Update on Churches Filing Chapter 11 Bankruptcy

As parts of the country are counting ballots, I thought I'd post about counting church chapter 11 cases. The headlines about churches and other religious organizations filing chapter 11 still focus predominately -- almost exclusively -- on Catholic Diocese filings. As of June 2020, 27 Catholic religious organizations have filed chapter 11, as detailed on a site put together by Professor Marie Reilly. But Catholic religious organizations' filings are a very small sliver of churches filing bankruptcy, as my prior research has shown. The last time that I updated my count of religious organization chapter 11 cases was at the end of 2017, and the last time I updated denominations and demographics of the congregations that file was in 2013. Since then, I've continued to track religious organizations' chapter 11 filings, using the same methodology, through the end of 2019. 

Preliminary results are in. Highlights: churches, synagogues, mosques, and other religious organizations are still filing bankruptcy, and the denominations and demographics of the congregations that filed have remained basically the same.*

As shown on the graph to the right, between 2014 and 2019, an average of 59 religious organizations filed chapter 11 each year.** This is lower than the average of 87 cases between 2006 and 2013 that I've previously reported, but it is consistent with a decline and leveling off of consumer bankruptcy filings overall during this period. As I've noted, in the past, religious organization chapter 11 filings tracked personal bankruptcy filings, not business bankruptcy filings. This continues to be true.

Find tables with congregation denominations and demographics, and some more detailed discussion after the jump.

Bankruptcy and Mindfulness

The practice of mindfulness and other types of meditation are growing on the coasts and within the law school and lawyer communities. Perhaps these practices can provide meaningful benefits to bankruptcy clients, bankruptcy lawyers and bankruptcy professors and judges. The essence of "mindfulness for lawyers" efforts begins with the notion that the adversary system can take a toll on home life, friendships and our own notions of who we want to be. A meditation practice can help us concentrate and be the best lawyers we can be and also the best friends and family members we want to be; and perhaps even help us to be the kind of persons we want to be. It is a mix of focusing more fully on the present, mixing that with lovingkindness to ourselves and others, and observing what is going on in our minds, all without judgment.

Consumer bankruptcy debtors, creditors, practitioners and judges are constantly faced with problems for which the legal system is at best a partial solution. In most cases there are a few true winners and a host of partial winners, partial losers and complete losers. Mindfulness can help us keep a focus on the matter in front of us and also help us maintain our passion for life and practice.  On the business bankruptcy side, our duty of loyalty combined with the zealous representation ethic can allow the day-to-day fighting to change our character and perhaps even our values. In every community there are a host of ways of starting such a practice.  The book 10% Happier by Dan Harris is an easy entry point and in most communities there is a Mindfulness Based Stress Reduction course available.  More and more law schools and bar associations are providing such opportunities. Mindfulnessinlawsociety.com and themindfullawstudent.com are excellent resources.  I am enjoying teaching mindfulness to law students as well as faculty and staff at Saint Louis University Law School. 

 

 

Update on Catholic Dioceses's Chapter 11 Filings, Fall 2018 Edition

A few weeks ago, Marie Reilly (Penn State Law, University Park) posted to SSRN a new paper, Catholic Dioceses in Bankruptcy, which details the outcomes of the eighteen chapter 11 cases filed by Catholic dioceses and religious institutes since 2004. The paper discusses some of the issues that I have blogged about individually over the past few years -- of note, RFRA and fraudulent conveyances, as well as the long-running Minneapolis and Saint Paul diocese case that ended in a settlement agreement which increased payout to sexual abuse claimants by $50 million from the debtor's original proposed plan. The paper also includes a succinct overview of how canon law, business organizational law, and property law interact in these cases. In short, if you are looking for a primer on broader issues that might emerge in future chapter 11 cases filed by dioceses, or simply interested in how a few area of law converge in these cases, this paper is worth a read.

The last chapter 11 filing that Reilly's paper discusses is that of Crosier Fathers and Brothers in Minnesota in June 2017. Since then, one more archdiocese filed chapter 11 -- San Juan at the end of August 2018. The Archdiocese of Agana (in Guam) also announced that it expects to file by January 2019. Like other dioceses, Agana's stated need to file stems from its struggles with more than 180 sexual abuse claims. But the Archdiocese of San Juan's case presents a couple unique issues.

Tax Reform and Nonprofit Bankruptcy

It's Tax Day! When the new tax bill was debated late last year, a few reports noted an unintended consequence of the bill's expansion of the standard deduction might be decrease people's charitable contributions, in turn harming nonprofits. After the bill passed, I continued to hear comments about the increased standard deductions' potential to cause financial problems for nonprofits, and saw estimates of a loss of $2 billion to the sector. Financial problems, of course, make me think of bankruptcy. And nonprofits make me think about religious organizations, which are the nonprofits I've studied the most in the context of bankruptcy. Tax Day seems like an appropriate day for some thoughts about the tax reform's possible connection to nonprofits' chapter 11 filings, particularly churches' chapter 11 filings.

New Saudi Bankruptcy Law ... A Boon for SMEs?!

Saudi Arabia's King Salman has approved a new bankruptcy law. {Download Saudi BK final 2-2018} Commentators have heralded this new law as a boost to economic reforms, in particular to the SME sector, but I have some serious doubts about this. A member of the Shura Council, the King's advisory body, is quoted in one report as explaining "[t]he idea is to simplify and institutionalise the process of going out of business so new organisations can come in." That latter part--new businesses coming in--requires individual entrepreneurs, either the one whose business just failed or new ones, to embrace the major risks of starting a new venture. In either event, a crucial aspect of an effective SME insolvency law, and I would argue THE most crucial aspect, is a fresh start for the failed entrepreneur (and a promise of such a fresh start for potential entrepreneurs). This fresh start is promised and delivered most effectively by provision conferring a discharge of unpaid debt. The new Saudi law all but lacks this key provision. Article 125 on the bottom of page 50 is quite clear about this: "The debtor's liability is not discharged ... for remaining debts other than by a special or general release from the creditors." It seems highly unlikely to me that creditors will offer such releases with any frequency. Yes, the new law provides a useful framework for negotiating restructuring plans, and the Kingdom deserves praise and respect for finally adopting such a measure. But the lack of a law- imposed discharge following liquidation when creditors are not willing to agree is not a foundation for a thriving SME recovery (though I understand and respect the reason why the Saudi law lacks an imposed discharge). Most SMEs are not enterprises--they are entrepreneurs; they are people, not businesses. Leaving these people to bear the continuing burden of unpaid debt does not, in my mind, reinvigorate failed entrepreneurship or entice others to join the movement. I'm afraid the effects on the SME sector of this law will be muted at best. I hope I'm wrong. 

Other (Non-Religious) Non-Profit Organizations Also File Bankruptcy

Yesterday I posted about the number of religious organizations that filed chapter 11 between 2006 and 2017, and how their filings track fluctuations in consumer bankruptcy filings during those years. Non-religious non-profit organizations also file chapter 11, but in fewer numbers than religious organizations. As shown in this graph, between 2006 and 2017, a mean of 44 other non-profits filed chapter 11 per year (note: I count jointly-administered cases as one case).

 In comparison, a mean of 79 religious organizations filed chapter 11 per year between 2006 and 2017. Over these twelve years, 36% of all chapter 11 cases filed by non-profit organizations were filed by non-religious non-profits.

Churches Are Still Filing Bankruptcy

Not only are religious organizations still filing under chapter 11. As in prior years, they continue to file under chapter 11 in line with fluctuations in consumer bankruptcy filings. Find a couple graphs below to show this. But first, some background.

In my prior work, I analyzed all the chapter 11 cases filed by religious organizations from the beginning of 2006 through the end of 2013. (I define any organization with operations primarily motivated by faith-based principles as religious.) I found that these chapter 11 cases were filed predominately by small, non-denominational Christian churches, which mainly were black churches (80% of more of their members are black). And, also, that the timing of the filings tracked consumer bankruptcy cases (chapters 7, 11, and 13), not business bankruptcy filings, but lagged by one year. That is, if consumer bankruptcy filings decreased in a given year, religious organizations' chapter 11 filings decreased in the next year. I linked this result to how religious organizations' leaders came to think about using bankruptcy to deal with their organizations' financial problems.

Since my original data collection, four years has passed. I thus recently identified all the religious organizations that filed under chapter 11 between the beginning of 2014 through the end of 2017. During these four years, religious organizations continued to file, but in smaller numbers per year, as shown in this graph (note: I count jointly-administered cases as one case).

Dana Gas and an Existential Crisis for Islamic Finance

The very foundations of the Islamic finance world were shaken a few weeks ago when Dana Gas declared that $700 million of its Islamic bonds (sukuk) were invalid and obtained a preliminary injunction against creditor enforcement from a court in the UAE emirate of Sharjah. Like Marblegate on steriods, Dana made this announcement as a prelude to an exchange offer, proposing that creditors accept new, compliant bonds with a return less than half that offered by the earlier issuance.

Dana shockingly claimed that evolving standards of Islamic finance had rendered its earlier bonds unlawful under current interpretation of the Islamic prohibition on interest and the techniques Dana had used to issue bonds carrying an interest-like investment return. I had expected to read that Dana had used an aggressive structure like tawarruq (sometimes called commodity murabahah) that pushed the boundaries of what the Islamic finance world generally countenanced, but no. The structure Dana had used was totally mainstream, a partnership structure called mudarabah. Dana asserted that the mudarabah structure had been superseded by other structures, such as a leasing arrangement called ijarah, though in Islamic law as in other legal families, there are often multiple permissible ways of achieving a goal, not just one. And when an issuer prepares an Islamic finance structure like this, it invariably gets a sign-off from a shariah-compliance board of respected Islamic law experts (sometimes several such boards). For Dana Gas to suggest that its earlier board was wrong to the tune of $700 million, or worse yet that Islamic law had somehow changed in a few years through an abrupt alteration of opinion by the world of respected Islamic scholars is ... troubling.

Foohey on Black Churches in Bankruptcy

Credit Slips blogger Pamela Foohey has a new article on SSRN, "Lender Discrimination, Black Churches, and Bankruptcy." This paper builds on her previous work about churches in bankruptcy to dig into the demographics of which churches end up in bankruptcy court. From her abstract: "Churches with predominately black membership — Black Churches — appeared in chapter 11 more than three times as often as they appear among churches across the country. A conservative estimate of the percentage of Black Churches among religious congregation chapter 11 debtors is 60%. The likely percentage is upward of 75%. Black Churches account for 21% of congregations nationwide."

Foohey discusses the various reasons why black churches would be overrepresented in chapter 11. I suspect there will be a lot of debate about the paper's conclusions, but it is hard to argue with the notion that race matters in bankruptcy as it does across so many parts of life in the U.S. (h/t to Mechele Dickerson's work). Foohey's paper will get bankruptcy experts talking again about why and how it matters, even if there is disagreement on the specifics.

Longest Running Catholic Archdiocese Chapter 11 Case Finally Ends

The Archdiocese of Milwaukee filed its chapter 11 petition on January 4, 2011. Yesterday, four years and ten months later, Bankruptcy Judge Susan Kelley confirmed the dioceses' reorganization plan. During those four plus years, the most contentious issue regarded a $55 million trust fund established rather suspiciously prior to filing to care for a cemetery. The parties were sent to mediation repeatedly, but the cemetery issue seemed to remain the hold up -- until the 7th Circuit ruled that the cemetery trust fund was not shielded from the Code's avoidance provisions by the Religious Freedom Restoration Act. After the 7th Circuit's ruling, the archdiocese revised its plan to distribute $21 million in total to sex abuse claimants. $16 million is coming from that cemetery trust fund. 

In comparison, the archdiocese's initial plan proposed to distribute $4 million in total to these claimants. The $21 million primarily will be split among 355 people. Though it is difficult to compare settlement amounts across diocese chapter 11 cases because of unknowns about abuse severity, state laws that apply to the underlying claims, and available insurance monies and other assets, the $21 million still makes Milwaukee's settlement one of the smallest based on the number of people to receive compensation.

Notifying Potential Claimants in Diocese Chapter 11 Cases

Since 2004, 12 Catholic dioceses have filed under Chapter 11. The latest case is that of the Archdiocese of St. Paul and Minneapolis, which filed in January 2015. The claims bar date is set for August 3. How should the Archdiocese go about notifying potential claimants -- clergy abuse survivors who have not yet come forward and who may feel ashamed and alone -- that they need to file a claim by the bar date?

Yesterday the official unsecured creditors' committee (which is comprised of five clergy abuse survivors) filed a motion requesting that the bankruptcy court order all 187 parishes to play a 7 minute video in which three abuse claimants explain the necessity of filing a claim by the bar date and talk about, from their unique perspectives, why coming forward, however hard it may be, is important, both for survivors and for the church. (The motion also requests that parishes publish the video on their websites.)

The video is hard to watch. The motion states that the committee tried to come to an agreement with the debtor and the parishes about the video. The motion identifies "cooperation clauses" in insurance contracts that require insured parties (the parishes) to limit the liability of the insurers to the greatest extent possible as the main problem that stalled negotiations. It also is understandable that parishes might not want to show the video or put it on their website simply because it is hard to watch. But ultimately I think that the video is a very worthwhile idea, as a legal and community-building matter.

Archdiocese's Potential Fraudulent Transfer Not Protected by RFRA, First Amendment

The Archdiocese of Milwaukee’s Chapter 11 case remains the longest running Chapter 11 case filed by an Archdiocese or other Catholic entity. It filed in January 2011, and because of religious-based objections to the application of the Code's fraudulent and preferential transfer provisions, Bankruptcy Judge Susan Kelley has declined to rule on any reorganization plan until the objections are settled.

The main hang-up is an April 2007 pre-petition transfer of $55 million from the Archdiocese’s general accounts to a trust earmarked for maintaining cemeteries--generally known as the "Cemetery Trust Fund." Post-filing, the Archbishop, acting in his role as the trustee of the Cemetery Trust Fund, sought a declaratory judgment from the bankruptcy court that the $55 million would never be part of the Archdiocese's bankruptcy because the First Amendment and/or the Religious Freedom Restoration Act (RFRA) barred the application of the Code's avoidance provisions. The action was defended by the Unsecured Creditors' Committee -- because the DIP was just a tad conflicted given that it acts through its sole corporate member, the Archbishop.

The question made its way up to the 7th Circuit, which issued a long awaited opinion today. The rulings are: (1) RFRA is not applicable because it only applies to suits in which the government is a party, and the Creditors' Committee is not the government; and (2) the Archbishop's free exercise rights are not violated by application of the Code's generally neutral principles that are narrowly tailored to support a compelling government interest in protecting creditors. In short, the Archdiocese decided to file under Chapter 11 and now it cannot seek a religious exemption for purported fraud.

Some Bibles Are More Exemptable Than Others

I wonder how many Bankruptcy professors have posed a hypothetical about the exemption of a rare Bible worth lots of money? Well, a federal District Court in Illinois had to answer the question for real.

The Illinois personal property exemption statute includes the debtor's Bible. A debtor in Southern Illinois asserted this exemption in a rare, first-edition Mormon Bible that she had acquired (for free) from her local library. Apparently, the library director had not been paying attention, as the 1830 Bible was appraised at at least $10,000.

Amusingly, the debtor's lawyer described this item of property on Schedule B as "old Mormon bible," further observing that "debtor has been told that there is a 100% exemption for bibles but valuable bibles may or may not be covered under such exemption" (!). The trustee accepted this open invitation and objected that the statute was never intended to apply to a Bible of such value, and the bankruptcy court agreed. The District Court reversed.  Responding to the standard law professor questions, the court noted that the word "necessary" in the statute modified only the first word, "wearing apparel," not the other words ("one does not need a bible, school books, or family pictures to survive"), and unlike other property in the statute, bibles are not subject to an explicit value restriction. QED.

Sometimes life does imitate fiction.

Holy Bible image courtesy of Shutterstock

Now Might Be the Time for the Longest Pending Catholic Diocese Chapter 11 Case to Settle

The Archdiocese of Milwaukee is one of 11 dioceses (plus 2 other Catholic-affiliated religious orders) to file under Chapter 11 -- and it likely will not be the last. All of the cases were filed in hopes of achieving global settlements of sexual abuse claims. The Milwaukee Archdiocese filed over 3.5 years ago, in January 2011, making it the longest running Diocese case. 6 of the 7 other dioceses that filed before it confirmed reorganization plans in an average of about 2 years after filing. The shortest time to confirmation was 10 months, while the longest was 2.75 years. The other diocese, San Diego, negotiated a settlement, via mediation, in approximately 9 months.

The Milwaukee Archdiocese and its creditors (predominately abuse claimants) have spent the last 3.5 years, despite a trip to mediation in 2012, primarily fighting over a $55 million trust fund established to pay for upkeep of the diocese's cemetery. Without the $55 million, abuse claimants are likely to receive no more than $4 million. The $4 million figure would be smallest settlement paid to abuse claimants in any of the Catholic Church bankruptcies so far. The cemetery trust issue is pending before the 7th Circuit. Meanwhile, attorneys' and other professionals' fees are rising, leading Judge Kelley to order the parties back to mediation, starting tomorrow.

Faith-Based Markets

Paul Krugman has a column today about the blind, fundamentalist faith in efficient markets.  This is a phenomenon that Stephen Lubben and I have been discussing recently (did Krugman just preempt our paper idea?), as we've both encountered it in the financial regulatory policy debate: 

• The Chapter 14 proposal that would resolve large financial institutions in bankruptcy takes it as a matter of faith that there would be sufficient private DIP financing available to resolve, say, JPMorgan Chase. I don't know how much would be needed, but it would be a multiple of the largest private DIP loans to date:  $10B for Energy Future Holding and $8B for Lyondell Chemical.  Where would the, perhaps $100B needed for a megabank come from?  Well, not from that megabank...  But don't worry, the market will provide.

• Housing finance reform proposals that would either total privatize the housing market (the House Republican solution) or privatize 10% of the market (the Johnson-Crapo bill in the Senate).  We could have a completely private housing finance system.  But don't be surprised when home prices drop precipitously.  There just isn't enough private risk-capital willing to assume credit risk on housing to finance the whole market. It's not clear to me that there's enough private risk-capital willing to assume the credit risk on 10% of the market, and if there isn't it is going to result in at least a 50 basis point increase across the board, and much higher price increases for riskier borrower.  But don't worry about these details.  The market will provide. 

So here's the inconvenient paradox of market fundamentalism:  the idea that the free market can be directed. Either the market is free or it will follow direction, but it's not going to do both. Markets do what markets want.  

Attorneys' Advice on Representing Religious Organizations in Chapter 11

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:

Usury Takes a Bite Out of the Poor

Those of us struggling with the issues raised by payday and title loans are consistently told to take morality out of the equation when considering these loans. Thus, it was refreshing to hear a recent presentation by Professor Alex Mikulich of the Jesuit Social Research Institute at Loyola New Orleans entitled “From the Peril of Predatory Lending to the Hope of Economic Justice: A Religious Social Ethical Perspective.” Rather than avoiding morality questions, Professor Mikulich focused exclusively on them in his eye-opening presentation at a recent Family Impact Seminar. He noted that the loans create many unjust results, and then explained that the literal translation of the word usury in Hebrew is to “take a bite out" of the poor.   He distinguished usury from mere  “interest,” which Professor Mikulich defines as part of a mutually beneficial relationship that is good for the community as a whole.

Cash as Social Infrastructure

Sticker in San Francisco: "Of course it's cash-only, it's the Mission."

Overheard: "Oooh, yeah, no, we don't take cards. Because the coffee is, like, local?" (both items courtesy Lana Swartz)

The word “cash” derives from Latinate words referring to “a chest or box for storing money,” not the money itself. The term originally meant the practices of storing, and the objects used to store items of value – not just money -- as well as the act of going to those storage devices to receive money (to “cash” a bill of exchange,, meant to go to the specific box where the money was). Cash as we know it today is more than a store of value and a medium of exchange; it has symbolic, pragmatic and artistic functions. In the US, even before Durbin, small merchants placed an extra surcharge on credit or offered discounts if customers used cash. Research being conducted at the Institute for Money, Technology and Financial Inclusion (IMTFI) is bringing to light a host of social, ritual and religious uses of cash and coin beyond their economic functions. What's their relationship to, say, mobile money? For us, they are design challenges more than anything else (see, e.g., the Royal Canadian Mint's MintChip, or discussions among developers about Google Wallet). Building an infrastructure for digital payments, especially in places that have been cash-only, entails some connection to the existing social infrastructures of cash.

Credit for Parenthood (in the Wall Street Journal)

Wall Street Journal Reporter Jessica Silver-Greenberg casts a spotlight on the market for fertility treatment loans - including loans that enable the purchase of other women's eggs  - in the article "In Vitro a Fertile Niche for Lenders."  (subscription required). Perhaps this will prompt some coverage of the adoption loan market, which also has very interesting not-for-profit lending options; the direct financial price of the credit may be low but some complicated strings are attached. My earlier efforts to broadly evaluate the impact of loans in these markets are here and here. 

Robosigning and Evidence

The robosigning issue brought to mind a Talmudic evidentiary rule that declares the testimony of certain types of people inadmissible:  

These are they who are ineligible (as witnesses): a dice-player, a usurer, pigeon-flyers, traffickers in Seventh Year produce, and slaves. This is the general rule; any evidence that a woman is not eligible to bring, these are not eligible to bring.  

Mishnah Rosh ha-Shanah 1:8.  

This is hardly the Federal Rules of Evidence, but I just thought it interesting.