Baltimore Lutheran High School Ass'n v. Employment Security Administration

CHARLES E. ORTH, Jr., Associate Judge of the Court of Appeals (retired), Specially Assigned. This case began almost eight years ago, prompted by the amendment of the Maryland Unemployment Insurance Law to conform to the Federal Unemployment Tax Act. See Acts 1977, Ch. 919. 1 Compare Maryland Code (1957, 1979 Repl.Vol.) Art. 95A, § 20(g)(7)(v)B and C and 26 U.S.Code § 3309(b)(1)(A) and (B) and (2) (1982). Subparagraphs B and C of § 20(g)(7)(v) of the Maryland Law as amended designate two of the types of employment which are not included in the Law: B. Service by an individual in the employ of ... an organization which is operated primarily for religious purposes and which is operated, supervised, controlled, or principally supported by a church or convention or association of churches; C. Service by a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry or by a member of a religious order in the exercise of duties required by that order.

Baltimore Lutheran High School Association, Inc. (Lutheran) is composed of Lutheran Churches, each of which is ⁶⁵⁴ a member of the Missouri Synod. Lutheran, separately incorporated, operates the Baltimore Lutheran High School (the School). Lutheran thought that the School was “operated primarily for religious purposes” and in November 1977 sought a ruling from the Employment Security Administration 2 to that effect so that persons who performed services for the School would be exempt from the provisions of the Maryland Unemployment Insurance Law. Lutheran was partially successful in its effort.

The Executive Director of the Employment Security Administration determined that those persons meeting the qualifications of subparagraph C who performed services for the School were exempt from unemployment insurance coverage. 3 But the Executive Director also determined that those persons who performed services for the School, other than those qualified under subparagraph C, were subject to unemployment coverage as not exempt under subparagraph B. He instructed the Division of Unemployment Insurance to take action accordingly. Lutheran was aggrieved by the latter determination. It took the issue to the Board of Appeals (Board I). The Board, however, reached the same determination as had the Executive Director.

Lutheran looked to the Superior Court of Baltimore City; that court affirmed the Board. Lutheran was not assuaged. It noted an appeal to the Court of Special Appeals. 4 We issued a ⁶⁵⁵ writ of certiorari before decision by that court and reported our decision in Employ. Sec. v. Balto.

Lutheran H.S., 291 Md. 750 , 436 A.2d 481 (1981) {Lutheran H.S. I). We remanded the case to the Board of Appeals (Board II) 5 without affirmance or reversal. Our decision in Lutheran H.S. I was rendered in the light of St. Martin Evangelical Lutheran Church v. South Dakota, 451 U.S. 772 , 101 S.Ct. 2142 , 68 L.Ed.2d 612 (1981). St. Martin concerned the unemployment tax status under § 3309(b) of the Federal Act and under the complementary South Dakota statute, of those schools which had no legal identity separate from a church, 451 U.S. at 782 -83 n. 12, 101 S.Ct. at 2148 -49 n. 12.

We recognized that St. Martin is not dispositive of the claim here because Lutheran is separately incorporated and operates the School. Lutheran H.S. I, 291 Md. at 756, 436 A.2d 481 . It was clear under St. Martin, however, that in order for Lutheran to establish an exemption, it must, as a separately incorporated organization, satisfy the requirements of § 3309(b)(1)(B) [of the Federal Act and § 20(g)(7)(v)B of the complementary Maryland Law]: (1) that the organization “is operated primarily for religious purposes,” and (2) that it is “operated, supervised, controlled or principally supported by a church or convention or association of churches.” 451 U.S. at 782 -783 n. 12, 101 S.Ct. at 2148 -49 n. 12. ⁶⁵⁶ Therefore, the initial question before us was the first requirement of the statutes—whether Lutheran operates the School primarily for religious purposes. 6 Lutheran H.S. I, 291 Md. at 757, 486 A.2d 481 . St. Martin did not articulate the factors to be taken into account in determining whether a school run by an independently incorporated organization was operated primarily for religious purposes.

We found in Lutheran H.S. I , however, that in applying standards in other contexts, the Supreme Court has identified appropriate factors. Id. at 757, 436 A.2d 481 . We reviewed the relevant decisions of the Court, id. at 757-761, 436 A.2d 481 , and set out those factors that appropriately may be taken into account, id. at 761, 436 A.2d 481 . We applied them to the operation of the School.

We set out in detail, as disclosed by the record, the composition of Lutheran, the supervision of the School and its funding, the purpose of the Association, the composition of the student body and the faculty of the School, the standards and the requirements of its educational process, and the part religion plays therein. Id. at 761-765, 436 A.2d 481 . We observed.: There was much evidence intended to show that religious indoctrination permeates the educational process within Lutheran High. However, there was no evidence to show the nature of the mandatory chapel services.

There was no evidence to show whether the religion courses taught at the school were devoted to deepening religious experiences in the particular faith rather than teaching a range of human religious experiences as an academic discipline. In addition, while there was testimony that religion is taught in every nontheological course, and that each faculty member is trained to teach all subjects from a Christian viewpoint according to the doctrine enunciated by the Synod, no details were provided as to the impact of religion on the instructional meth ⁶⁵⁷ ods employed and the substantive content presented. More particularly, no teacher presented any evidence to show how teaching a nontheological course from a Christian viewpoint and according to the standards established by the Synod, differed from teaching such a course according to the academic requirements of the subject matter and the standards established by the State Department of Education. Finally, there was no evidence to show whether the school subscribes to and follows the principles of academic freedom.

Id. at 765, 436 A.2d 481 . We declared: [I]n order to determine whether a school is operated primarily for educational rather than religious purposes, it is necessary to consider whether courses are taught in “an ‘atmosphere of intellectual freedom’ ... ‘without religious pressures,’ ” Roemer [v. Board of Public Works of Maryland], 426 U.S. [736,] 756, 96 S.Ct. [2337, 2349, 49 L.Ed.2d 179 (1976)], and according to the principles of academic freedom. In the absence of evidence to show the substantive content of both theological and nontheological courses, and the instructional methods employed in these courses, there is no basis upon which to make this determination. Id. at 766, 436 A.2d 481 .

We concluded, “Manifestly, in reaching its conclusion, the Board did not take all of the appropriate factors into account.” Id. Although to that point, Lutheran had failed to prove its claim that the School was operated primarily for religious purposes, we believed that, in the circumstances, the purposes of justice would be advanced by permitting further proceedings. We therefore remanded the case to the Board of Appeals without affirmance or reversal, giving Lutheran the opportunity to fill the gaps in the evidence we had noticed and affording the Board the opportunity to reassess Lutheran’s claim by applying, in the light of the entire record, the standard and the appropriate factors we had set forth. Id.

Board II conducted a plenary hearing as directed. Whereupon it held: ⁶⁵⁸ Services performed for Baltimore Lutheran High School by persons who are not ministers of religious education are engaged in covered employment within the meaning of § 20(g)(7)(v)B of the Maryland Unemployment Insurance Law and 26 U.S.C. Section 3309 (b)(1)(B). Board II expressly affirmed the determinations of the Executive Director and of Board I. Lutheran appealed to the Circuit Court for Baltimore County. That court affirmed Board II.

Lutheran appealed.to the Court of Special Appeals and again we granted certiorari before decision by the intermediate court. The key to the appeal now being considered is whether the School is operated primarily for religious purposes. 7 Three separate and distinct administrative bodies have answered this question in the negative. Their decisions have been affirmed by two circuit courts. We must decide initially, within the limits of our authority, whether the decision shall stand.

It is apparent from the decisions of Board II and the Circuit Court of Baltimore County that neither of them believed that Lutheran had adequately met its burden of filling the evidentiary gaps. 8 In reaching its decision, ⁶⁵⁹ Board II adopted, with two exceptions, the findings of fact made by Board I as set out in Lutheran H.S. I at 761-765 , 436 A.2d 481 . 9 The Board made additional factual findings which were supported by the evidence adduced before it. Board II then applied all the factual findings to the appropriate factors set out in Lutheran H.S. I . 10 Board II concluded that the School was not operated primarily for religious purposes. “The primary purpose of Lutheran High School,” it decided, “is to operate a secondary school and impart a secondary education to its students.” At the hearing before Board II on remand the only witness produced by Lutheran was Allan Schmidt, the Principal of the School. We are in accord with the comments of the judge of the Circuit Court for Baltimore County regarding his testimony. A thorough reading of the record in the second hearing indicates that the Board attempted to “consider whether the courses are taught ‘in an atmosphere of intellectual freedom’ ... ‘without religious pressures’ (citation omitted) and according to the principle of academic freedom.” [citing to Lutheran H.S. I] at 766 [ 436 A.2d 481 ].

However, the Board’s efforts were frustrated when the only testimony introduced was that offered by Mr. Schmidt. ⁶⁶⁰ The principal was vague and conclusory as to whether the secular courses were taught “according to the principles of academic freedom.” Id. at 766 [ 436 A.2d 481 ]. When asked to give examples of how the secular classes were taught, Mr. Schmidt stated that in many instances when a teacher noticed that a student was having trouble academically, personally or was a disciplinary problem, the Bible would often be used to give guidance. The principal also relies on the presence of the Lutheran teachers in the classroom to impose religious pressure on students. The judge deemed the statements of Schmidt to be “insufficient to show the Board that classes were not taught in an atmosphere of intellectual freedom”; in other words, Schmidt did not show that intellectual or academic freedom was overwhelmed by religious pressure.

The judge noted this Court’s suggestion that the Board consider testimony from teachers of secular subjects, but Lutheran did not ' offer such testimony for the consideration of the Board. In short, the judge opined, although “[t]he Board considered what little new evidence was brought before it in the second hearing,” Lutheran did not meet its burden of producing evidence legally sufficient to show that the School was operated primarily for religious purposes. He affirmed the decision of Board II. The scope of review of a final decision of an administrative agency is the same in substance whether the agency is under the Administrative Procedure Act or excluded from it under Md.Code (1984) § 10-202 of the State Government Article.

Judicial review of the actions of agencies which are included in the Administrative Procedure Act is as prescribed by SG § 10-215. 11 Por the most part, the scope of judicial review of the decisions of agencies which are excluded from the Administrative Procedure Act is ⁶⁶¹ separately set out in various statutes. 12 Thus, the judicial review of decisions of the administrative body of concern here, the Board of Appeals of the Department of Employment and Training, excluded from the Administrative Procedure Act, SG § 10—202(a)(3)(iii), appears in Art. 95A, § 7(h). It provides, in relevant part: Any party aggrieved by a decision of the Board of Appeals may secure judicial review thereof by appeal to the circuit court of the county____ In any judicial proceeding under this section, the findings of the Board of Appeals as to the facts, if supported by competent, material and substantial evidence in view of the entire record, and in the absence of fraud,[ 13 ] shall be conclusive, and the jurisdiction of said court shall be confined to questions of law____ An appeal may be taken from the decision of the circuit court of the county to the Court of Special Appeals in the same manner, but not inconsistent with the provisions of this article, as is provided in civil cases. The substantiality of the evidence is the common denominator of the scope of judicial review with respect to all administrative agencies. Hammond, C.J., speaking for a majority of this Court in Insurance Comm’r v. Nat’l Bureau, 248 Md. 292 , 236 A.2d 282 (1967), summed it up in this way: Whichever of the recognized tests the court uses—substantiality of the evidence on the record as a whole, clearly erroneous, fairly debatable or against the weight or preponderance of the evidence on the entire record—its appraisal or evaluation must be of the agency’s fact-finding results and not an independent original estimate of or decision on the evidence.

The required process is difficult ⁶⁶² to precisely articulate but it is plain that it requires restrained and disciplined judicial judgment so as not to interfere with the agency’s factual conclusions under any of the tests, all of which are similar. There are differences but they are slight and under any of the standards the judicial review essentially should be limited to whether a reasoning mind reasonably could have reached the factual conclusion the agency reached. This need not and must not be either judicial fact-finding or a substitution of judicial judgment for agency judgment. Id. at 309-310 , 236 A.2d 282 .

That is to say, a reviewing court, be it a circuit court or an appellate court, shall apply the substantial evidence test to the final decisions of an administrative agency, but it must not itself make independent findings of fact or substitute its judgment for that of the agency. Of course, a reviewing court may always determine whether the administrative agency made an error of law. Therefore, ordinarily, the court reviewing a final decision of an administrative agency shall determine (1) the legality of the decision and (2) whether there was substantial evidence from the record as a whole to support the decision. In Bulluck v. Pelham Wood Apts., 283 Md. 505 , 390 A.2d 1119 (1978), Eldridge, J., speaking for the Court and citing and quoting from cases within and without the State, treatises and law journals, discussed the meaning and application of “substantial evidence.” He observed that “substantial evidence” has been defined as such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.

The scope of review is limited to whether a reasoning mind reasonably could have reached the factual conclusion the agency reached. In applying the substantial evidence test, the reviewing court should not substitute its judgment for the expertise of those persons who constitute the administrative agency from which the appeal is taken. The reviewing court also must review the agency’s decision in the light most favorable to the agency, since decisions of administrative agencies are prima facie ⁶⁶³ correct and carry with them the presumption of validity. Furthermore, not only is it the province of the agency to resolve conflicting evidence, but where inconsistent inferences from the same evidence can be drawn, it is for the agency to draw the inferences.

Id. at 512-513 , 390 A.2d 1119 . We affirmed the views expressed in Nat’l Bureau and Bulluck in P.G. Doctor’s Hosp. v. HSCR Comm’n, 302 Md. 193, 200-202 , 486 A.2d 744 (1985) and even more recently in Johns Hopkins Hospital v. Ins. Comm’r, 302 Md. 411, 418 , 488 A.2d 942 (1985). Lutheran has apparently overlooked the limited scope of judicial review of administrative agencies for it does not argue in terms of the function of the reviewing court.

It posits that the testimony of Schmidt was “clear and convincing,” but obviously the Board did not find the testimony clear enough or convincing enough to establish to its satisfaction that the School was operated primarily for religious purposes. Lutheran sets out six reasons which it claims will prove that the School was so operated. These reasons, however, are actually factual findings now suggested by Lutheran, but the Board did not make these findings. It seems that Lutheran would have us act as a trier of fact.

This we may not do. Lutheran argues that Board II ignored certain testimony presented to it, but the record reflects otherwise. Contrary to Lutheran’s contention, the record shows that the Board considered the mandatory chapel services, the Lutheran philosophy of education, the use of the Bible in the classroom and the effect of the teachers’ Christian beliefs in the methodology of education and on classroom content. This evidence, however, did not persuade Board II that the School’s primary purpose was religious.

On our review of the entire record, we believe that a reasoning mind reasonably could have reached the conclusion that the School was not operated primarily for religious purposes. Therefore, since a reviewing court may not substitute its judgment for that of the Board, and since ⁶⁶⁴ the court must review the Board’s decision in the light most favorable to the Board (the Board’s decision is prima facie correct and carries the presumption of validity), the decision of Board II must be left undisturbed. Furthermore, even if conflicting inferences could be drawn from the factual findings made by Board II in the exercise of its function as the trier of fact, that is, it could be inferred that the School was or was not primarily religious, it is for the Board to draw the inference, not the reviewing court. We have followed this principle in the past, see, e.g., Comptroller v. Haskin, 298 Md. 681 , 472 A.2d 70 (1984), and we shall continue to do so.

In reaching its decision, Board II followed the standard and applied the factors we set out in Lutheran H.S. I. Therefore, it made no error of law. We hold that the Circuit Court for Baltimore County did not err, absent a constitutional impediment, in affirming the decision of Board II. Lutheran presented a conditional question in its petition for a writ of certiorari. If we held that the Circuit Court for Baltimore County was correct in upholding the decision of Board II that employees of the School were not exempt from unemployment insurance coverage, then Lutheran' would have us consider whether § 20(g)(7)(v)B of the Maryland Unemployment Insurance Law was constitutionally valid as applied to Lutheran. 14 Inasmuch as we have affirmed the decision of Board II, the conditional question has surfaced.

We did not reach the constitutional issue in Lutheran H.S. I. See 291 Md. at 754 n. 2, 436 A.2d 481 . Board II ⁶⁶⁵ only impliedly indicated that the laws were constitutional by finding that they did not result in excessive governmental entanglement with religion. The Circuit Court for Baltimore County made an express holding that Maryland’s Unemployment Insurance Law was constitutionally valid as applied to Lutheran. The constitutional provision involved is the First-Fourteenth Amendment’s declaration that no law shall be made “respecting an establishment of religion, or prohibiting the free exercise thereof; ____” See Murdock v. Pennsylvania, 319 U.S. 105, 108 , 63 S.Ct. 870, 872 , 87 L.Ed. 1292 (1943); Cantwell v. Connecticut, 310 U.S. 296, 303 , 60 S.Ct. 900, 903 , 84 L.Ed. 1213 (1940).

We need look only to United States v. Lee, 455 U.S. 252 , 102 S.Ct. 1051 , 71 L.Ed.2d 127 (1982) to resolve Lutheran’s constitutional claim with respect to the free exercise of religion. Lee was primarily concerned with social security taxes but there is such an affinity between those taxes and unemployment insurance taxes as to make Lee dispositive. The court noted in Lee : The Social Security Act and its subsequent amendments provide a system of old-age and unemployment benefits. 26 U.S.C. § 3101 et seq. (1976 ed. and Supp. III).

These benefits are supported by various taxes, including, relevant to this appeal, the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) taxes. The FICA tax is a tax paid in part by employees through withholding, 26 U.S.C. § 3101 (1976 ed., Supp. Ill), and in part by employers through an excise tax. 26 U.S.C. § 3111 (1976 ed., Supp. III). The FUTA tax is an excise tax imposed on employers. 26 U.S.C. § 3301 . Both taxes are based on the wages paid to employees, and the recordkeeping and transmittal of funds are obligations of the employer.

Only the FICA tax is collected from self-employed individuals. Id. at 254 n. 1, 102 S.Ct. at 1053 n. 1. Lee was a member of the Old Order Amish and he hired other Amish to work on his farm and in his carpentry shop. He failed to file the quarterly social security tax returns ⁶⁶⁶ required of employers, withhold social security taxes from his employees, or pay the employer’s share of social security taxes.

The Internal Revenue Service assessed him for unpaid employment taxes. He paid a small amount and sued in the United States District Court for the Western District of Pennsylvania for a refund, claiming that imposition of social security taxes violated his First Amendment free exercise rights and those of his Amish employees. The District Court held that the statutes requiring Lee to pay social security and unemployment insurance taxes were unconstitutional as applied. The Supreme Court thought otherwise and reversed the judgment of the District Court.

Id. at 254-256 , 102 S.Ct. at 1053-1055 . In holding that Lee was not entitled to an exemption, the Supreme Court recognized the Amish belief “that there is a religiously based obligation to provide for their fellow members the kind of assistance contemplated by the social security system.” Id. at 257 , 102 S.Ct. at 1055 . The Court accepted Lee’s “contention that both payment and receipt of social security benefits is forbidden by the Amish faith. Because the payment of taxes or receipt of benefits violates Amish religious beliefs, compulsory participation in the social security system interferes with their free exercise rights.” Id.

But that did not end the inquiry. The Court noted, “Not all burdens on religion are unconstitutional.” Id. It declared, “The state may justify a limitation on religious liberty by showing that it is essential to accomplish an overriding governmental interest.” Id. at 257-258 , 102 S.Ct. at 1055 . The Court described the social security system and concluded that “the Government’s interest in assuring mandatory and continuous participation in and contribution to the social security system is very high.” Id. at 258-259 , 102 S.Ct. at 1056 .

It further found that accommodating the Amish belief would “unduly interfere with fulfillment of the governmental interest.” Id. at 259 , 102 S.Ct. at 1056 . It said: “To maintain an organized society that guarantees religious freedom to a great variety of faiths requires that some religious practices yield to the ⁶⁶⁷ common good. Religious beliefs can be accommodated, but there is a point at which accommodation would ‘radically restrict the operating latitude of the legislature.’ ” Id. at 259 , 102 S.Ct. at 1056 ; quoting Braunfeld v. Brown, 366 U.S. 599, 606 , 81 S.Ct. 1144, 1147 , 6 L.Ed.2d 563 (1961) (other citations omitted). Lutheran’s position is far weaker than was that of Lee.

In Lee , as we have seen, the Court took off from the premise that compulsory participation in the social security system interfered with the free exercise rights of the Amish. Lutheran, however, does not make such a claim. There is no suggestion that