Unclear Bankruptcy Rules Challenge Catholics and Disciples

By Kosseff, Jeff | The Christian Century, August 10, 2004 | Go to article overview

Unclear Bankruptcy Rules Challenge Catholics and Disciples


Kosseff, Jeff, The Christian Century


The nonprofit status of the Catholic Archdiocese of Portland, Oregon, which filed for bankruptcy last month, and the Protestant-affiliated National Benevolent Association, which fled for protection in February, may help determine legal precedents for church bodies that say they are unable to meet their financial obligations.

The vast majority of organizations that file for bankruptcy protection are for-profit companies. Statutes and abundant ease law set clear priorities for the court as it straightens out companies' finances: creditors come first, shareholders second.

Nonprofits are different in several important ways--not the least because such filings have been relatively rare. Also, nonprofits don't have shareholders. They are exempted from taxes in exchange for meeting a mission such as housing the poor or, in the archdiocese's case, operating a church.

And, when a nonprofit files for bankruptcy protection, the court faces a tough decision: Can money donated to serve a charitable mission be used to pay off creditors?

Take, for example, the case of National Benevolent Association, a large St. Louis-based agency affiliated with the Christian Church (Disciples of Christ). The association, which serves abused children, the disabled and the elderly, flied for bankruptcy this year after issuing more than $200 million in bonds.

"There's always the tension in these cases between repaying creditors and the mission of the charity," said Howard Stile, a New York attorney with Chadbourne & Parke LLP.

In its first bankruptcy court hearing in Texas, Judge Ronald B. King made it clear that the nonprofit has a new top priority. "They have a mission, and the new mission is to pay the creditors," said King, according to a transcript of a February 18 hearing. Seife, who represents creditor KBC Bank, said the statement was telling. "If there is a trend, it is to put the interests of the creditors as paramount," Seife said.

But Stephanie Wickouski, an attorney with Gardner Carton & Douglas in Washington, D.C., said there isn't enough legal precedent on nonprofit bankruptcies to draw broad conclusions. "These arguments are still somewhat groundbreaking on both sides," she said. …

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