Debt Among the Faithful: Churches, Lenders & Troubled Loans in Kansas
88 J. Kan. Bar Assn 6, 34 (2019)
Kansas Bar Journal
June, 2019
By
Michael D. Fielding
I.
Introduction
In
considering some of the grand cathedrals of Europe, Henry
Adams once described a church door as the pons
seclorum, or "the bridge of the ages." In
Adams's estimation, it represented a point of connection
between us and our ancestors, but Adams's notion does not
require a 900-year-old building to make its point. A great
many churches— even those in the relatively young
American Midwest—already have histories that span
several generations. Indeed, part and parcel of a
church's mission is to convey the faith, to pass it on,
not just to friends and neighbors, but across time as well,
to succeeding generations. There is an intentional
intergenerational aspect to churches.
Many
things are capable of traversing this space between past and
present using the church door that Adams imagined as a
figurative bridge, with religious conviction or faith being
chief among them. But there are also more worldly things that
get passed on. In pursuing their missions, many faith-based
institutions borrow money to finance their activities, and
those debts can outlive the generation that created them,
impacting the next generation. As we all know, contexts and
circumstances can change, and the faith community, like the
rest of the world, is not immune to financial hardship.
Furthermore, troubled church loans need not have an
intergenerational quality; after all, loans, like milk, can
sour quickly.
The
intersection of finance and faith-based institutions creates
unique issues for Kansas' commercial lenders. Both
lenders and churches need to have a better understanding of
these matters so they can successfully navigate the
challenges of a troubled church loan. This article addresses
key considerations in that regard. To begin, it is helpful to
analyze the statistical data regarding religious
participation in Kansas, as well as how churches fare when
they file for bankruptcy. The article then discusses the
unique boundaries that exist between religious institutions
and civil courts. Knowing these rules is essential, as
lenders inevitably must rely on the civil law when dealing
with a troubled loan. From there, the article explores
bankruptcy matters unique to churches. Finally, the article
provides some practical guidance for lenders and churches who
are wrestling with non-performing or troubled loans debt
among the faithful
II.
Empirical Data -Churches & Troubled Loans
Religious
Participation in Kansas
To
gauge the wisdom of a business endeavor, it is wise to
explore the marketplace to understand what sort of demand
exists for a product. That concept undoubtedly applies to
entities that make loans to faith-based institutions. To
begin, Kansas has a population of just more than 2.9
million. According to the Pew Research Center
on Religion and Public Life, the vast majority of Kansans (88
percent) believe in God while 79 percent say that religion is
important in their lives. Approximately 76 percent of Kansas
adults identify as Christians. That figure is
predominantly comprised of three major groups: Evangelical
Protestants (31 percent); Mainline Protestants (24 percent);
and Catholics (18 percent). Only 4% of Kansans are of
non-Christian faiths, including Jewish, Muslim, Buddhist and
Hindu. Approximately 20 percent of Kansas
adults are unaffiliated with any religion (i.e., religious
"nones"), and, of this figure, only three
percent consider themselves agnostic while two percent are
atheist. But despite the widespread religious
affiliations of Kansans, the data also reveals a slow but
discern-able trend away from organized
religion.
| Description | 2007 | 2014 |
|
Absolute or fairly certain belief in God |
91%
|
88%
|
|
Religion considered very or somewhat important
in one's life
|
86%
|
79%
|
|
Weekly attendance at religious services
|
48% |
37%
|
|
Monthly/occasional attendance at religious
services
|
30%
|
35%
|
|
Daily or weekly prayer
|
78%
|
74%
|
|
Weekly or monthly feeling of spiritual peace
|
66%
|
76%
|
|
Weekly or monthly scripture study
|
45%
|
44%
|
While
the reasons for declining participation in organized religion
are outside the scope of this article, both churches and
lenders would be wise to consider the impact of these trends.
This is not to say that organized religion is going the way
of the Sony Walkman. After all, the data clearly reveals a
size able portion of the population is very faithful in their
religious participation. But the number of faithful
parishioners relative to the general population is slowly
dwindling. The decline in religious participation means
churches will increasingly be faced with declining numbers
and fewer donations. Less revenue, in turn, will have a range
of implications. In its most benign effects, churches will
increasingly be faced with cutting costs, reducing staff, or
possibly consolidating ever-smaller congregations. In its
worst manifestation churches will seek bankruptcy protection
to restructure their debts in an effort to continue serving
their congregants. One should not extrapolate from current
data trends that future declines will occur at the same pace
as they have over the past few decades. While it is possible
the trend could reverse itself, there is an equally
strong—perhaps stronger—argument that those
trends could accelerate, in which case church funding would
face even more challenges. In other words, what may appear to
be a financial storm on the distant horizon could actually
come upon particular churches much faster than they expect.
And, regardless of the level of church participation, there
are macroeconomic considerations that must be weighed because
anytime the U.S. economy slips into a recession, donations
will decrease and put greater strain on religious
institutions.
Churches,
Troubled Loans & Bankruptcy
Despite
the plethora of different religious institutions in the
United States, there is very little empirical analysis
regarding how churches deal with troubled loans. However, the
existing literature is nonetheless very informative. In 2013,
Professor Pamela Foohey published an empirical study
examining church bankruptcy filings between 2006 and 2011 in
the United States, finding that during this time period over
500 faith-based institutions filed for Chapter 11 bankruptcy
protection. These entities predominantly
operated places of worship, but some also ran schools, food
pantries, daycares, and halfway houses. Christian
denominations comprised the vast majority of bankruptcy
filings (93-4%) with the main operation type being a place of
worship. Catholic diocesan bankruptcies
accounted for less than 2% of the filings.
[14]
The
empirical evidence indicates that Christian congregationalist
churches (e.g., churches governed by a local majority) are
more likely to have financial troubles. Specifically, a
large majority of the Christian church bankruptcy filings
come from "Congregationalist denominations, such as
Pentecostal churches and those of several Baptist
sects." Indeed, "certain Christian
denominations [were] overrepresented in comparison to
congregations nationwide." These results are not
surprising. "These congregations likely are not subject
to broad governing bodies that may monitor their finances and
provide assistance if necessary, potentially motivating their
bankruptcy filings. Rather, they often are ... on their own
with fewer options when they encounter financial
problems."
The
data reveals that the vast majority of religious institutions
that file for Chapter 11 do so because of challenges paying
the mortgages on their real property
[19] In other words, they
file for Chapter 11 so that they can restructure their
mortgage payments and retain their property
[20]
Additionally a bankruptcy filing may be necessary to stop
foreclosure on a daycare or school where the congregants send
their children.
Church
debtors had assets with an average worth $2.8 million ($1.3
million median) with real property constituting $2.6 million
($1.2 million median) of that figure. Total debts
averaged just over $2 million ($964,620 median) with debts
secured by real property averaging $1.7 million ($810,890
median). Churches that file for bankruptcy
tend to have very little unsecured debt. Surprisingly, 72
percent of the debtors were balance-sheet solvent when they
filed for bankruptcy and 76% of the debtors qualified as
small business debtors. Furthermore, the average years of
operation was 23 (with a median of 15).
Church
bankruptcies are generally driven by two main factors: (1)
inability to pay obligations due to reduced income and
congregant job loss as well as refusal by banks to refinance
and (2) dependency on key leaders who either make poor
decisions or leave the church (moving away or death) causing,
in turn, congregants to lose faith or stop attending the
church. Notably, religious institutions that
file for bankruptcy typically have operated for a long time
under the direction of a key clergy leader.
[28]
Furthermore, "the leaders of many of the smaller
congregations lacked business acumen, even more so than
owners of small businesses. Consequently, these
organizations' books and records often were in disarray,
and their leaders generally were less sensitive to the
business aspects of the churches, including not foreseeing
and planning for the impact of the recession on the
congregation's giving."
What
are a church's odds of successfully emerging from Chapter
11? That answer depends on whether the religious institution
is sufficiently strong to...
