, which

established as a matter of law that Lipscomb is a pervasively

sectarian educational institution and that the loan transaction

amounted to a direct economic benefit for Establishment

Clause purposes.

50a

The profile of a pervasively sectarian educational

institution

In evaluating whether Lipscomb is a pervasively sectarian

institution, our attention should be directed in the first instance

to Hunt v. McNair, 413 U.S. 734 (1973), since it is the only

case dealing with the precise issue at hand that yielded a

majority opinion. In Hunt, the Supreme Court also addressed

the issue of state aid to a religious school in a challenge to the

validity of the South Carolina Educational Facilities Authority

Act (“the Act”), under which revenue bonds were issued to the

Baptist College at Charleston, South Carolina, a

Baptist-affiliated college. Through the issuance of the revenue

bonds, the Act provided assistance to higher educational

institutions in constructing and financing projects, such as

buildings, facilities, and site preparation, specifically excepting

“any facility used or to be used for sectarian instruction or as a

place of religious worship nor any facility which is used or to

be used primarily in connection with any part of the program of

a school or department of divinity for any religious

denomination.” Jd. at 736.

Applying the factors set forth in Lemon, the Court in Hunt

held that the Act did not violate the Establishment Clause,

finding in pertinent part that the statute did not have the

primary effect of advancing or inhibiting religion insofar as the

college did not have a significant sectarian orientation and the

projects were limited to those with a secular purpose. In Hunt,

the Supreme Court noted:

Aid normally may be thought to have a primary effect

of advancing religion when it flows to an institution in

which religion is so pervasive that a substantial

portion of its functions are [sic] subsumed in the

religious mission or when it funds a specifically

Sla

religious activity in an otherwise substantially secular

setting.

Id. at 743. The Court in Hunt concluded that the aid did not go

to a pervasively sectarian institution, nor to fund specifically

religious activities, and thus would not “place the Authority in

the position of providing aid to the religious as opposed to the

secular activities.” Id. at 744. Although Hunt did not outline a

test for identifying a pervasively sectarian institution, the Court

found that the Baptist college in question was not pervasively

sectarian inasmuch as “there are no religious qualifications for

faculty membership or student admission, and that only 60% of

the College student body is Baptist, a percentage roughly

equivalent to the percentage of Baptists in that area of South

Carolina.” 413 U.S. at 743-44,

Notwithstanding the absence in Hunt of an explicit test for

identifying a pervasively sectarian educational institution, the

plurality opinion in Roemer v. Bd. of Public Works of Md., 426

U.S. 736 (1976) set forth a profile of a pervasively sectarian

educational institution for evaluating Establishment Clause

claims. In Roemer, the Court considered an Establishment

Clause challenge to the constitutionality of a Maryland statute

providing public aid in the form of grants (“Sellinger grants”)

to colleges affiliated with the Roman Catholic Church. In

Roemer, the plurality noted that “the focus of the debate”

concerned whether the grant program had the primary effect of

advancing religion and Creating excessive church-state

entanglement. As to the primary-effect question, the plurality

in Roemer noted that “Hunt requires (1) that no state aid at all

go to institutions that are so ‘pervasively sectarian’ that secular

activities cannot be separated from sectarian ones, and (2) that

if secular activities can be Separated out, they alone may be

funded.” Jd. at 755. In determining whether an institution was

“pervasively sectarian,” the plurality opinion in Roemer noted

that it was necessary to “paint a general picture of the

52a

institution, composed of many elements.” Jd. at 758.

Summarizing the elements of a sectarian profile set forth in the

Court’s majority opinion in Comm. for Public Educ. and

Religious Liberty v. Nyquist, 413 U.S. 756, 767-68 (1973), the

plurality in Roemer stated:

The elements of the “profile” were that the schools

placed religious restrictions on admission and also

faculty appointments; that they enforced obedience to

religious dogma; that they required attendance at

religious services and the study of particular religious

doctrine; and that they were an ‘integral part’ of the

religious mission of the sponsoring church; that they

had religious indoctrination as a ‘substantial purpose’ ;

and that they imposed religious restrictions on how

and what the faculty could teach.

Roemer, 426 U.S. at 753 n. 18 (citing Nyquist, 413 U.S. at

767-68).

In light of the views expressed in the majority opinions in

Hunt and Nyquist, the proper starting point for evaluating the

Establishment Clause challenge in this case is to adopt the

profile for a pervasively sectarian educational institution stated

by the plurality in Roemer, as this most closely adheres to

Supreme Court precedent expressed in majority opinions on

this topic. See Agostini, 521 U.S. at 237 (noting that “the Court

of Appeals should follow the case which directly controls,

leaving to this Court the prerogative of overruling its own

decisions”).

It should be noted that this approach accords with that

taken by the Fourth Circuit in Columbia Union Coll. v. Clarke,

159 F.3d 151 (4th Cir. 1998) (“Columbia Union I’), which

adopted a four-factor test that is essentially a restatement of the

Supreme Court’s profile of a pervasively sectarian educational

institution. In Columbia Union I, the Fourth Circuit identified

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four “general areas of inquiry” in determining whether a school

is pervasively sectarian: “(1) does the college mandate religious

worship; (2) to what extent do religious influences dominate

the academic curriculum, (3) how much do religious

preferences shape the college’s faculty hiring and student

admission processes, and (4) to what degree does the college

enjoy ‘institutional autonomy’ apart from the church with

which it is affiliated.” Jd. at 163. Although the Fourth Circuit

asserted that a college is not pervasively sectarian unless it

possesses a “great many” of the characteristics identified in the

four-factor test, 159 F.3d at 163, there is nothing clearly stated

in prior Supreme Court precedent to the effect that a

pervasively sectarian instruction must possess “a great many”

of the relevant characteristics; rather, the focus of the inquiry is

whether religion so permeates the secular education functions

provided by a religious-affiliated educational institution that its

religious and secular educational functions are in fact

inseparable. Further, I take issue with the Statement by the

Fourth Circuit in Columbia Union I that “because the Supreme

Court has never held any institution of higher education to be

‘pervasively sectarian,’ we lack even a clear “general picture’

of a ‘pervasively sectarian’ college or university.” 159 F.3d at

163. In my view, the general profile of a pervasively sectarian

institution is not as difficult to discern from Supreme Court

jurisprudence as the Fourth Circuit purports it to be. Although

the Fourth Circuit correctly recognized that “{nJeither the

Supreme Court, nor any circuit court to our knowledge, has

ever found a college to be pervasively sectarian,” id. at 169, it

is clear that the Supreme Court certainly left open this

possibility. See Hunt, 413 U.S. at 743 (citing Tilton v.

Richardson, 403 U.S. 672, 682 (1971)); see also Va. Coil.

Bldg. Auth. v. Lynn, 260 Va. 608, 538 S.E.2d 682 (Va. 2000)

(applying the elements of the Roemer test to find that Regent

University, created under the auspices of the Christian

54a

Broadcasting Network, Inc., is a pervasively sectarian

institution).

Lipscomb fits the profile of a pervasively sectarian

educational institution

Viewing the undisputed facts, the district court properly

concluded that Lipscomb is, as a matter of law, a pervasively

sectarian educational institution. First, the record indicates that

Lipscomb places religious restrictions on admission, and that

more than 70% of the student body belongs to the Churches of

Christ. Lipscomb also places religious restrictions on faculty

and staff appointments, requiring that all personnel, with

limited exceptions, be members in good standing of the

Churches of Christ. Specifically, all members of Lipscomb’s

faculty and staff are expected to attend daily chapel and adhere

to church doctrines. Further, faculty members are contractually

bound to promote the beliefs of the Churches of Christ, both in

and out of the classroom, and if any member leaves the church,

it is an immediate ground for termination of employment. As

noted by the district court, Lipscomb also reserves the right

under Title VII of the Civil Rights Act of 1964 (as amended) to

discriminate, “where it is necessitated by the specific religious

tenets held by the institution.”

Second, Lipscomb enforces obedience to its religious

dogma, directing that the Bible be taught “every school day to

every student enrolled . . . by teachers who are sound in the

faith and faithful in their lives to its sacred truths.” According

to Lipscomb, its “supreme purpose” is “to teach the Bible as the

revealed will of God to man and as the only and sufficient rule

of faith and practice, and to train those who will attend in a

pure Bible Christianity.”

Third, Lipscomb requires its students to participate in daily

Bible study and attendance at chapel. According to Lipscomb,

“(t]he university has no authority to suspend [the daily Bible}

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requirement for any student.” As the district court found, all

Students must take at least one Bible class every day of each

semester and are required to take at least one course from each

of the following four categories: The Gospels, The Church, Old

Testament, and Defense of the Faith. According to Lipscomb,

the Bible is the inspired word of God, and Students are

encouraged to apply Biblical principles in conducting the

affairs of their personal and professional lives. Students are also

required to pass Bible courses, and the failure to do so results

in being placed on “Bible probation,” which could lead to

expulsion. From 1988 to 1992, approximately 100 students

were placed on Bible probation. In addition, students are

required to attend chapel every school day, and the failure to do

So may lead to being placed on “chapel probation.”

Fourth, attendance at chapel and the study of the Bible at

Lipscomb are an “integral part” of the religious mission of the

Churches of Christ. This is made clear repeatedly throughout

Lipscomb’s Faculty and Student Handbooks, as well as its

university catalogues.

Fifth, religious indoctrination is a “substantial purpose” at

Lipscomb. As set forth in Lipscomb’s corporate charter and

bylaws of the Board of Directors, “[t]he Corporation was

organized for the purpose of teaching the word of God and the

various branches of the useful knowledge, commonly taught in

institutions of learning for the following general purpose: ...

the support of public worship, the building of churches and

chapels and the maintenance of missionary undertakings.”

Moreover, as the district court noted, “[t]he land on which the

construction projects funded by the bend proceeds were

undertaken is subject to restrictive covenants tha require that

the property be used exclusively to further the religious mission

of the institution so long as the property is owned by

Lipscomb.” Steele v. Indus. Dey, Bd. of the Metro. Gov. of

56a

Nashville and Davidson County, 117 F.Supp.2d 693, 710 (M.D.

Tenn. 2000).

Sixth, Lipscomb imposes religious restrictions on how and

what the faculty teach. As Lipscomb acknowledges, it does not

subscribe to the AAUP’s Statement of Principles on Academic

Freedom. Specifically, there was unrebutted testimony that

Lipscomb instructs the faculty in the Biology and Physics

Departments to “teach creationism.” By Lipscomb’s own

admission, the religious tenets of the Churches of Christ are

designed to permeate every facet of the University, including

classroom instruction in subjects that are considered

non-religious or nonsectarian.

Here, the record shows that Lipscomb satisfies all the

elements of a sectarian educational institution profile,

conclusively demonstrating that religion pervades it to such an

extent that “its functions are subsumed in the religious

mission.” Hunt, 413 U.S. at 743. Accordingly, there is no

genuine issue of material fact about whether Lipscomb is a

pervasively sectarian educational institution.

Lipscomb is clearly distinguishable from educational

institutions found not to be pervasively sectarian

As an educational institution, Lipscomb is clearly

distinguishable from those higher educational institutions that

the Supreme Court has found not to be pervasively sectarian.

For example, in Tilton v. Richardson, 403 U.S. 672 (1971), the

Supreme Court found that a direct federal grant awarded

pursuant to the Higher Education Facilities Act of 1963 to four

colleges and universities affiliated with the Roman Catholic

Church for the construction of academic facilities devoted to

secular purposes did not violate the Establishment Clause,

except for the section of the Act that limited federal interest in

the facilities to a period of twenty years because it allowed the

unconstitutional contribution of valuable property to a religious

57a

institution, and could be “used to promote religious interests.”

403 U.S. at 683. The colleges in Tilton were described in the

following terms:

All four schools are governed by Catholic religious

organizations, and the faculties and student bodies at

each are predominantly Catholic. Nevertheless, the

evidence shows that non-Catholics were admitted as

students and given faculty appointments. Not one of

these four institutions requires its students to attend

religious services. Although all four schools require

their students to take theology courses, the parties

Stipulated that these courses are taught according to

the academic requirements of the Subject matter and

the teacher’s concept of professional standards. The

parties also stipulated that the courses covered a range

of human religious experiences and are not limited to

courses about the Roman Catholic religion. The

Schools introduced evidence that they made no

attempt to indoctrinate students or to proselytize.

Indeed, some of the required theology courses at

Albertus Magnus and Sacred Heart are taught by

rabbis. Finally, as we have noted, these four schools

subscribe to a well-established set of principles of

academic freedom, and nothing in this record shows

that these principles are not in fact followed. In short,

the evidence shows institutions with admittedly

religious functions but whose predominant higher

education mission is to provide their students with a

secular education.

Id. at 686-687. Unlike Tilton, where the theology courses at the

colleges affiliated with the Roman Catholic Church were

“taught according to the academic requirements and the

teacher’s concept of professional Standards,” without

attempting “to indoctrinate students or to proselytize,” the

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religion classes at Lipscomb are Bible classes, not theology

classes. At Lipscomb, Bible classes are taught as “the revealed

will of God to man and as the only and sufficient rule of faith

and practice, and to train those who will attend in a pure Bible

Christianity, excluding from the faith all opinions and

philosophies of men, and from the work and worship of the

church of God all human inventions and devices,” except those

that “will aid in the understanding and teaching of the

Scriptures.”

Lipscomb also clearly differs from the Baptist college in

Hunt. As already noted, the Baptist College at Charleston was

not found to be a pervasively sectarian educational institution

based upon the fact that it did not impose religious

qualifications on its faculty and staff and given that the

percentage of the student body roughly reflected the same

percentage of Baptists in the area. Unlike the college in Hunt,

which did not hire faculty on the basis of religion, apart from

those teaching in the theology departments, Lipscomb requires

that its faculty be members in good standing of the Churches of

Christ. Further, the fact that the student body at Lipscomb is

largely affiliated with the Churches of Christ reflects

Lipscomb’s placement of religious restrictions on student

admissions.

Lipscomb is also clearly distinguishable from the Roman

Catholic colleges in Roemer, which were “characterized by a

high degree of institutional autonomy” from “their formal

affiliation with the Roman Catholic Church.” Roemer, 426 U.S.

at 755. By contrast, Lipscomb’s “supreme purpose” is “to teach

the Bible as the revealed will of God to man and as the only

and sufficient rule of faith and practice, and to train those who

will attend in a pure Bible Christianity.” Further, unlike the

colleges in Roemer, Lipscomb does not subscribe to the

AAUP’s Statement of Principles on Academic Freedom.

Moreover, unlike the colleges in Roemer, where attendance at

59a

religious exercises was not required and where spiritual

development was encouraged as a “secondary objective,”

Lipscomb requires attendance at religious service, placing those

who fail to attend on “chapel probation,” and clearly promotes

Spiritual development as the primary objective of the

institution. While the colleges in Roemer gave mandatory

religion and theology courses taught “primarily by Roman

Catholic clerics,” those courses only supplemented “a

curriculum covering ‘the spectrum of a liberal arts program.’”

Roemer, 426 U.S. at 756. In contrast, the Bible classes at

Lipscomb are central to the mission of the school, and the

failure to pass a Bible course results in a student being placed

on “Bible probation,” which subjects the student to dismissal

from the school if he or she does not pass every Bible course

taken while on Bible probation. Lipscomb thus clearly stands

Separate and apart from the higher educational institutions that

the Supreme Court has found not to be pervasively sectarian.

It should also be noted that Lipscomb is markedly different

from the religious academy in Johnson that this Court found

not to be pervasively sectarian. In Johnson, this Court described

the religious academy in the following terms:

As to the nature of the institution, as with any

religiously affiliated school, the Academy pledges its

allegiance to its faith. Nevertheless, the facts establish

that the Academy is not a pervasively sectarian

institution. The Academy’s Restated Articles of

Incorporation provide that the school’s purpose is to

“conduct an independent Catholic school from

pre-school through and including the 12th grade,

wherein the arts and sciences, and other forms of

primary and secondary learning are taught, and

diplomas and honors therein conferred: while

maintaining a philosophy consonant with that of the

network of the Sacred Heart schools of which it is a

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member.” (J.A. at 66.) The Academy’s curriculum

and requirements provides that

[e]very student at [the Academy] receives

intensive training in the basic academic

skills of English, Mathematics, History,

Foreign Language and Science. Art, Music,

Drama, Forensics, Theology and Computer

Science are essential parts of this program.

[The Academy] offers each student a full

Physical Education Program designed to

develop a sense of sportsmanship, a respect

for physical fitness and an awareness of the

enjoyment derived from athletic endeavors.

(J.A. at 154.) A review of the course descriptions and the

subjects covered for each of the courses offered at the

Academy, with the exception of the Religion Department,

demonstrates that the Academy does not interject religion into

every aspect of its curriculum. Moreover, there are no religious

requirements for membership on the Academy’s Board of

Trustees. Non-Catholics have served, and currently serve, on

the Board.

In addition, the Academy does not discriminate on the

basis of race, color, creed, or national origin in its admissions

process, nor does it give preference in admission to Roman

Catholics. Furthermore, the Academy does not discriminate on

the basis of race, color, or national origin in any of its

educational policies, scholarship and loan programs, athletic or

extracurricular activities, or other-school administered

programs. As of the date of the issuance of the bonds at issue,

135 of the 366 (non-preschool) students at the Academy, or

37%, were not Catholic. And as of the date of the stipulation,

34% of the students were not Catholic. The facts indicate that

faiths represented in the Academy student body include

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non-Catholic Christian, Jewish, Islamic, Shinto and others.

Finally, the Academy does not discriminate on the basis of race,

color, creed or national Origin in the hiring of its employees.

The Academy has a teaching faculty of 60, of whom five are

members of religious orders. There is no religious-affiliation

requirement or preference for the Academy’s teachers, and the

School does not inquire as to the religious affiliation of

Prospective faculty members.

Johnson, 241 F.3d at 516-17. Most striking, Lipscomb, unlike

the academy in Johnson, interjects religion into virtually all

aspects of its institutional life. Further, unlike the school in

Johnson, Lipscomb reserves the right under Title VII of the

Civil Rights Act of 1964 to discriminate in the hiring of faculty

and staff on the basis of religion.

Lipscomb is also distinguishable from Columbia Union

College, the educational institution affiliated with the Seventh

Day Adventist Church that the Fourth Circuit did not regard as

@ pervasively sectarian educational institution. See Columbia

Union Coll. v. Oliver, 254 F.3d 496 (4th Cir. 2001) (“Columbia

Union IT’). In Columbia Union II, the Fourth Circuit Stated:

The district court respected fully the majority’s

order of remand in Colwmbia Union I. Working

through the four factors in this case, the court found

that although Columbia Union had a mandatory

worship policy, it applied only to a minority of

was insufficient to show that the traditional liberal arts

classes were “taught with the primary objective of

religious indoctrination.” The court pointed to

“affirmative evidence indicating that secular

education is the primary goal of” Columbia Union.

The court examined the college’s mission statement

62a

and the descriptions of secular curricula in the

college’s catalog, among other things, in making this

finding. The court looked at the college’s syllabi for

secular courses and determined that the religious

references were too isolated and scattered to justify a

finding that religion permeates the secular courses.

And although the court found that the Seventh-day

Adventist Church exerted a dominance over college

affairs and that the college gave an express preference

in hiring and admissions to members of the Church,

these factors by themselves were not enough to make

the college a pervasively sectarian one.

Id. at 508-09. In contrast to Columbia Union College,

Lipscomb has a mandatory worship policy and imparts

instruction with the primary objective of religious

indoctrination. Lipscomb also places religious restrictions on

admission and expressly hires faculty and staff based upon

membership in the Churches of Christ.

Indeed, Lipscomb is even more pervasively sectarian than

Regent University (“Regent”), the only other institution that has

been found by a court to be a pervasively sectarian institution

for Establishment Clause purposes. As noted by the Virginia

Supreme Court in Lynn,

Regent’s Articles of Incorporation, provide that:

[Regent] shall exist for the purpose of bringing

glory to God and His Son Jesus Christ by providing an

institution or institutions of learning in which those

who are mature in the knowledge of God and His

ways can assist and guide, in a spirit of free inquiry

and scholarly excellence, those who would learn of

Him, His ways, and His creation, while together they

study ways to glorify God and better their world.

63a

538 S.E.2d at 685. Lynn also noted that Regent has adopted a

Statement of Faith that provides,

Regent University is a Christ-centered institution. The

Board of Trustees, along with the faculty and staff of

the university, are committed to an evangelical

interpretation and application of the Christian faith.

The campus community is closely identified with the

present-day renewal movement, which emphasizes the

gifts, fruit and ministries of the Holy Spirit. It is

expected that all trustees, officers, administrators and

faculty will subscribe to this Statement in writing[.]

Id. Regent’s Mission Statement provides:

Preamble--Regent University is a graduate institution

that exists to bring glory to God the Father and His

Son Jesus Christ through the work of the Holy Spirit.

Mission--Our mission is to provide an exemplary

graduate education from biblical perspectives to

aspiring servant leaders in pivotal professions and to

be a leading center of Christian thought and action.

Vision--Our vision, through our graduates and other

scholarly activities, is to provide Christian leadership

in transforming society by affirming and teaching

principles of truth, justice and love as described in the

Holy Scriptures, embodied in the person of Jesus

Christ, and enabled through the power of the Holy

Spirit.

Id. In spite of its religious mission, Regent does not have any

“specific religious requirement for student admissions, and “the

lack of such a ‘{Christian] commitment’ does not negatively

impact an applicant’ s standing for admission.” Jd. at 686,

However, the Virginia Supreme Court noted that “[aJll

applicants are required to submit a ‘Clergy Recommendation,’

both as a matter of policy and practice. Among the questions

asked is whether the applicant has ‘made a meaningful personal

commitment to Jesus Christ.’” Jd. The Virginia Supreme Court

in Lynn further remarked:

Although encouraged to do so, students are not

required to attend Regent’s weekly corporate chapel

services or participate in any particular religious

activities. However, they must have “[pJersonal goals

consistent with the mission and goals of Regent

University,” and must submit a “[pJersonal goals

statement” addressing how their “personal and

spiritual objectives” relate to Regent’s

“Christ-centered educational philosophy.” The

instructions explain that “for the Christian, [a goal] is

a statement of faith in God’s will for his or her life.”

Faculty, unlike students, are required to sign a

document indicating their adherence to the “Statement

of Faith.” They are “strongly encouraged but they’re

not required” to attend chapel. The faculty is required

to integrate “faith and learning.” Dr. Selig testified,

and the SACS (Southern Association of Colleges and

Schools) and the ABA (American Bar Association)

agree, that the Statement of Faith has not interfered

with academic freedom. Regent’s detailed academic

freedom policy encourages faculty to “pursue truth

. . . by research, discussion, and other forms of

inquiry.” Nonetheless, Regent prohibits faculty from

using “their position or classroom as a platform to

demand adherence by students to a personal

theological viewpoint, political preference or social

agenda.” The SACS in a review of Regent's

accreditation application in 1998 found that “[flaculty

and students are free to examine all pertinent data,

question assumptions, be guided by the evidence of

scholarly research, and teach and study the substance

of a given discipline.” With respect to its curriculum,

each faculty member at Regent is required to include

in the syllabus for each class a “description of how the

Christian faith and the Bible wil] be incorporated into

the course.”

Id. at 617-18.

Like Regent, the “supreme purpose” of Lipscomb is to

Promote Christian ideals. Both Lipscomb and Regent also

require applicants to submit a recommendation from a member

of the clergy, without specifying the denomination. However,

unlike Regent, nearly three-quarters of the Students at

Lipscomb are identified with a particular creed, the Churches

of Christ. Further, in contrast to Regent, which encourages, but

does not require, its students to attend chapel services or to

Participate in certain religious activities, daily Bible class and

chapel attendance are mandatory at Lipscomb. In addition,

while both schools require its faculty to adhere to religious

principles and to incorporate the Bible into class instruction,

Regent provides much greater latitude in terms of academic

freedom than Lipscomb. Thus, even among pervasively

sectarian religious institutions, Lipscomb Clearly stands out as

unrelentingly sectarian in its policies and practices.

institution, it thus must be determined whether the issuance of

the tax-exempt revenue bonds is a direct or indirect benefit for

noted that because Hunt found that the Baptist College at

Charleston was not a sectarian educational institution, it did not

need to decide the issue whether the issuance of the revenue

bonds constituted direct state aid in that case. In a footnote,

though, the Court in Hunt remarked:

The ‘state aid’ involved in this case is of a very

special sort. We have here no expenditure of public

funds, either by grant or loan, no reimbursement by a

State for expenditures made by a parochial school or

college, and no extending or committing of a State’s

credit. Rather, the only state aid consists, not of

financial assistance directly or indirectly which would

implicate public funds or credit, but the creation of an

instrumentality (the Authority) through which

educational institutions may borrow funds on the basis

of their own credit and the security of their own

property upon more favorable interest terms than

otherwise would be available. The Supreme Court of

New Jersey characterized the assistance rendered an

educational institution under an act generally similar

to the South Carolina Act as merely being a

“governmental service.’ Clayton v. Kervick, 56 N.J.

523, 530-531, 267 A.2d 503, 506-507 (1970). The

South Carolina Supreme Court, in the opinion below,

described the role of the State as that of a “mere

conduit.” 258 S.Ct., at 107, 187 S.E.2d, at 650.

Because we conclude that the primary effect of the

assistance afforded here is neither to advance nor to

inhibit religion under Lemon and Tilton, we need not

decide whether, as appellees argue, Brief for

Appellees 14, the importance of the tax exemption in

the South Carolina scheme brings the present case

under Walz v. Tax Comm'n, 397 U.S. 664, 90 S.Ct.

1409, 25 L.Ed.2d 697 (1970), where this Court upheld

a local property tax exemption which included

religious institutions.

67a

tax-exempt revenue bond issue amounts to a direct benefit

because it held that the religious academy was nota pervasively

functions is subsumed in the religious mission so as to suggest

that the state aid to Lipscomb has the primary effect of

advancing religion.

In deciding this question, it is advisable to make some

preliminary observations. First, although the majority opinion

correctly notes that this precise issue has not been addressed by

other circuits or by the Supreme Court, it inaccurately states

that all the state courts that have addressed the issue “have

found that the issuance of industrial revenue bonds is not

tantamount to the giving of direct aid to religious schools.”

Opn. at n. 2. However, with the exception of the Virginia

Supreme Court’s decision in Lynn, 538 S.E.2d at 682, none of

the cases cited by the majority has addressed the precise

question at hand, namely, whether tax-exempt bond financing

to a pervasively sectarian educational institution constituted a

form of direct state aid, having the primary effect of advancing

religion, in violation of the Establishment Clause. Indeed, as

noted by the California Supreme Court in Calif. Educ.

Facilities Auth. v, Priest, 526 P.2d 513, 518, n. 8 (Cal. 1974),

one of the cases cited by the majority:

Of course, if the Authority were to exercise its powers

in aid of an institution which is pervasively sectarian

within the meaning of the Hunt test, a different

conclusion might be compelled.

Tas iene

68a

“Individual projects can be properly evaluated if and

when challenges arise with respect to particular

recipients and some evidence is then presented to

show that the institution does in fact possess these

(disqualifying) characteristics.” (Tilton v. Richardson

(1971) supra, 403 U.S. 672, 682.)) We emphasize,

however, that the fact an institution of higher

education is affiliated with or governed by a religious

organization is insufficient, without more, to establish

that aid to that institution impermissibly advances

religion. (See Hunt v. McNair (1973) supra, 413 U.S.

734, 743; Tilton v. Richardson (1971) supra, 403 U.S.

672, 686-687.)

Priest, 526 P.2d at 518, n. 8 (parallel citations omitted.)

Further, contrary to the suggestion in the majority opinion,

it is of no moment that “[t]he Board has arranged tax-exempt

financing, for example, for a number of colleges and

universities with and without a religious affiliation, as well as

for low-income housing projects, the Country Music Hall of

Fame, the Easter Seal Society, retirement centers, the Jewish

Community Center, the Young Mens Christian Association,

Nashville Public Radio.” As recognized by the Supreme Court,

there is a distinction between a “pervasively sectarian”

institution and a “religiously affiliated” one. See Johnson, 241

F.3d at 510 (“A pervasively sectarian institution is one whose

religious functions cannot be separated from its non-religious

functions; an institution is not pervasively sectarian merely

because it is religiously affiliated.”) (citing Hunt, 413 U.S. at

743); Columbia Union I, 159 F.3d at 158 (citing Roemer, 426

U.S. at 750.) Further, it is of no legal significance that “no

claim is made that the Board ever favored or disfavored one

religion over another.” See Zelman, 122 S. Ct. at 2505 (Breyer,

J. dissenting opinion) (noting “the development of

constitutional doctrine that reads the Establishment Clause as

69a

avoiding religious strife, not by providing every religion with

_ n equal opportunity (say, to secure state funding or to pray in

public schools), but by drawing fairly clear lines of separation

between church and State”) (emphasis in Original). What

matters in this case, then, is only whether the state aid provided

to Lipscomb, a pervasively sectarian institution, is in violation

of the Establishment Clause.

The district court properly concluded that the

Establishment Clause was violated because Lipscomb received

a direct economic benefit from the government, which resulted

in excessive entanglement of the government with the religious

institution. Although the district court noted that “[t]here is no

Single, clear definition of ‘direct benefit’ to control this

analysis,” Black’s Law Dictionary defines “direct” in the

relevant sense as “[i]mmediate; proximate; by the shortest

course; without circularity; operating by an immediate

connection or relation, instead of operating through a medium;

the opposite of indirect.” Black’s Law Dictionary 459 (6th ed.

1990). In contrast, “indirect” is defined as “[nJot direct in

relation or connection; not having an immediate bearing or

application; not related in the natural way.” Id. at 773.

As the district court correctly noted, the Board and Metro

were both directly connected to the Project benefiting

Lipscomb. According to the official statement regarding the

issuance of $15 million in educational facilities refunding

bonds,

The Issuer [the Board] was created on May 6,

1959 pursuant to the Act as a public corporation and

instrumentality of the Metropolitan Government of

Nashville and Davidson County, Tennessee, for the

purpose, among other things, of financing educational

facilities with a view to promoting the education of

the people of the State of Tennessee. The Issuer is

70a

authorized by the Act to issue revenue bonds,

including refunding bonds, payable solely from the

revenues and receipts from any such facilities and

secured by a pledge of said revenues and receipts.

(J.A. at 130-31.) Thus, contrary to the protestations of the

Board and Metro, it is clear that because the Board is an

instrumentality of Metro, both Defendants were involved in the

project benefiting Lipscomb, notwithstanding their separate

legal identity. Further, the district court properly rejected

Metro’s contention that it could not be liable for an

Establishment Clause violation in this case because it only

provided “host approval” for the bonds to be federally tax

exempt. As the district court properly noted, Metro’s role in the

financing was critical because the bonds could not have been

issued as federally tax exempt without Metro’s participation in

approving the bond issue.

Under the terms of the statute, local governments are

authorized to offer low-interest loans by making funds

available through the issuance of tax-exempt municipal bonds.

Here, Lipscomb approached the Board seeking a low-interest .

development loan funded by the proceeds of the tax-exempt

bond issuance. While the money that went to Lipscomb

ultimately came from private investors who purchased the

tax-exempt revenue bonds, and while Lipscomb must repay

Sovran Bank for the loan, the direct economic benefit that

Lipscomb received from the governmental entities, as the

~ district court pointed out, was the low-interest “loan from the

Board and, hence, from Metro.” Steele, 117 F. Supp.2d at 717.

Thus, even though there was no direct transfer of money

from the Board to Lipscomb, the district court correctly found

that “[t]he money went directly to Lipscomb in the form of a

loan from the Board, an instrumentality of Metro.” Id.,117F. -

Tla

Supp.2d at 720. As_a result of the low-interest loan of $15

million originated by the Board at Lipscomb’s request,

Lipscomb thus saved about 30% of the cost of its campus

building projects. These savings enabled Lipscomb to fund the ~~

new library, intramural sports building and field, parking lots,

landscaping, computer mainframe, baseball Stadium, tennis af

courts, fiber optic network, a pedestrian walkway, and renovate

its administration and business school buildings. Through the

low-interest loan, Lipscomb was thereby able to improve its

facilities to increase its student enrollment to 3,000, and thus

advance its sectarian mission.

- The district court also properly rejected Defendants’

argument that Lipscomb’s economic benefit came from the

bond purchasers who purchased the tax-exempt revenue bonds,

anc not from the government. Properly understood, Lipscomb____

received a direct economic benefit in the form of a low-interest

government sponsored loan. For Establishment Clause

purposes, it is immaterial that the Board subsequently assigned

the. loan to Sovran Bank.

The district court also correctly rejected Defendants’

argu.nent that the bondholders, not Lipscomb, are the true

beneficiaries of the aid program. As the district court properly

noted, the Supreme Court in Hunt examined a similar

transaction and found that “[t]he income tax-exempt status of

the interest enables the Authority, as an instrumentality of the

State, to market the bonds-at a Significantly lower rate of

interest than the educational institution would be forced to pay

if it borrowed the money by conventional private financing.”

Steele, 117 F.Supp.2d at 717 (quoting Hunt, 413 U.S. at 739).

Thus, the district court rightly concluded that “Lipscomb

received a flow of funds into its coffers provided by a loan

from the Board. These funds did not merely supplement the

teaching of secular subjects at Lipscomb; they were central to

the school’s stated goal of increasing enrollment. If Lipscomb’s

72a

mission is to promote Churches of Christ doctrine, then Metro,

through the Board, provided aid to promote Churches of Christ

doctrine.” Steele, 117 F. Supp.2d at 718.

It should be pointed out, af this juncture, that

characterizing the role of the state as a “mere conduit” on the

basis that the use of governmental funds is not involved ignores

the fundamental character of the government’s participation in

this kind of financing arrangement. In this respect, it is

important to examine the reasoning of the Virginia Supreme

Court in Lynn, which found that the governmental aid involved

in the revenue-bond financing in that case did not amount to

“direct aid” to Regent University, a pervasively sectarian

educational institution, because no governmental aid was

received by the University since the bond proceeds are funds of

private investors. 538 S.E.2d at 638. According to—Lynn,

“Regent receives these funds because of the genuinely

independent choices of investors,” whose decisions to purchase

the bonds “cannot be attributed to state decision making.” Id.

at 639 (citing Zobrest v. Catalina Foothills Sch. Dist., 509 U.S.

1, 10 (1993)). Accordingly, the Virginia Supreme Court

concluded that there was no Establishment Clause violation

because “[n]o government funds ever reach Regent’s coffers.”

Id.

, What is being ignored in this account is the fact that the

government provides the pervasively sectarian educational

institution with a direct economic benefit in the form of a

low-interest loan, which the institution would not be able to

obtain without the direct participation of the government. Thus,

although it is true that no state funds are being transferred

through this kind of financing mechanism, the relevant question

is whether the government has provided the pervasively

sectarian educational institution with a direct economic benefit.

Contrary to the understanding of the court in Lynn, a direct

economic benefit is not necessarily determined by merely

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looking at whether there was a transference of governmental

money. To constitute a direct economic benefit to a pervasively

sectarian educational institution, it is sufficient that the

government makes it possible for the institution to obtain

economic aid that it would not otherwise be able to obtain

without the government’s direct participation. That no

governmental funds actually reach the coffers of the

pervasively sectarian educational institution does not alter for

one moment the fact that a direct economic benefit accrues to

such an institution as a result of the government’s active

participation in arranging for a low-cost loan that enables the

institution to advance its sectarian mission.

In view of the government’s direct involvement with

advancing the religious mission of a pervasively sectarian

educational institution, it cannot be said that this form of state

aid comes within Walz v. Tax Comm'n, 397 US. 664 (1970),

where the Supreme Court upheld a property tax exemption to

religious organizations for properties used solely for religious

. worship. See Hunt, 413 U.S. at 745 n. 7. As noted in the

concurring opinion of Justice Brennan in Walz, while general

subsidies of religious activities would constitute impermissible

State involvement with religion, tax exemptions “constitute

mere passive state involvement with religion and not the

affirmative involvement characteristic of outright government

subsidy.” Walz, 397 U.S. at 690-91. As explained by Justice

Brennan:

_

Tax exemptions and general subsidies, however,

are qualitatively different. Though both provide

economic assistance, they do so in fundamentally

different ways. A subsidy involves the direct transfer

of public monies to the subsidized enterprise and uses

resources exacted from the taxpayers as a whole. An

exemption, on the other hand, involves no such

transfer. It assists the exempted enterprise only

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passively, by relieving a privately funded venture of

the burden of paying taxes.

Id. (footnotes omitted.) Thus, in finding that the property

exemptions in question did not rise to the level of excessive

governmental involvement, Justice Brennan noted:

To the extent that the exemptions further secular ends,

they do not advance “essentially religious purposes.”

To the extent that purely religious activities are

benefited by the exemptions, the benefit is passive.

Government does not affirmatively foster these

activities by exempting religious organizations from

taxes, as it would were it to subsidize them. The

exemption simply leaves untouched that which

adherents of the organization bring into being and

maintain.

Id. at 693.

Although no state funds were transferred through the

revenue-bond financing employed in this case, the form of state

aid at issue, however, exhibits the “affirmative involvement

characteristic of outright governmental subsidy.” Jd. at 691.

Here, the Board and Metro do not play a “passive” role, but

rather “affirmatively foster” the activities of Lipscomb by

acceding to its request for a low-interest loan funded by

tax-exempt revenue bonds. Moreover, the tax-exempt revenue

financing does not “simply leave[ ] untouched that which

adherents of the organization bring into being and maintain.”

Id. Instead, the issuance of the low-interest loan to the

pervasively sectarian educational institution in this case

“employs the organs of government for essentially religious

purposes” by allowing Lipscomb to fund improvements to its

University in order to advance its sectarian mission. Jd. By

providing a low-interest loan funded by tax-exempt revenue

bonds to a pervasively sectarian educational institution, the

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Board and Metro provided the kind of State aid that is

characteristic of a direct governmental subsidy.

Consequently, given Lipscomb’s pervasively sectarian

character, it must be concluded that Lipscomb’s receipt of a

direct economic benefit in the form of a low-interest $15

million loan resulted in excessive governmental entanglement

with the religious mission of the University. In view of

Lipscomb’ s “character and purposes,” Agostini, 521 U.S. at 232

(quoting Lemon, 403 U.S. at 615), its “secular activities cannot

be separated from sectarian ones.” Roemer, 426 U.S. at 755.

Because the religious and secular functions are inseparable at

Lipscomb, “no safeguard can ensure that direct monetary aid,

even if designated to fund the school’s secular functions, will

not aid its religious mission.” Columbia College I, 159 F.3d at

158 (citing Roemer, 426 U.S. at 758 n. 21.) So even though the

loan agreement explicitly prohibits Lipscomb from using any

bond-financed facilities for religious purposes, there is no way

to prevent that from happening here because of the University’s

pervasively religious character. Since the sectarian and secular

activities at Lipscomb are so inextricably intertwined, the

government cannot avoid excessive entanglement with the

sectarian mission of the University. Agostini, 521 U.S. at 234.

Accordingly, the low-interest loan arranged by the Board

through the issuance of the tax-exempt revenue bonds to

Lipscomb results in a violation of the Establishment Clause.

Indeed, it is not at all clear that Lipscomb would have been able

to proceed with its construction and renovation project without

the issuance of the tax-exempt revenue bonds; certainly, the

record indicates that it would not have been possible to proceed

on such financially favorable terms.

The Supreme Court’s recent decision in Zelman, 122 S. Ct.

at 2460, does not alter this conclusion, but indeed supports it.

As noted by the Court in Zelman, “our decisions have drawn a

consistent distinction between government programs that

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provide aid directly to religious schools . . . and programs of

true private choice, in which government aid reaches religious

schools only as a result of the genuine and independent choices

of private individuals.” Jd. at 2465 (citations omitted.).° The

Court added:

Mueller [v. Allen, 463 U.S. 388 (1983)], Witters

[v. Washington Dept. of Servs. for Blind, 474 U.S.

481 (1986)], and Zobrest [v. Catalina Foothills

School Dist., 509 U.S. 1 (1993)] thus make clear that

where a government aid program is neutral with

respect to religion, and provides assistance directly to

a broad class of citizens who, in turn, direct

government aid to religious schools wholly as a result

of their own genuine and independent private choice,

the program is not readily subject to challenge under

the Establishment Clause. A program that shares these

features permits government aid to reach religious

institutions only by way of the deliberate choices of

numerous individual recipients. The incidental

advancement of a religious mission, or the perceived

endorsement of a religious message, is reasonably

attributable to the individual recipient, not to the

government, whose role ends with the disbursement

of benefits.

Id. at 2467.

The situation is quite different, though, when the

government aid program provides a direct economic benefit to

a pervasively religious educational institution and thereby

advances its religious objectives. For unlike state aid to

* The majority opinion runs this distinction together, citing in footnote

three cases involving government aid provided directly to religious schools

with those involving government aid that reaches religious schools through

||

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individual recipients who choose to advance the religious

mission of an educational institution, the government’s role

does not end with the disbursement of benefits when economic

aid is made directly to a pervasively religious educational

institution, such as Lipscomb. In the case of a pervasively

sectarian educational institution, such direct economic aid by

the state is, by definition, inextricably intertwined with the

religious mission of the school so as to establish that the

government is endorsing the sectarian character of the

institution in violation of the Establishment Clause of the

United States Constitution. To permit such state aid to a

pervasively sectarian educational institution does not merely

“remove a brick from the wall that was designed to separate

religion and government,” Zelman, 122 S. Ct. at 2485 (Stevens,

J. dissenting opinion); it leaves a gaping hole in the wall

separating church and state.

CONCLUSION

Based upon the foregoing, I would AFFIRM the district

court’s order granting Plaintiffs’ motion for summary

judgment, denying Defendants’ motions for summary

judgment, and entering a permanent injunction prohibiting the

, Board and Metro from issuing additional tax-exempt bonds to

Lipscomb or tax-exempt bonds to any pervasively sectarian

institution.

78a

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

Nos. 00-6646/00-6647/00-6648/00-6649

HAROLD E. STEELE; DON PETERSON; Rev. DAVID MAYNARD;

HARMON WRAY; Rev. TOM BAKER, JR.,

Plaintiffs-Appellees,

v.

INDUSTRIAL DEVELOPMENT BOARD OF

METROPOLITAN GOVERNMENT NASHVILLE (00-6648);

METROPOLITAN GOVERNMENT OF NASHVILLE (00-6646);

DAVID LIPSCOMB UNIVERSITY (00-6647);

NATIONSBANK (00-6649);

NATIONSBANK/TENNESSEE (00-6649),

Defendants-Appellants.

Before: NORRIS and CLAY, Circuit Judges; SARGUS,

District Judge.

JUDGMENT

On Appeal from the United States District Court

for the Middle District of Tennessee at Nashville.

FILED

AUG 14 2002

LEONARD GREEN, CLERK

THIS CAUSE was heard on the record from the district

court and was argued by counsel.

IN CONSIDERATION WHEREOF, it is ORDERED that

the district court’s grant of summary judgment in favor of the

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plaintiffs is REVERSED. IT IS FURTHER ORDERED that

the district court’s denial of summary judgment as to

defendants Metropolitan Government of Nashville and David

Lipscomb University is REVERSED.

ENTERED BY ORDER OF THE COURT

—/s/_Leonard Green

Leonard Green, Clerk

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APPENDIX B

IN THE UNITED STATES DISTRICT COURT

MIDDLE DISTRICT OF TENNESSEE

NASHVILLE DIVISION

HAROLD E. STEELE, DON PETERSON,

REV. DAVID MAYNARD, HARMON WRAY,

REV. TOM BAKER, JR.., Individually, and as State Tax

Payers and as Members of Americans for Religious Liberty;

and AMERICANS FOR RELIGIOUS LIBERTY

a Foreign, Not-For-Profit Corporation,

Plaintiffs,

v.

THE INDUSTRIAL DEVELOPMENT BOARD OF THE

METROPOLITAN GOVERNMENT OF NASHVILLE

AND DAVIDSON COUNTY; THE METROPOLITAN

GOVERNMENT OF NASHVILLE AND DAVIDSON

COUNTY; DAVID LIPSCOMB UNIVERSITY; SOVRAN

BANK; SOVRAN BANK/ TENNESSEE.

Defendants.

: Civil No. 3:91-0421

Judge Trauger

ORDER

For the reasons express in the accompanying -

Memorandum, the plaintiffs’ Motion for Summary Judgment

(Docket No. 258) is GRANTED. The Motions for Summary

Judgment filed by Metropolitan Government of Nashville and

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Davidson County (Docket No. 189 (and by David Lipscomb

University (Docket No. 193) are DENIED.

A permanent injunction is hereby ISSUED, enjoining the

Industrial Development Board and Metropolitan Government

of Nashville and Davidson County from issuing additional tax-

exempt bonds for the benefit of David Lipscomb University or

for any other pervasively sectarian institution. The plaintiffs

shall be awarded $1.00 each as nominal damages and their

attorney’s fees pursuant to 42 U.S.C. § 1988.

Enter this 24" day of October 2000.

_/s/ Aleta A. Trauger

ALETA A. TRAUGER

United States District Judge

nyc ae

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IN THE UNITED STATES DISTRICT COURT

MIDDLE DISTRICT OF TENNESSEE

NASHVILLE DIVISION

HAROLD E. STEELE, DON PETERSON,

REV. DAVID MAYNARD, HARMON WRAY,

REV. TOM BAKER, JR., Individually, and as State Tax

Payers and as Members of Americans for Religious Liberty;

and AMERICANS FOR RELIGIOUS LIBERTY

a Foreign, Not-For-Profit Corporation,

Plaintiffs,

v.

THE INDUSTRIAL DEVELOPMENT BOARD OF THE

METROPOLITAN GOVERNMENT OF NASHVILLE

AND DAVIDSON COUNTY; THE METROPOLITAN

GOVERNMENT OF NASHVILLE AND DAVIDSON

COUNTY; DAVID LIPSCOMB UNIVERSITY; SOVRAN

BANK; SOVRAN BANK/ TENNESSEE.

Defendants.

Civil No. 3:91-0421

Judge Trauger

MEMORANDUM

In this proceeding to invalidate a political subdivision’s

bond issue to benefit a private, religious university, the

principal inquiry is whether the bond issue violates the

Establishment Clause of the First Amendment of the United

States Constitution.

The court has before it motions for summary judgment

filed by Defendant David Lipscomb University (“Lipscomb”),

Defendant Metropolitan Government of Nashville (“Metro”),

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-

and the plaintiffs. Defendant Industrial Development Board of

the Metropolitan Government of Nashville and Davidson

County (“Industrial Development Board” or “Board”,

Defendant Sovran Bank, and Defendant Sovran

Bank/Tennessee have not filed motions for summary judgment

and have not responded to the plaintiff's motion for summary

judgment.

I. STATEMENT OF FACTS AND PROCEDURAL

HISTORY

David Lipscomb University, founded in 1891, describes

itself as a “liberal arts university.” (Docket No. 269, para. 4) It

is located in Nashville, Tennessee, and has an enrollment of

approximately 2,500 students. (Docket No. 269, para. 4) It is

affiliated with the Churches of Christ, and its primary mission

has been to integrate Christian faith and practice with the

pursuit of academic excellence. (Docket No. 269, para. 4)

During the early 1990s, Lipscomb undertook a major

redevelopment project on its campus. To finance the project,

Lipscomb sought a $15 million, low-interest loan from the

| Industrial Development Board. The Industrial Development

Board approved the loan and financed it by issuing tax-exempt

industrial development bonds worth $15 million.’ The bond

With regard to the nature of Lipscomb, however, the parties have offered

evidence from both time Periods, school years 1989-90 and 1990-91.

Whenever possible, the court has used information relating to the 1989-90

84a

issue was also approved by Metro’s Mayor Bill Boner as

federally tax-exempt. The loan from the proceeds of the bonds

was used in part to construct and equip- a new library, to

renovate and convert the old library into administrative offices,

and to construct a new intramural athletics building (“or student

activitics center’), four new tennis courts, a new baseball

stadium, an intramural field, and an addition to the school’s

Business Center. (Docket No. 192, Cochran Aff., para. 10)

The bonds are typical of industrial revenue bonds that are

commonly issued for educational or industrial purposes. The

bonds were issued by the Board pursuant to its authority under

state law to issue bonds for the financing of projects for “[a]ny

nonprofit educational institution in any manner related to or in

furtherance of the educational purposes of such institution,

including but not limited to classroom, laboratory, housing,

administrative, physical education, and medical research and

treatment facilities.” TENN. CODE ANN. § 7-53-101(11)(A)(vii)

(1990 Supp.).? Because the bonds were issued as education

revenue bonds by the Board, the income produced by the bonds

is exempt from state taxation. In addition, the bonds were

approved by both the Board and Metro’s Mayor under the

provisions of 26 U.S.C. § 103 (1994), making the interest on

the bonds federally tax exempt. Consequently, the bonds carry

a lower interest rate than conventional financing, and Lipscomb

realizes the benefit through the resulting lower interest rate on

its loan from the Board.

year because that is the information that was available to the Board and

Metro when the original bonds were issued and any Establishment Clause

issues would have been considered.

2 Although § 7-53-101 et seq. has remained essentially unchanged

since 1990, the code in effect in May 1990 will be used in this case because

that was the date of the original issuance of the industrial development

bonds.

= '

85a

The plaintiffs are state and local taxpayers residing in the

Nashville area. They contend that the issuance of tax-exempt

revenue bonds for David Lipscomb University provides an

impermissible benefit to a pervasively sectarian institution,

thereby violating the Establishment Clause of the First

Amendment of the United States Constitution. (Docket No.

200) Such aid, they argue, has the impermissible effect of

advancing religion because a substantial portion of Lipscomb’s

functions are subsumed in its religious mission. (Docket No. ;

200) Plaintiffs and/or their counsel objected to the issuance of

the bonds on this basis at public hearings and meetings of the

Board held on April 10, 1990, April 16, 1990,* May 30, 1990

* At the first public hearing, plaintiff's attorney herein, Joe Johnston,

and two ministers spoke against issuing the bonds to Lipscomb. Harmon L.

Wray Jr. (a plaintiff herein), after identifying himself as having received a

Master of Divinity degree from Duke University Divinity School and a

Master of Arts in Religious Ethics from Vanderbilt University, stated, in

part:

As an active church man of another denomination, I

consider my friends at David Libscomb as brothers and sisters in

the Christian faith. But I do not believe that I and other taxpayers

should have to subsidize the University’s development through

the issuance of tax-free bonds.

I am convinced that a very particular version of the

Christian faith pervades every aspect of institutional and campus

life at Lipscomb, and it is evident that the administration, faculty, _

and student body are shot through with this theological

perspective. There is nothing at all wrong with this, except when

the general public is required to help support it through

unconstitutional and unwise administrative decisions made by the

government bodies such as the one here.

(Docket No. 204, Ex. 3, Public Hearing, Transcript of Proceedings, April

16, 1990, pp. 7, 9)

86a

and January 22, 1991.4 (Docket No. 275, para. 9) When the

bonds were approved over their objection, plaintiffs filed suit

in this court on May 30, 1991, as municipal taxpayers

challenging the validity of the Board’s action in issuing tax-

exempt revenue bonds for the benefit of Lipscomb. (Docket

No. 1; Docket No. 268, para. 15) Lead plaintiff Harold E.

Steele died on April 1, 1998. (Docket No. 273, para. 2)

The plaintiffs were found to have standing to bring this suit

as municipal taxpayers who have an interest in preventing their

local government from subsidizing religious institutions.

(Docket No. 83) The plaintiffs argued that the tax base of the

state and local governments was reduced by the tax-exempt

bonds and, therefore, tax dollars were being expended on

behalf of a pervasively religious institution. They asserted that,

if tax-exempt bonds had not been issued, Lipscomb would have

financed all or part of the project through taxable bonds, which

would have provided significant revenue for the city coffers.

Although the Board is an instrumentality of the

Metropolitan Government, the bonds do not constitute an

indebtedness of either the Board or the Metropolitan

Government. (Docket No. 1, attach., Ex. D at 4; Docket No.

197, Cochran Aff., paras. 7-8) Neither the Board nor the

Metropolitan Government can be held liable to pay any portion

of the principal or interest on the bonds or any costs incident to

their issuance. TENN. CODE ANN. § 7-53-306 (1985). No state

or local government tax revenues have been or will be spent as

a result of the issuance of the bonds. (Docket No. 197, Cochran

Aff., para. 7)

‘ The final date, January 22, 1991, relates to the special meeting

considering the proposed redemption of the 1990 bonds and the issuance of

the 1991 bonds. The prior hearings and meetings related to the issuance of

the original bonds.

87a

The judge originally assigned to this case found that, even

if no tax money is spent, taxpayer status is proper grounds for

an Establishment Clause challenge to policies that affect the

City’s general revenue fund. Summary judgment was denied on

those grounds and, on interlocutory appeal, the Sixth Circuit

Court of Appeals upheld the ruling on standing. Steele v. Indus.

Dev. Bd. of the Metro. Gov't of Nashville and Davidson

County, 39 F.3d 1182 (6th Cir.1994)(unpublished table

decision), cert. denied, 515 U.S. 1121, 115 S.Ct. 2275, 132

L.Ed.2d 279 (1995).

Lipscomb submitted a renewed motion for summary

judgment on December 15, 1995, asserting that the “tax

exempt” status the bonds derived from the Board could not

have harmed the plaintiffs because the bonds would not have

fallen under the Hall Income Tax statute anyway. Because the

bonds would mature in less than six months, the university

argued, they were demand instruments, which are not taxable

under the Hall Income Tax statute. The question of whether the

bonds would have fallen under the Hall Income Tax statute if

they had not been issued as tax-exempt bonds was certified to

the Tennessee Supreme Court. The Tennessee Supreme Court

ruled that, under the plain meaning of the law, bonds are not

demand instruments and, therefore, are taxable. Steele v. Indus.

Dev. Bd. of the Metro. Gov't of Nashville and Davidson

County, 950 S.W.2d 345 (1997).

Lipscomb has now filed a third motion for summary

judgment on the merits, alleging that its receipt of tax-exempt

revenue bonds for its facilities expansion project is not a

violation of the Establishment Clause, nor does it have the

primary effect of advancing religion. (Docket No. 193) Metro

has also moved for summary judgment on several grounds.

(Docket No. 189) Oral argument was held May 10, 2000, after

which the court requested that the plaintiffs submit a motion for

summary judgment. The plaintiffs have moved for summary

88a

judgment on the grounds that Lipscomb is so pervasively

sectarian that a substantial portion of its function is subsumed

in its religious mission. (Docket No. 258) As such, the

plaintiffs assert, the $15 million in tax-exempt revenue bonds ~

provided in this case had the impermissible effect of promoting

religion as a matter of law. (Docket No. 258)

IT. ANALYSIS

A. Summary Judgment Standard

Rule 56(c) of the Federal Rules of Civil Procedure

provides that summary judgment may be rendered if “the

pleadings, depositions, answers to interrogatories, and

admissions on file, together with the affidavits, if any, show

that there is no genuine issue as to any material fact and that the

moving party is entitled to a judgment as a matter of law.”

Fed.R.Civ.P. 56(c).

In order to prevail, the movant has the burden of proving

the absence of a genuine issue of material fact as to an essential

element of the opposing party’s claim. Celotex Corp. v. Catrett,

477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 202

(1986); Street v. J.C. Bradford & Co., 886 F.2d 1472, 1479 (6th

Cir.1989). In determining whether the movant has met its

burden, the court must view the evidence in the light most

favorable to the nonmoving party. See Matsushita Elec. Indus.

Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 1356,

89 L.Ed.2d 538 (1986). If the nonmoving party, however, fails

to make a sufficient showing on an essential element of the

case with respect to which the nonmoving party has the burden,

the moving party is entitled to summary judgment as a matter

of law. See Williams v. Ford Motor Co., 187 F.3d 533, 537-38

(6th Cir.1999). :

To preclude summary judgment, the nonmoving party “‘is 7

required to present some significant evidence which makes it

necessary to resolve the parties’ differing versions of the

89a

dispute at trial.” Gaines y. Runyon, 107 F.3d 1171, 1174-75

(6th Cir.1997). The nonmoving party must show that “there is

sufficient evidence favoring the honmoving party for a jury to

return a verdict for that party.” Anderson v. Liberty Lobby Inc.,

477 U.S. 242, 249, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202

(1986). To determine whether the nonmoving party has raised

a genuine issue of material fact, the evidence of the nonmoving

party is to be believed, and all justifiable inferences are to be

drawn in its favor. See id., at 255, 106 S.Ct. at 2513.

The court should also consider whether the evidence

presents “a sufficient disagreement to require submission to a

jury or whether it is so one-sided that one party must prevail as

a matter of law.” Street, 886 F.2d at 1479. If the evidence

Offered by the nonmovant is “merely colorable,” “not

Significantly probative,” or is not enough to lead a fair-minded

jury to find for the nonmoving party, the motion for su

judgment should be granted. Anderson, 477 U.S. at 249-52, 106

S.Ct. at 2510-12.

B. The issuance of Tax-Exempt Bonds

1. Statutory Authority and Standards

for Tax-Exempt Bond Issuance

Under 26 U.S.C. § 103, gross income does not include

interest on any state or local bonds that are both private

activity bonds and qualified under 26 U.S.C. § 141. See 26

U.S.C. § 103(a)(b)(1) (1994). A private activity bond is

defined, in relevant part, under 26 U.S.C. § 141 as any bond

that is part of an issue which meets the “Private loan financing

test.” 26 U.S.C. § 141(a)(2) (1994). The “private loan financing

test” is met where “the amount of the proceeds of the issue

which are to be used (directly or indirectly) to make or finance

loans... . to persons other than governmental units exceeds the

lesser of (A) 5 percent of such proceeds, or (B) $5,000,000.” 26

U.S.C. § 141(c)(1) (1994).

90a

In order for the interest on the bonds to be exempt from

federal taxation, the private activity bonds must also be

qualified under 26 U.S.C. § 141(e) (1994). There are three

criteria that a bond issuance must meet under this section.

First, the bond must fall within one of the enumerated

categories: “(A) an exempt facility bond, (B) a qualified

mortgage bond, (C) a qualified veterans’ mortgage bond, (D) a

qualified small issue bond, (E) a qualified student loan bond,

(F) a qualified redevelopment bond, or (G) a qualified

501(c)(3) bond.” 26 U.S.C. § 141(e)(1) (1994). Second, the

bond issue must meet the volume cap requirements of section

146.° 26 U.S.C. § 141(e)(2) (1994); see also 26 U.S.C. § 146

(1994). Finally, the bond issue must meet the requirements of

each applicable subsection of section 147.26 U.S.C. § 141(e)(3)

(1994). Under the public approval requirement of section

147(f), in order to be a qualified bond a private activity bond

must be approved by both the governmental unit issuing the

bond and the governmental unit that has jurisdiction over the

area in which the facility receiving financing through the bond

proceeds is located. See 26 U.S.C. § 147(f)(2)(A) (1994).

A bond that meets each of these criteria will be designated

as a qualified private activity bond under 26 U.S.C. § 103.

Where the bonds issued are qualified private activity bonds, the

interest from the bonds will be exempt from federal taxation.

26 U.S.C. § 103 (1994).

In this case, the bonds were issued for the benefit of

Defendant David Lipscomb University, a private educational

institution. (Docket No. 259, para. 13; Docket No. 273, para.

>The volume cap requirements of section 146(a) apply to the aggregate

value of private activity bonds issued by the issuer in the calendar year. See

26 U.S.C. § 146(a) (1994). There have been no claims that the Board

exceeded its cap in issuing the bonds at issue in this case, and the court will

presume it did not.

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13) The proceeds of the bonds, in the amount of $15,000,000,

were loaned to Lipscomb for building and renovating facilities

on its campus. (Docket No. 1, para. 28; Docket No. 2, para. 28;

Docket No. 3, para. 8; Docket No. 4, para. 28; Docket No. 273,

para. 6) This meets the “private loan financing test” of section

141(c) because the entire amount of bond proceeds loaned to

Lipscomb exceeded the Statutory minimum loan amount.

Therefore, the bonds may be characterized as private activity

bonds under 26 U.S.C. § 141(a) (1994).

In order to be tax exempt, the bonds must also be qualified

under the provisions of section 14] (¢). 26 U.S.C. § 103 (1994)

The bond issue meets the first criteria for being a qualified

private activity bond under section 141(e)(1) because the

bonds are qualified 501(c)(3) bonds, which is one of the

enumerated categories of bond types under this section. See 26

U.S.C. § 141(e)(1) ( 1994). A qualified 501(c)(3) bond is

defined in section 145(a) as a private activity bond where “all

property which is to be provided by the net proceeds of the

issue is to be owned by a 501(c)(3) organization.” 26 U.S.C.

§ 145(a)(1) (1994). All of the proceeds of the $15,000,000

bond issue were loaned to Lipscomb for use in building new

facilities and in renovating existing facilities. (Docket No. 191,

para. 10; Docket No. 192, Cochran Aff., para.

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