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Attorneys' Advice on Representing Religious Organizations in Chapter 11

posted by Pamela Foohey

As part of my study of religious organizations' Chapter 11 cases, I interviewed attorneys who represented a variety of churches and other faith-based institutions in their reorganization cases. Some of my findings are presented in this new paper. In short, the interviews confirm my previous conclusion based on an analysis of documents filed in religious organizations' Chapter 11 cases: reorganization oftentimes can be beneficial for these debtors.

Of the 52 Chapter 11 cases discussed by attorneys, 23% ended in a confirmed reorganization plan, and another 40% resulted in an agreement between the debtor and its creditors. When I interviewed the attorneys, 71% of their clients were still operating, though a couple churches were in the midst of foreclosure. When asked what "special considerations" other attorneys should be aware of in future representations, attorneys focused on six issues:

(1) Governing Structure. A board of trustees (or similar) should oversee all religious organizations. However, a sizable portion of religious organizations that file for bankruptcy effectively vest control of the organization in one lead pastor or reverend. The potential mismatch between who attorneys interact with and report to, and who has the ability, at least on paper, to make decisions for the organization makes it crucial to be "smart" about ensuing that all the relevant individuals (pastors, board members, congregants) are on board with what is happening during the Chapter 11 case.   

(2) Licenses / Permits. In an attempt to generate extra revenue or provide services to members, some organizations undertake side businesses, such as operating daycares and delis. Problems with the licenses, permits, and inspections that are required to run these businesses developed during some representations.

(3) Cash Collateral. Though some secured lenders did not assert that their security interests extended to collections and pledges, other attorneys were a bit surprised when lenders argued that monies coming into the churches from congregants' donations were their collateral. Of course, having access to this cash during the case has the potential to allow the case to proceed more smoothly, leading to fights over cash collateral.

(4) The Plan. Attorneys' main focus in these cases was assessing how to demonstrate that revenue aligned with expenses such that secured creditors would agree to deals and bankruptcy courts would confirm reorganization plans. Indeed, issues with licenses, permits, and cash collateral stood out to attorneys because the cases otherwise felt much like single-asset real estate cases. But because religious organizations' revenue primarily comes from voluntary donations, it almost defies projection. It is difficult to determine how much money will appear in the basket each Sunday. Similarly, if a church has a "critical mass" of members who want to see the congregation survive, money (and personal guarantees) may flow into the church almost magically. The complexity in projecting revenue led attorneys to identify crafting plans that demonstrated their clients’ ability to succeed in the future as the primary "special consideration" of religious organizations' Chapter 11 cases.

(5) Leaders' Expectations. As sometimes happens when representing debtors, attorneys thought that some leaders had unrealistic expectations about what Chapter 11 could achieve for their organizations. Leaders at times behaved as though donors simply would appear, had infeasible ideas about cutting expenses, and generally did not want to think of their organizations as businesses. This further contributed to difficulties in putting forth realistic reorganization plans or proposals for restructuring mortgages.

(6) Getting Paid. Leaders’ propensity not to think of their religious organizations as businesses also led some to ask for a reduction in attorneys’ fees, often citing the community aspect of the organization. In turn, a majority of the attorneys were willing to cut religious organizations breaks: they reduced their hourly rate, lowered their retainers, were more generous with time, or otherwise adapted their fees.

Though the uniqueness of religious organizations’ Chapter 11 cases and leaders’ potential tendency not to pay could cause attorneys to hesitate to take on future representations, attorneys generally enjoyed these cases. The cases offered attorneys an opportunity to support their communities, to participate in atypical reorganizations, and to provide advice that they thought was productive in the correct circumstances. In the future, approaching these cases with a focus on organizational structure, cash collateral, and sources of revenue may enhance the efficiency and effectiveness of religious institutions’ reorganizations -- and prevent a few headaches.

Comments on the new paper are very welcome.

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