Debt Among the Faithful: Churches, Lenders & Troubled Loans in Kansas, 0619 KSBJ, 88 J. Kan. Bar Assn 6, 34 (2019)

AuthorBy Michael D. Fielding
Position88 J. Kan. Bar Assn 6, 34 (2019)

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. Introduction1

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.2 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.3 Approximately 76 percent of Kansas adults identify as Christians.4 That figure is predominantly comprised of three major groups: Evangelical Protestants (31 percent); Mainline Protestants (24 percent); and Catholics (18 percent).5 Only 4% of Kansans are of non-Christian faiths, including Jewish, Muslim, Buddhist and Hindu.6 Approximately 20 percent of Kansas adults are unaffiliated with any religion (i.e., religious "nones"),7 and, of this figure, only three percent consider themselves agnostic while two percent are atheist.8 But despite the widespread religious affiliations of Kansans, the data also reveals a slow but discern-able trend away from organized religion.9

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.10 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.11 These entities predominantly operated places of worship, but some also ran schools, food pantries, daycares, and halfway houses.12 Christian denominations comprised the vast majority of bankruptcy filings (93-4%) with the main operation type being a place of worship.13 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.15 Specifically, a large majority of the Christian church bankruptcy filings come from "Congregationalist denominations, such as Pentecostal churches and those of several Baptist sects."16 Indeed, "certain Christian denominations [were] overrepresented in comparison to congregations nationwide."17 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."18 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.21 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.22 Total debts averaged just over $2 million ($964,620 median) with debts secured by real property averaging $1.7 million ($810,890 median).23 Churches that file for bankruptcy tend to have very little unsecured debt.24 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.25 Furthermore, the average years of operation was 23 (with a median of 15).26 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.27 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."29 What are a church's odds of successfully emerging from Chapter 11? That answer depends on whether the religious institution is sufficiently strong to...

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