Tag: Church bankruptcy

BANKRUPTCY IS NOT ECCLESIASTICAL

In recent years, judgments against churches or denominational level organizations, generally in sexual abuse cases, caused churches and denominations, as well as their insurers, to consider previously unthinkable asset exposure.  When assets cannot be marshalled sufficiently to pay the judgments and preserve the church or denomination as a going concern, other avenues are considered.  One that has been used is bankruptcy.  Unfortunately, bankruptcy is not always a panacea.

In re Roman Catholic Church of the Archdiocese of Santa Fe, Opinion [and Recommendation] (Bkr. D. NM, 2020), the United States Magistrate recommended to the District Judge that the Unsecured Creditors’ Committee be authorized to submit avoidance claims that the Archdiocese, as Debtor in Possession, did not file.  The creditors’ committee alleged that fraudulent transfers were made to a real estate trust, to or among a financial assets trust, or to avoid the parish churches’ claimed interests in property titled in the name of the Archdiocese.  Several years before the bankruptcy petition, the Archdiocese restructured by transferring real estate held in its name to a real estate trust.  Also, much of the real estate was held for the parish churches and actually purchased by the parish churches in prior decades before the parish churches were established as entities such as non-profit corporations.  The federal magistrate noted that some or all of the transactions alleged to be fraudulent might have been made so long ago that the statute of limitations might prohibit further action.  The Archdiocese argued that many of the transfers, especially those involving parish churches, were the result of internal church governance.  The Archdiocese argued the Ecclesiastical Abstention Doctrine would preclude unwinding of those transfers.  The Magistrate recommended the argument be rejected by the District Judge of New Mexico because the bankruptcy code was a Neutral Principle of Law.  The Magistrate recommended that the underlying abuse claims be settled by the Archdiocese and the claimants rather than “millions” of dollars spent resolving fraudulent transfer claims.  The transfers alleged to be fraudulent according to the Magistrate represented $150,000,000 in assets.

The Archdiocese failed to reorganize in the 20th century and the efforts to do so in the 21st century may be judged too late or too suspicious.  The parish churches should have been incorporated, their property should have been titled in the name of the parish church, and warranty deed reservation clauses to the Archdiocese would have probably protected the Archdiocese from defections.  Other church and parachurch organizations should have been formed to fulfill the same function.  In other words, the body should have had many parts by the end of the 20th century.  The lesson should not be lost on other denominations not to repeat the mistake.  The other possible lesson is that bankruptcy protection may sometimes help the claimant more than the respondent, because it forces the respondent to put all of its assets on display.

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.