CHURCH MEMBERS IN CHURCH BANKRUPTICIES

If a church slides into bankruptcy and decides to sell assets to extricate itself, are the members of the church entitled to be heard? Or, are the church members like common stock shareholders and simply along for the ride?

The federal bankruptcy court hearing In re: Sindesmos Hellinikes-Kinotitos of Chicago, Debtor, Memorandum Decision (ND ILL, ED, Bankr., 2019) faced a motion by church members to void an approved sale of real property made by church leadership to satisfy secured creditors. In order to have standing to challenge the authority of church leadership to approve the sale of property, the church members had to show (1) the church intended to vest in church members “a property right sufficient to require service” required by the bankruptcy code and (2) “sufficient to create a pecuniary interest in the outcome of the sale.” To determine if the church intended to create property rights in church members could have required the Court to “probe into the allocation of power within the church.” The Court declined to make that dive but rather relied on state law that determined the “trustees” of a church had the authority to dispose of church assets. The Court noted that the church members may have had the right to challenge the leadership’s decision to sell by invoking “Dispute Resolution Procedures” set forth in the denominational governance documents but did not do so. Because of the absence of a property right conferred by the church on its church members, the church as debtor had no duty to provide notice. In any event, the bankruptcy in question was high profile and reported in the national news because it involved the financial failure of a venerable church, which the Court noted, too.

It seems rather likely that if church members could not prevent the financial failure of their church in the first instance, they would have no unsatisfied property right to assert to stop foreclosures and asset sales. Moreover, church members attempts to engage meaningfully in the bankruptcy proceedings will likely be too late if they did not engage meaningfully before, especially if the opportunity to intervene was well documented. In most foreclosures it would be. In any event, church members will have to demonstrate a property interest greater than that of a common stock shareholder in order to have a seat at the bankruptcy table.

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