Andrew Stone Mayo, for God and Money: the Place of the Megachurch Within the Bankruptcy Code

• Publication year: 2011

FOR GOD AND MONEY: THE PLACE OF THE MEGACHURCH WITHIN THE BANKRUPTCY CODE

INTRODUCTION

Creditors cannot force churches into involuntary bankruptcy because they are classified as “eleemosynary” institutions.1 This protection is an exception to the general principles of the Bankruptcy Code (“Code”), which has a well- established policy of providing “equal treatment of creditors while affording the debtor some flexibility in formulating a plan.”2 The policy of equality is attractive to both creditors and debtors. Creditors are guaranteed equal treatment under the law, while debtors are able to work out their financial situations under the protection of the automatic stay.3 The Code, however, also protects certain corporations from involuntary bankruptcy. These are corporations that are not “moneyed, business, or commercial” in nature, including “churches, schools, and charitable organizations and foundations.”4

Megachurches raise serious questions about the scope of this special protection from involuntary bankruptcy.5 The core church aspect of a megachurch—worship, liturgy, mission work, and the like—must be respected. However, churches that engage in non- or quasi-religious activities, such as owning and operating gyms, movie theaters, and amusement parks, should not

be protected from involuntary bankruptcy. Extending protection to these quasi-religious organizations does not adhere to the intentions or fit the definitions of the Code.6

In the past decade, federal circuit courts have begun to recognize that megachurches are qualitatively different than the local parishes protected by the statutory language of the Code.7 However, the Supreme Court has not

1. See 11 U.S.C. §§ 303, 1112(c) (2006) (stating that an involuntary case may only be brought against a corporations that are “moneyed, business, or commercial”).

2. 5 WILLIAM L. NORTON, JR. NORTON BANKR. L. & PRAC. 3D § 97:3 (2010).

3. Id.

4 §§ 303, 1112(c).

5 This Comment is in no way meant to denigrate the megachurch as a religious, social, or civil community.

6 See §§ 303, 1112(c).

1. See, e.g., Ogundipe v. Mukasey, 541 F.3d 257, 263 (4th Cir. 2008) (holding that some megachurches provide for clerics beyond the apparent means of the church); United States v. Gillespie, 452 F.3d 1183, 1191 (10th Cir. 2006) (holding that some megachurches offer services sufficiently unrelated to worship due to their

   addressed the issue of how to distinguish megachurches from their smaller counterparts with respect to bankruptcy proceedings. Moreover, Congress has not adjusted the Code to develop special rules for megachurches. Without a directive from Congress or the Supreme Court, federal courts have been reticent to redefine the place of the megachurch within the economy. Instead, courts adopted a case-by-case approach to understand how a megachurch fits

   within existing statutory schemes.8 While this method has been functional, an

   ad-hoc approach by courts will eventually lead to problems as more megachurches file for bankruptcy.9

   
   

   The question of how to address megachurches within the Code has become more relevant during America’s current economic downturn. Like other businesses and organizations, megachurches struggle to bring in enough revenue to support their expenditures.10 Crystal Cathedral, a California

   megachurch founded in the 1950s that boasts over ten thousand members, announced in April 2010 that it owed creditors over $55 million.11 The church estimated that as many as 185 creditors could be waiting for payment.12 The church stated that it was not looking into bankruptcy, but that it could not afford to pay the creditors at the time.13 The church refused to enter bankruptcy for six months.14 It ignored the complaints of creditors, including those with long-standing ties to the church who had been trying to collect money for

   months with no results.15 Creditors who did not wish to file a lawsuit could only wait and hope that the church would be able to wade through its messy financial situation or eventually file for bankruptcy. However, should the fact that the church owned a campus with soccer fields, a retreat center, and

   
   

   commercial function); United States v. Lamont, 330 F.3d 1249, 1256 (9th Cir. 2003) (stating that some churches may have taken on functions that are sufficiently unrelated to religious worship to fall under the criminal code).

2. See, e.g., Gillespie, 452 F.3d at 1187–88; Lamont, 330 F.3d at 1256.

3. See Jennifer S. Evans-Crowley & Kenneth Pearlman, Six Flags Over Jesus: RLUIPA, Megachurches, and Zoning, 21 TUL. ENVTL. L.J. 203, 204 (2008) (“Those that have adopted [zoning regulation] have taken a variety of approaches . . . that have been only moderately successful . . . . As megachurches continue to spread, communities will need to develop more effective mechanisms to control negative impacts.”).

4. See, e.g., Greg Magnus, Crystal Cathedral Facing Mounting Debt; Creditors Pressing, OCLNN (Mar.

   26, 2010, 7:32 AM), http://www.oclnn.com/orange-county/2010-03-26/business/crystal-cathedral-owes- money-to-vendors.

5. Id.

6. Deepa Bharath, Crystal Cathedral Asks Vendors For Forgiveness, ORANGE COUNTY REGISTER (Apr. 9, 2010, 5:19 PM), http://www.ocregister.com/articles/cathedral-243466-vendors-creditors.html.

7. Magnus, supra note 10.

8. Michael Martinez, Megachurch Crystal Cathedral Ministries Seeks Bankruptcy Protection, CNN (Oct. 18, 2010), http://www.cnn.com/2010/US/10/18/california.mega.church.bankruptcy/index.html.

9. Id.

   camping grounds, change the fact that creditors would have no recourse other than individual lawsuits if the church refused to pay?16

   
   

   The Code does not answer this question. Section 303 dictates when creditors may commence an involuntary bankruptcy:

   
   

   An involuntary case may be commenced only under chapter 7 or 11 of this title . . . and only against a person, except a farmer, family farmer, or a corporation that is not a moneyed, business, or commercial corporation, that may be a debtor under the chapter

   under which such case is commenced.17

   
   

   The statutory notes maintain the prohibition on involuntary bankruptcy suits against “[e]leemosynary institutions, such as churches, schools, and charitable organizations and foundations . . . .”18

   
   

   Furthermore, § 1112 prevents conversion of a case from chapter 11 to chapter 7 bankruptcy against a “corporation that is not a moneyed, business, or commercial corporation . . . .”19 The statutory notes state, “Subsection (c) prohibits the court from converting a case concerning a farmer or an eleemosynary institution to a liquidation case unless the debtor consents.”20 Therefore, a corporation that is not moneyed, business, or commercial cannot be liquidated involuntarily through chapter 7 bankruptcy, even if the

   corporation enters chapter 11 bankruptcy voluntarily.

   
   

   Megachurches, more frequently than other religious organizations, have aspects of both religious and secular organizations; that is, they sometimes operate as a moneyed, business, or commercial corporation that the Code does not protect from involuntary bankruptcy.21 The question is whether the non-

   charitable activities of a megachurch should be classified as eleemosynary and therefore be exempted from involuntary bankruptcy.

   
   

10. See Bharath, supra note 12.

11. 11 U.S.C. § 303 (2006) (italics in original).

18 S. REP. No. 95-989, at 31 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5818.

19 § 1112(c).

20 S. REP. No. 95-989, at 118.

1. See Patricia Leigh Brown, Megachurches as Minitowns, N.Y. TIMES, May 9, 2002, http://www. nytimes.com/2002/05/09/garden/megachurches-as-minitowns.html?scp=1&sq=megachurches%20as%20 minitowns&st=cse; see, e.g., Hoile v. Unity Life Ins. Co., 136 F.2d 133, 135–36 (4th Cir. 1943) (holding that the state legal status of an institution determines if it is “moneyed, business, or commercial”); Alabama & C.R.

   Co. v. Jones, 1 F. Cas. 275, 280 (C.C.S.D. Ala. 1871) (No. 126) (holding that “moneyed, business, or commercial” corporations can be made bankrupt); Rankin v. Florida, A. & G.C.R. Co., 20 F. Cas. 274, 279

   (N.D. Fla. 1868) (No. 11567) (holding that corporations chartered for business are subject to bankruptcy).

   The Code does not require an organization to be exclusively charitable in order to be considered eleemosynary.22 Nor does it preclude wealthy or profitable organizations from the protection against involuntary bankruptcy.23 Churches, schools, and charities cannot be punished for being well-run or successful.24 Instead, the manner in which the organization makes its money

   determines its eleemosynary status.25

   
   

   This Comment analyzes the shortcomings of the Code’s definition of an eleemosynary institution and how certain economic features of megachurches could be better addressed. Part I defines the megachurch and explains its purpose in the community. Part II describes the Code’s approach to eleemosynary institutions and their exemption from involuntary bankruptcy, focusing particularly on the problems that the advisory notes create in dealing with megachurches. Part III addresses how existing tests of eleemosynary status fail to address the complexities of the megachurch. Part IV compares the Code’s treatment and definition of eleemosynary institutions to those of the Fair Labor Standards Act. Part V suggests that churches should be granted a rebuttable presumption of eleemosynary status, which can be overcome by a finding of fraud or abuse. Furthermore, this Comment proposes that if creditors can demonstrate that an organization’s commercial activities outweigh its eleemosynary nature based on a four-factor balancing test, then the organization should likewise be subject to involuntary bankruptcy.

   
   

   This Comment argues that megachurch activities cannot be eleemosynary if they make money through means similar to moneyed, business, or commercial corporations and serve no “religious” purpose.26 Those endeavors should be within the reach of involuntary bankruptcy. As a matter of statutory

   interpretation, the Code needs a test of eleemosynary status that distinguishes between tithes and donations to...