Bankrupting the faith.

• Author: Foohey, Pamela
• Position: I. Introduction into III. Efficiencies and Outcomes A. Responsive Bankruptcy Courts, p. 719-744

TABLE OF CONTENTS I. INTRODUCTION II. IDENTIFYING RELIGIOUS BANKRUPTCIES A. Methodology and Data Table 1: Ten Jurisdictions with Greatest Percentage of Religious Organization Filings During Study Timeframe B. Characteristics of Faith-Based Organization Debtors Table 2: Main Operation Type of Unique Religious Organization Chapter 11 Debtors Table 3: Financial and Other Characteristics of Religious Organization Chapter 11 Debtors III. EFFICIENCIES AND OUTCOMES A. Responsive Bankruptcy Courts 1. Identifying the Doomed to Fail Table 4: Months to Disposition of Religious Organization Chapter 11 Debtors' Cases 2. Influence of Debtors, Creditors, and Other Parties Table 5: Party Filing Successful Motion to Dismiss B. Varieties of Outcomes Table 6: Outcomes of Religious Organization Debtors ' Cases IV. KEEPING THE FAITH Table 7: Main Precipitators of Filing, Religious Organization Debtors' Cases with Plans A. Coping During the Great Recession B. Resuscitating a Failing Congregation C. Benefits of Chapter 11 V. IMPLICATIONS FOR CHAPTER 11 VI. CONCLUSION I. INTRODUCTION

"As a pastor, God trusts you with the spiritual guidance of His people and the handling of His money."--Dave Ramsey (1)

Why would a church, synagogue, or religious school seek to reorganize under the Bankruptcy Code? What do their filings reveal about the use and effectiveness of Chapter 11? Before a string of Roman Catholic dioceses sought bankruptcy protection to handle litigation stemming from sexual abuse allegations, (2) the notion of religious organizations (3) filing for bankruptcy perhaps seemed unfathomable. (4) Nonetheless, between 2006 and 2011, faith-based institutions located throughout the United States filed over 500 petitions under Chapter 11. (5)

One of the most publicized filings was that of Crystal Cathedral Ministries, (6) the home of the internationally-distributed televangelist show and North America's longest running televised church service "Hour of Power." (7) Crystal Cathedral Ministries' road to bankruptcy began with the retirement of its founder. (8) The replacement pastor resigned after three unsettling years during which the church experienced unrest and member attrition. (9) Throughout these years, the economic downturn also took its toll, and between 2008 and 2010 Crystal Cathedral Ministries' gross revenue plummeted from almost $55 million to below $25 million. (10) By the time it filed under Chapter 11, nearly a dozen creditors had instigated lawsuits against it for unpaid debts. (11)

However, Catholic dioceses and megachurches are not the only religious institutions seeking to reorganize. (12) Instead, they are the minority. (13) This Article presents the results of a comprehensive empirical study of faith-based organizations that filed under Chapter 11 from the beginning of 2006 to the end of 2011, culled from a review of over 60,000 bankruptcy petitions. (14)

This Article examines the institutions' characteristics, reasons for filing, and case outcomes to investigate what benefits Chapter 11 brings to the organizations and whether bankruptcy is an effective solution to their financial problems. Based on the successful reorganizations and continued operations of some of the debtors in the study, it finds that Chapter 11 has the potential to provide a productive means for addressing their financial problems by offering religious organizations an avenue to rehabilitate their operations following economic downturns, failures and transitions in leadership, and standstills in negotiating with creditors. (15) In exploring these Chapter 11 cases, this Article not only reveals the previously unreported prevalence of religious organizations' bankruptcies, (16) but it also adds to only recently developing scholarly discussions of nonprofit bankruptcies, (17) providing groundwork for future consideration of the Code's application to nonprofit entities. (18)

Further, drawing upon the religious organization cases, the Article responds to two broader debates about Chapter 11: the role of bankruptcy courts in adjudicating these cases, and the broad purposes of business reorganization. As to the former, an assessment of the religious organization cases parallels recent studies suggesting that Chapter 11 is not an inefficient method for addressing the financial problems of corporations. (19) The review additionally shows that a greater percentage of debtors confirm and consummate plans or otherwise benefit from Chapter 11 than historically thought. (20) As to the latter, in considering whether the religious organization cases focus more on preserving going-concern value (21) or keeping owner-operators and their small businesses together, the analysis reveals that the cases straddle these two accounts of Chapter 11, thereby identifying a set of cases that implicate multiple theories of business reorganization. (22)

For example, Ark of Safety Apostolic Faith Temple's (Ark of Safety) story encompasses many of the problems that the religious organizations in this study faced before filing. Formed in 1998 by Bishop Herman Jackson, Ark of Safety offered spiritual services and community outreach to the residents of Cicero, Illinois, a town ten miles west of Chicago. (23) Bishop Jackson held the church's first worship service in a small storefront. (24) The ministry grew and relocated to a 24,000 square foot building, purchased and owned by the church as a nonprofit corporation. (25) When Bishop Jackson divorced in 2008, "confusion and devastation" ensued, forming a gap within the church administration. (26) This resulted in decreased attendance and a significant portion of the members leaving the ministry. (27) Though many members stayed committed to Bishop Jackson and the congregation, (28) the souring economy led to layoffs, leaving many remaining parishioners unable to donate as much as they had in the past. (29) The economy further affected the church's financial condition when its daycare tenant abruptly ended its lease. (30) This added to the reduction in Ark of Safety's revenues and led to even more member attrition as families with children enrolled in the defunct daycare also left the church. (31) Ark of Safety struggled to find a new daycare tenant; once it did, it took more than a year before the new tenant could secure the required operating licenses. (32)

By early 2010, Ark of Safety could no longer remain current on its financial obligations. (33) Most distressing was its inability to pay the $1 million mortgage on its church building valued at $1.2 million. (34) Otherwise, it owed about $150,000 to unsecured creditors, and owned a church organ...