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Bankrupt Churches

posted by Bob Lawless

My colleague, Professor Pamela Foohey, has just posted a paper on SSRN about religious organizations that have filed chapter 11. While the Roman Catholic dioceses bankruptcies have grabbed a lot of attention, Foohey identifies 509 other cases filed by faith-based organizations from 2006 - 2011. The amount of work in this study is impressive. Foohey individually reviewed each of the 60,000+ chapter 11 cases filed during that time frame to find the faith-based bankruptcies. The result is a census of faith-based organizations in chapter 11, including churches, schools, and community-assistance organizations.

Previous scholarship has explored the purposes behind small businesses in chapter 11. Traditionally, chapter 11 has been justified as preserving the going-concern value of the corporate entity. Professors Douglas Baird and Ed Morrison published an important paper challenging this traditional conception. Their data showed how many small-business bankruptcies are about redeploying the human capital of the business's entrepreneur. Foohey argues that her data suggest that faith-based organizations in chapter 11 straddle these two accounts. Many of the entities in Foohey's study appear to have substantial going concern value -- for example, a piece of real estate with significant equity -- while others center around the problems of a key leader in the religious organization.

Foohey supports her conclusions with data about financial characteristics and about what happens in bankruptcy court to faith-based organizations. By exploring faith- based chapter 11s, her paper not only helps us understand these cases in their own right but also helps us understand chapter more generally. It was great to see this scholarship come together so well, and it appears it will be the first paper in a series of important papers on the phenomenon of faith-based chapter 11s.


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