Fortunately, there are few church bankruptcies. The bankruptcies that are of note are usually of larger hierarchical church organizations. Local churches may be foreclosed but after that typically they simply dissipate or meet in rented space or homes.
In Re: The Archdiocese of Saint Paul and Minneapolis, Slip Op. (8th Cir. 2018), four hundred clergy sexual abuse claimants represented by a creditors committee sought to consolidate all of the 200 affiliated non-profit corporations related to the archdiocese so that their assets could be added to the estate of the archdiocese. These 200 affiliated non-profit corporations included local parish churches, schools, charities and foundations. The 200 affiliated non-profit corporations were formed consistent with state law and as a result their boards were composed of the archbishop, vicar general, parish priest and two lay members appointed by the other three. The affiliates were allegedly directly or heavily controlled by the archbishop, and occasionally abolished some of the affiliates. However, the Unites States Court of Appeals for the 8th Circuit affirmed the trial courts that refused to grant consolidation. The 8th Circuit noted that the bankruptcy code allowed substantive consolidation only as an extra-ordinary equitable remedy to be ordered in rare cases. The occasional failure to adhere to corporate forms or the occasional discontinuation of an affiliate and absorption of its assets was not enough to warrant the remedy. The remedy was generally expected to be used only when affiliates were part of a Ponzi scheme or were, in fact, mere alter egos of the debtor, neither of which were before the trial court.
Failure to follow corporate forms if sufficiently pervasive that it results in commingling of assets may lead to a conclusion an affiliate is a mere alter ego. The sufficiency would seem to be reached if corporate forms are disregarded in a cavalier or criminal manner and not in a few isolated incidents. That the archbishop served on every board and had the power to remove board members, in the case reported herein, resulted as much from state corporation law applicable to all non-profit corporations. Thus, state corporation law should be consulted to make sure the composition of affiliate’s boards is either expressly authorized or expressly required.