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Secured Credit, Churches, and Reorganization

posted by Pamela Foohey

Chapter 11's ability to empower true reorganization has received much criticism of late in light of an increasingly held assumption that most Chapter 11 cases end in a 363 sale of the debtor's assets. Around this time last year, the American Bankruptcy Institute and the University of Illinois College of Law co-hosted a symposium dedicated to discussing secured creditors’ rights and role in modern Chapter 11. Papers from the symposium (including by Slips contributors) very recently became available here.

I was lucky enough to moderate a couple of the symposium panels. As I was listening to the discussion, I noticed that what I was hearing about secured creditors and 363 sales did not match  what I had observed in my study of how religious organizations (mainly smaller churches) currently use Chapter 11. To accompany the release of the symposium papers, I wrote a short piece describing how secured creditors influenced religious organizations' Chapter 11 cases in ways that did not lead to widespread sales, but rather, plans and settlements.

In religious organizations' cases, though one or two creditors usually held security interests covering almost all of the debtors' assets, debtors proposed and confirmed reorganization plans, and reached similar consensual restructuring deals with their creditors through the Chapter 11 process. And there were very few sales. For instance, based on my interviews with attorneys who represented a sample of the religious organization debtors, more than half the cases ended with a confirmed or consensual agreement, and 60% of the debtors remained operating post-bankruptcy.  

Church cases, of course, are one sub-set of Chapter 11 cases. But they also are small business cases, and thus potentially are representative of some of the thousands of smaller Chapter 11 cases filed across the country every year that tend to be left out of discussions about the evolution of Chapter 11. These cases demonstrate that Chapter 11 still has the ability to empower more traditional reorganization. And there may be other sub-sets of Chapter 11 cases where similar traditional reorganizations are still taking place. This is not to say that reform of Chapter 11 is not needed. Rather, the goal of the paper is to suggest that proposals for reform should be considered in light of these cases (and potential similar cases) so as not to inadvertently disrupt the productive, value-creating reorganizations that are happening. 


I really enjoy reading your in-depth work on church bankruptcies. However, I think your essay does not take into consideration the possible effects of some common features that distinguish these cases from other Chapter 11 cases, such as:

1. The real estate collateral can be very difficult to market, and to some extent can be hard to value.

2. Unlike most other business cases, the secured lenders often have no personal guarantees.

3. The income stream is all current income from donations that is difficult to attach or garnish. Many nondenominational churches do not have endowments or other savings.

4. Congregations don't have "owners," so the universe of 363 "buyers" is limited. Other congregations want an empty building, usually, and they often have plenty of choices in the non-bankruptcy marketplace. I guess there could be chapter 11's resolved by the congregation merging with another nonbankrupt one, although I cannot think of one.

BTW, full disclosure, I have represented creditors in a number of cases that are probably in your data set.

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