churches, lenders & troubled loans in kansas bar... · 2020. 5. 21. · faith” and...

34 The Journal of the Kansas Bar Association

Debt Among the Faithful: Churches, Lenders & Troubled Loans in Kansas

Michael D. Fielding

Debt Among the Faithful: Churches, Lenders & Troubled Loans in Kansas

Michael D. Fielding

I. Introduction1

In considering some of the grand cathedrals of Europe, Henry Adams once described a church door as the pons seclorum, or “the bridge of the ages.” In Adams’s estimation, it represented a point of connection between us and our ancestors, but Adams’s notion does not require a 900-year-old building to make its point. A great many churches—even those in the relatively young American Midwest—already have histories that span several generations. Indeed, part and parcel of a church’s mission is to convey the faith, to pass it on, not just to friends and neighbors, but across time as well, to succeeding generations. Th ere is an intentional intergenerational aspect to churches.

Many things are capable of traversing this space between past and present using the church door that Adams imagined as a fi gurative bridge, with religious conviction or faith being chief among them. But there are also more worldly things that get passed on. In pursuing their missions, many faith-based institutions borrow money to fi nance their activities, and those debts can outlive the generation that created them, impacting the next generation. As we all know, contexts and circumstances can change, and the faith community, like the rest of the world, is not immune to fi nancial hardship. Further-more, troubled church loans need not have an intergenerational quality; after all, loans, like milk, can sour quickly.

Th e intersection of fi nance and faith-based institutions creates unique issues for Kan-sas’ commercial lenders. Both lenders and churches need to have a better understanding of these matters so they can successfully navigate the challenges of a troubled church loan. Th is article addresses key considerations in that regard. To begin, it is helpful to analyze the statistical data regarding religious participation in Kansas, as well as how churches fare when they fi le for bankruptcy. Th e article then discusses the unique boundaries that exist between religious institutions and civil courts. Knowing these rules is essential, as lenders inevitably must rely on the civil law when dealing with a troubled loan. From there, the article explores bankruptcy matters unique to churches. Finally, the article provides some practical guidance for lenders and churches who are wrestling with non-performing or troubled loans.


debt among the faithful

II. Empirical Data – Churches & Troubled LoansReligious Participation in Kansas

To gauge the wisdom of a business endeavor, it is wise to explore the marketplace to understand what sort of demand ex-ists for a product. That concept undoubtedly applies to entities that make loans to faith-based institutions. To begin, Kansas has a population of just more than 2.9 million.2 According to the Pew Research Center on Religion and Public Life, the vast majority of Kansans (88 percent) believe in God while 79 per-cent say that religion is important in their lives.3 Approximately 76 percent of Kansas adults identify as Christians.4 That fig-ure is predominantly comprised of three major groups: Evan-gelical Protestants (31 percent); Mainline Protestants (24 per-cent); and Catholics (18 percent).5 Only 4% of Kansans are of non-Christian faiths, including Jewish, Muslim, Buddhist and Hindu. 6 Approximately 20 percent of Kansas adults are unaf-filiated with any religion (i.e., religious “nones”),7 and, of this figure, only three percent consider themselves agnostic while two percent are atheist. 8 But despite the widespread religious affiliations of Kansans, the data also reveals a slow but discern-able trend away from organized religion.9

While the reasons for declining participation in organized religion are outside the scope of this article, both churches and lenders would be wise to consider the impact of these trends. This is not to say that organized religion is going the way of the Sony Walkman. After all, the data clearly reveals a

sizeable portion of the population is very faithful in their reli-gious participation.10 But the number of faithful parishioners relative to the general population is slowly dwindling. The decline in religious participation means churches will increas-ingly be faced with declining numbers and fewer donations. Less revenue, in turn, will have a range of implications. In its most benign effects, churches will increasingly be faced with cutting costs, reducing staff, or possibly consolidating ever-smaller congregations. In its worst manifestation churches will seek bankruptcy protection to restructure their debts in an effort to continue serving their congregants. One should not extrapolate from current data trends that future declines will occur at the same pace as they have over the past few de-cades. While it is possible the trend could reverse itself, there is an equally strong—perhaps stronger—argument that those trends could accelerate, in which case church funding would face even more challenges. In other words, what may appear to be a financial storm on the distant horizon could actually come upon particular churches much faster than they expect. And, regardless of the level of church participation, there are macroeconomic considerations that must be weighed because anytime the U.S. economy slips into a recession, donations will decrease and put greater strain on religious institutions.

Churches, Troubled Loans & Bankruptcy

Despite the plethora of different religious institutions in the United States, there is very little empirical analysis regard-ing how churches deal with troubled loans. However, the existing literature is nonetheless very informative. In 2013, Professor Pamela Foohey published an empirical study exam-ining church bankruptcy filings between 2006 and 2011 in the United States, finding that during this time period over 500 faith-based institutions filed for Chapter 11 bankruptcy protection.11 These entities predominantly operated places of worship, but some also ran schools, food pantries, daycares, and halfway houses.12 Christian denominations comprised the vast majority of bankruptcy filings (93.4%) with the main operation type being a place of worship.13 Catholic diocesan bankruptcies accounted for less than 2% of the filings.14

The empirical evidence indicates that Christian congrega-tionalist churches (e.g., churches governed by a local major-ity) are more likely to have financial troubles.15 Specifically, a large majority of the Christian church bankruptcy filings come from “Congregationalist denominations, such as Pente-costal churches and those of several Baptist sects.”16 Indeed, “certain Christian denominations [were] overrepresented in comparison to congregations nationwide.”17 These results are not surprising. “These congregations likely are not subject to broad governing bodies that may monitor their finances and provide assistance if necessary, potentially motivating their bankruptcy filings. Rather, they often are … on their own with fewer options when they encounter financial problems.”18

Description 2007 2014

Absolute or fairly cer-tain belief in God

91% 88%

Religion considered very or somewhat im-portant in one’s life

86% 79%

Weekly attendance at religious services

48% 37%

Monthly/occasional attendance at religious services

30% 35%

Daily or weekly prayer 78% 74%

Weekly or monthly feeling of spiritual peace

66% 76%

Weekly or monthly scripture study

45% 44%

www.ksbar.org | June 2019 37


The data reveals that the vast majority of religious institu-tions that file for Chapter 11 do so because of challenges pay-ing the mortgages on their real property.19 In other words, they file for Chapter 11 so that they can restructure their mortgage payments and retain their property.20 Additionally, a bankruptcy filing may be necessary to stop foreclosure on a daycare or school where the congregants send their children.21

Church debtors had assets with an average worth $2.8 million ($1.3 million median) with real property constitut-ing $2.6 million ($1.2 million median) of that figure.22 To-tal debts averaged just over $2 million ($964,620 median) with debts secured by real property averaging $1.7 million ($810,890 median).23 Churches that file for bankruptcy tend to have very little unsecured debt.24 Surprisingly, 72 percent of the debtors were balance-sheet solvent when they filed for bankruptcy and 76% of the debtors qualified as small business debtors.25 Furthermore, the average years of operation was 23 (with a median of 15).26

Church bankruptcies are generally driven by two main fac-tors: (1) inability to pay obligations due to reduced income and congregant job loss as well as refusal by banks to refinance and (2) dependency on key leaders who either make poor de-cisions or leave the church (moving away or death) causing, in turn, congregants to lose faith or stop attending the church.27 Notably, religious institutions that file for bankruptcy typi-cally have operated for a long time under the direction of a key clergy leader.28 Furthermore, “the leaders of many of the smaller congregations lacked business acumen, even more so than owners of small businesses. Consequently, these organi-zations’ books and records often were in disarray, and their leaders generally were less sensitive to the business aspects of the churches, including not foreseeing and planning for the impact of the recession on the congregation’s giving.”29

What are a church’s odds of successfully emerging from Chapter 11? That answer depends on whether the religious institution is sufficiently strong to reorganize. Attorneys that have represented faith-based organizations in bankruptcy:

[C]ommented that the institutions they represented typically waited long past when it would have been more effective to seek assistance, usually not coming to them until the “drop dead date” before a foreclosure sale. Most prevalently, attorneys attributed the delay to leaders’ desire to believe that their churches’ situations would miraculously improve despite declining contri-butions and other serious issues. Pastors seemed unre-alistic about what they could do, sometimes “going by faith” and “thinking [that] a miracle is going to fall out of the sky.” They were ill prepared for ‘the inevitability of a filing, again perhaps because they had faith that things will work out.”30

The empirical evidence suggests that bankruptcy courts quickly dispose of non-viable religious institution filings.31 But the data also suggests that a large majority of faith-based institutions that confirm a Chapter 11 plan are able to obtain a final decree from the court which means it has been consummated.32 Comparing these results to nationwide Chapter 11 filings adds some perspective. For fiscal years 2008-2015 the statistics reveal that 47.3 percent of all Chapter 11 cases were dismissed, 19.2 percent were converted to another Chapter, and only 28.0 percent were confirmed.33 In a very similar manner, faith-based bankruptcy filings had a confirmation rate of 26.5 percent.34

III. Boundaries Between Religious Institutions and Civil Courts

Before considering troubled church loans, it is first neces-sary to explore the ramifications of what civil courts can and cannot do with respect to religious institutions. Understand-ing the preexisting boundaries is essential to knowing when civil courts may or may not intervene in ecclesiastical matters.

General

Kansas law has long recognized that “churches may become ‘bodies corporate’ with ‘the same power to make bylaws for the regulation of their affairs as other corporations.’”35 Just as corporations differ in how they manage their affairs, “‘dif-ferent religious societies [also] exercise authority over their fi-nancial and property affairs in different ways.’”36 Kansas law permits governing church bodies authority to create not-for-profit corporations to be used for church-related purposes.37

A church’s standards extend to its members. “[A] person who voluntarily joins a church, and tacitly at least agrees to be bound by all rules and regulations of such church, can-not afterwards be allowed to wholly ignore and disregard such rules and regulations.”38 “[D]isgruntled church members may not bypass church procedures to contest decisions with which they are not pleased.”39 Rather, they can exercise their federal and state constitutional rights and freely attend or freely leave the church of their choice.40

When are church decisions binding on civil courts?

Given the federal and Kansas constitutional protections for churches and the free exercise of religion, a critical issue is when are church matters immune or not immune from civil court review. Fortunately, Kansas courts have provided clear guidance to this question. It is well-settled that “civil courts are bound to accept the decisions of the highest judicatories of a religious organization of hierarchical polity on matters of discipline, faith, internal organization, or ecclesiastical rule, custom, or law.”41 Indeed, “the Constitution requires that civil courts accept their decisions as binding upon them.”42 This rule also applies to congregational churches.43



But churches are not completely immune from judicial scrutiny and intervention.44 While civil courts lack juris-diction to meddle in the religious affairs of a church, “when church-related controversies involve civil or property rights, the civil courts will take jurisdiction and decide the merits of the case in order to assure regularity of business practices and the right of private use and ownership of property.”45 Further-more, churches are not immune from tort liability,46 and they can be held liable for their own contracts.47

Surprisingly (and as will be shown hereafter), Kansas law provides different treatment to churches depending on wheth-er they are hierarchical or congregationalist in nature. A hier-archical church is one which is organized with other churches with similar doctrine which have a common ruling body or ecclesiastical head.48 In contrast, congregational churches are locally governed by the majority. Congregational churches “are free to adopt constitutions, by-laws, and internal rules which will alter or regulate their proceedings, but even these must be enacted by majority vote. And in the absence of such voluntarily-adopted rules, each such congregation functions as a pure democracy.”49 Of course, congregational churches may combine and become hierarchical in nature. But once that occurs “the right of dominion, control and disposal of church property ... is governed by church law.”50

The Kansas Court of Appeals recently noted “that where a dispute over the control of church property arises out of a schism within a congregation that is affiliated with a hi-erarchical denomination and a decision regarding the issue has been made by the highest tribunal of that denomination to which the issue has been presented, civil courts are to ac-cept the decision of the tribunal as binding.”51 Furthermore, the United States Supreme Court has determined that, even where a governing ecclesiastical body in another country de-termines who may use church property in the United States, a civil court cannot interfere with that decision even though it is suspected that the foreign governing ecclesiastical body is under the influence of a foreign country.52

So how do courts determine when the principle of hierar-chical deference must be applied when a schism has occurred? The Kansas Court of Appeals recently articulated a test for doing so. Specifically, it provided:

[C]ivil courts can apply the principle of hierarchi-cal deference in such cases by answering the following straightforward questions from a purely secular per-spective:

• First, was the congregation affiliated with a hierarchical church body or denomination pri-or to the schism?

• Second, does the hierarchical church body or denomination have its own rules and pro-

cedures for the resolution of property disputes arising out of a schism?

• Third, has there been a determination of the property dispute by the highest tribunal of the hierarchical church body or denomination to which the issue has been presented?

If the answers to each of these questions is affirmative, then a civil court must accept the decision of the church tribunal as binding.53

Due process in congregationalist churches

Congregationalist churches are required to provide due pro-cess to their parishioners. According to the Kansas Supreme Court, “in a congregational or nondenominational church…secular principles of law that are ‘applicable to public and pri-vate lay organizations and to civil governments as well’ should be applied.”54 “A congregational church member has a right under common-law principles to a fairly conducted meeting on the question of expulsion, and that includes reasonable no-tice, the right to attend and speak against the proposed action, and the right to an honest count of the vote. In the absence of church law or usage, a majority vote of the members present at a regular Sunday service prevails on expulsion. It does not require formal evidence, the right to counsel, or the right to present witnesses (unless church rules so require).”55 In short, “[i]f a congregational church provides a procedure for expul-sion of a member, a good faith effort to follow that procedure must be made.”56

Judicial Intervention in church affairs

The Kansas Supreme Court has long recognized two key distinctions in church affairs. The first distinction is “the church as a religious group devoted to worship, preaching, missionary service, education and the promotion of social welfare.”57 Civil courts do not intervene in this area.58 But churches do not operate in a vacuum and the Kansas Supreme Court has also recognized the second distinction of “the church as a business corporation owning real estate and mak-ing contracts.”59 When “civil or property rights [are involved] the civil courts will take jurisdiction and decide the merits of the case for themselves.”60 Why is this? “[C]ivil courts…take jurisdiction…‘to assure the regularity of business practices and the right of private use and ownership of property.’”61 “The property and financial affairs of churches must be the concern of secular authority in order to assure regularity of business practices and assure the right of citizens to have their gifts used as they direct. Government owes this assurance to citizens and this in no way hinders any citizen’s religious freedom.”62 But this judicial intervention is also somewhat tempered by the fact that the law “recognizes that different religious societies exercise authority over their financial and



property affairs in different ways.”63 “Hence, States, religious organizations, and individuals must structure relationships in-volving church property so as not to require the civil courts to resolve ecclesiastical questions.”64

Who controls the church’s property?

Control of church property can become a very sore point of contention when splits arise within a church. The Kansas Su-preme Court has recognized that, while a person may declare him or herself to be the spiritual leader of a congregation, the mere declaration does not automatically mean such person is vested to control the secular affairs of the church (e.g., control of property) but rather the legal control of the church’s prop-erty must be clearly acknowledged and agreed to by the con-gregation.65 Furthermore, just because a minister may be the sole legal trustee of the church does not mean that minister holds title to the property for his or her own benefit to the ex-clusion of other church members.66 Rather, the minister must continue to properly serve in the role of trustee as required by the law.67 With this concept in mind, it is no surprise that a “deed executed in favor of a trustee or trustees of an unincorporated church society creates a fiduciary relationship between said trustees and the congregation of the church, and the trustees hold said property for the benefit of the congrega-tion. Any conveyance made by said trustees in violation of the fiduciary relationship and contrary to the purposes for which the trust was created is void.”68

It is well-settled that if a local church is affiliated with a hierarchical organization, then property conveyed to the lo-cal church is deemed to be held in trust for the benefit of the hierarchical organization, even if there is an absence of express trust language.69 Given this reality, the Kansas Court of Ap-peals has given clear guidance on what local churches must do if they want to maintain full control of their property and prevent it from being deemed to be held in trust for a hierar-chical church. Specifically:

A local church, if it desires to remain independent of the influence of a parent church body, must maintain this independence in the important aspects of its operation, e.g., polity, name, finances. It cannot, as here, enter a binding relationship with a parent church which has provisions of implied trust in its constitution, bylaws, rules, and other documents pertaining to the control of property, yet deny the existence of such relationship. A local church cannot prosper from and enjoy the benefits afforded by a parent hierarchical church, participate in the functioning of that body, and then disclaim affilia-tion when the parent church acts contrary to the desires of the local church, so as to shield from equitable or contractual obligations the property acquired by the lo-cal church either before or during such affiliation.70

Kansas law recognizes reversionary rights to real estate con-veyed to churches. For example, property may be conveyed to a church on condition that it be used for worship as provided by the church’s charter and such land will revert back in the event that it is no longer used as provided in the conveyance.71 If the church (or its trustees) control property outright, and it ceases to be used for its original intended purpose, then ap-plicable church law will determine how the church may use or dispose of the property.72 In short, in resolving church prop-erty disputes the civil court may consider whether the original transfer of the land to the church had restrictions or not and whether the church itself is an independent congregation or one that is governed by a higher ecclesiastical authority.73

Factions and schisms

Many critical challenges arise when there are factions or schisms within a church regarding control of property. These disputes rarely occur “in a secular vacuum….[D]isputes between factions over who has the right to control a local congregation’s property frequently arise out of an underlying disagreement regarding issues relating to theological or internal church polity.”74 Fortunately, Kansas law is clear as to who retains control of the property in these situations. “When a schism occurs in a church the all important question is which of the rival factions adheres to the fundamentals of the original tenets, beliefs, rules and practices of the organization and as against those who have departed therefrom the civil courts when called upon will award the church property to those who continue to adhere thereto.”75 In other words, those who depart the faith forfeit any right to the church’s property.76 This rule applies even when the seceders include the minister, one or more trustees or when the remaining faithful adherents are in the minority.77 In short,

When a local religious organization has acquired prop-erty through the contributions and sacrifices of many members, past and present, all of whom have adhered



to certain doctrines regarded as fundamental to a par-ticular national denomination, no faction may be per-mitted to divert the church property to another de-nomination or to the support of doctrines, usages, and practices basically opposed to those characteristic of the particular denomination.78

Given this unique interplay of the law, it is possible to have a situation where a trustee of church property is excommunicated from the congregation but such an action does not remove that person as trustee.79 Such a result would likely not be palatable to most congregations. Consequently, the practical takeaway is that trust provisions, reversionary clauses and other property-related matters should be drafted appropriately so as to avoid the need for judicial intervention in church affairs in the event of a schism or doctrinal dispute.80 “If a religious organization’s manner of holding property fails under neutral civil law to protect its internal view of property ownership, but such internal view could have been accommodated by civil law, the burden on the exercise of religion is caused not by the neutral law but by the religious organization’s own choice.”81

When a church dies

From time to time participation in certain churches dwin-dles to the point where the church can no longer sustain itself or needs to “merge” with another entity of similar beliefs. To deal with these situations, the Kansas legislature has passed certain statutes which set forth to whom property of one par-ticular denomination will be transferred.82 Of course, a trans-fer of a church’s assets to another entity will most likely con-stitute a default under the applicable loan documents. But is acceleration of the debt and foreclosure on the collateral the right result in that situation for the lender? The practical reality is that a transfer of the assets to and/or merger with an-other congregation provides an ideal opportunity for a lender to obtain a new and financially stronger guarantor of the loan such that it may continue properly performing.

IV. Churches in Bankruptcy

With the backdrop of the church-civil court boundaries in mind, it becomes easier to understand how these issues play out in the context of a church bankruptcy filing.

Bankruptcy Court limitations The Bankruptcy Code prohibits involuntary bankruptcy

filings against nonprofit entities including religious institu-tions.83 It also prohibits a bankruptcy court from converting a nonprofit’s Chapter 11 proceeding to Chapter 7.84 How-ever, this does not stop a Chapter 11 debtor from voluntarily converting its case to Chapter 7.85

The prohibition against civil court review of ecclesiasti-cal decisions extends to the bankruptcy court. For example,

when a clergy member is dismissed by the church for violating church law, the First Amendment’s ministerial exception will bar the claimant from as-serting a claim for back-pay due to alleged wrong-ful termination.86 In other words, the church’s decision to dismiss the clergy member will be deemed final and binding and prohibits allowance of his proof of claim. But the fact that a minister and other church officials hold important positions in the church does not make them immune from common-law liability for

actions brought in bankruptcy court for prepetition breaches of their fiduciary duties (such as self-dealing, paying excessive salaries and bonuses, misusing church funds, etc.).87

As its name implies, the automatic stay immediately goes into effect upon the filing of a bankruptcy petition.88 It pro-hibits any actions to collect upon debts or exercise control of the debtor outside of the bankruptcy process.89 But in the context of religious entities, following the filing of a bank-ruptcy proceeding a separate religious proceeding which has been created to wrest away control of the debtor violates the automatic stay.90

Determining bankruptcy estate propertyA fundamental question in any bankruptcy proceeding is

what property belongs to the debtor. The answer to this ques-tion is critical. If it is estate property, it must be administered in accordance with the Bankruptcy Code. If it is deemed not to belong to the debtor, then it is not estate property and will be subject to state law creditor remedies. By way of il-lustration, if a religious institution files for Chapter 11 and its place of worship is held in a trust separate from the corporate church structure, then that property will not be part of the bankruptcy estate and will be subject to the lender’s normal rights and remedies under state law. As can be seen from this scenario, analysis of state law becomes integral to evaluating what constitutes property of the estate.

Section 541 of the Bankruptcy Code sets forth a very ex-pansive definition determining what constitutes estate prop-erty. But does a bankruptcy court impermissibly cross the dividing line between church/state involvement when it determines what belongs to the church’s bankruptcy estate? The short answer is no. When a religious institution files



for bankruptcy protection the court has the legal authority to determine what property is part of the bankrupt estate.91 Furthermore, “no First Amendment issue arises when a court resolves a church property dispute by relying on state statutes concerning the holding of religious property, the language in the relevant deeds, and the terms of corporate charters of reli-gious organizations.”92

As noted above, Kansas law recognizes that donations to a local church that is part of a hierarchical organization are deemed to be held in trust for the benefit of the hierarchical entity.93 Similarly, in a bankruptcy proceeding, the fact that local members contribute to the local church does not prevent those funds from being used to pay claims against the debt-or.94 In other words, those funds are deemed to be property of the estate. Applying bankruptcy law in this manner does not violate the Religious Freedom Restoration Act.95 While no cases have addressed it yet, this rationale would also likely be deemed applicable to the Kansas Preservation of Religious Freedom Act.96

Single-asset real estate and small-business Bankruptcy Code provisions

As noted above, a large portion of church bankruptcy filings are primarily due to real property debt. Does that mean those cases should be classified as single-asset real estate cases (which are subject to more stringent standards under the Bankruptcy Code)? A “single asset real estate” case is one where “real prop-erty constituting a single property or project which generates substantially all of the gross income of a debtor who is not a family farmer, and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental hereto.”97 Under this definition a church bankruptcy filing should not be classified as a single-asset real estate case. The church does not own the building simply to rent it and earn money. Rather, “[f ]aith-based institutions conduct ‘substantial business’ in their real property-that is, the ‘business’ of ministering—other than op-erating the property, and thus technically they are not” single-asset real estate entities.98

Similarly, church bankruptcy proceedings are not consid-ered small-business bankruptcy filings for purposes of the Bankruptcy Code because a “small business debtor” is defined as one who engages in “commercial or business activities.”99 Clearly, a church, standing alone, does not qualify under this definition. As a practical matter, there are three key distinc-tions between a small-business bankruptcy filing and a church bankruptcy filing:

First, they have operated on average three times lon-ger than the average small business debtor. Second, they own assets of considerable value apart from their leaders’ ability to energize a congregation. In particu-lar, they own real property worth millions of dollars….

Third, the nonprofit corporation owns those assets, and the corporation is the sole obligor on any secured debt encumbering the assets.100

However, if the church operates a daycare or educational facility, then a bankruptcy court could potentially, find that related entity may qualify as a small business case.

Chapter 11 reorganization considerationsThe research cited above plainly illustrates that some church

bankruptcy filings are desperate “Hail Mary” attempts at sav-ing the situation. These efforts generally fail. But there are religious institutions that are not dead on arrival at the bank-ruptcy court, but rather are capable of being resuscitated. When contemplating the likelihood of success, there are a few key elements which should be considered by both debtors and lenders.

Absolute priority ruleA practical problem that arises in nonprofit chapter 11 re-

organizations is whether the Bankruptcy Code’s absolute pri-ority rule applies when general unsecured creditors are not paid in full. In a nutshell, the absolute priority rule requires that higher priority classes must be paid in full before lower subordinate classes may receive any distribution.101 But the religious institutions are not-for-profit entities whose mission is not to maximize profits for their investors. Rather, those faith-based organizations have a different purpose. In a com-mercial bankruptcy proceeding if assets are insufficient to pay general unsecured creditors in full it is very possible to have a plan of reorganization which grants the general unsecured creditors stock in the reorganized entity. Those creditors, in turn, can direct the management. This, in turn, frequently re-sults in new management being put in place. After all, many creditors who lost money with old management strongly pre-fer someone new who will hopefully better steer the ship.

But that same scenario generally does not happen in non-profit bankruptcy matters. The two Circuit Courts of Appeals that have addressed the absolute priority rule in the context of a not-for-profit entity have both held that the rule did not apply.102 One commentator noted: “The few courts that have decided absolute priority claims in nonprofit bankruptcies overall hold that the absolute priority rule is categorically sat-isfied by nonprofit entities, except in limited circumstances, even if the nonprofit had members and those members, along with the nonprofit’s managers and directors, retained control of the reorganized nonprofit.”103

This result likely surprises many bankruptcy practitioners. But the outcome is not so astonishing when one considers the general rule that a charitable “organization’s assets must be permanently dedicated to an exempt purpose. This means that if an organization dissolves, its assets must be distributed for an exempt purpose described in section 501(c)(3) [of the



Internal Revenue Code], or to the federal gov-ernment or to a state or local government for a public purpose.”104 In a solvent bankruptcy of a for-profit-entity the bankruptcy distribu-tions are made to shareholders. But such a re-sult would never occur for a nonprofit whose assets must be maintained for a charitable purpose and not distributed to “owners.”

As a corollary to this point “most courts have [also] held that the absolute priority rule does not prohibit [nonprofit officers, directors and members] from maintaining control of the reorganized debtor (at least in cases where the officers, directors and members do not hold any economic stake in the debtor).”105 Indeed, “unlike in a bankruptcy of a for-profit corporation, managers and directors of a re-organized nonprofit may often retain control of the nonprofit over the objection of an im-paired class of creditors.”106 This, in turn, rais-es the question: can a church viably reorganize with existing management? In other words, is the plan feasible?

Feasibility issuesUnlike the boards of for-profit entities whose primary ob-

jective is to maximize profits, the board of a nonprofit entity has a duty to ensure that the organization accomplishes its stated purpose and mission.107 Because revenue generation is not the organization’s primary focus, this creates unique challenges when a religious institution seeks to reorganize in Chapter 11.

To confirm a Chapter 11 plan a debtor must show that the plan is feasible.108 A plan of reorganization will be deemed fea-sible if “[c]onfirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorgani-zation, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan.”109 Stated differently, “‘feasibility’ relates to the fi-nancial viability of a debtor under a plan of reorganization.”110 To demonstrate that a Chapter 11 plan is feasible the debtor does not need to guarantee success, but rather only needs to show a “reasonable assurance of success.”111

The debtor has the burden of proving the feasibility of a plan by a preponderance of the evidence.112 How is this done? The plan will necessarily require payment of certain debts which means the church must show what revenues can reasonably be anticipated. Nonprofit funding generally falls into four broad categories: “[1] nonprofits that depend entirely on do-nations; [2] nonprofits that have a mixture of donations and revenue-generating business operations; [3] nonprofits that are entirely dependent on revenue-generating business opera-tions; and [4] nonprofits that survive off of unique sources of funding, such as assessments of members.”113 To the extent

that a church or an affiliated not-for-profit en-tity is eligible to receive funds from a govern-mental entity, the governmental entity cannot deny the application on the basis of religion.114 Similarly, a governmental entity cannot deny a church a grant simply because the church is in bankruptcy.115

As a practical matter, churches generally derive revenue through donations (although churches with related enterprises such as day-care or schools will also derive some income through these business-like endeavors). From a lender’s perspective donations are problem-atic when contemplating debtor-in-possession and/or post-confirmation financing for the church. This is because a congregant’s state-ment that he or she will donate some amount of money is simply a statement of an intent to make a future gift which lacks consideration to make it a binding, enforceable obligation.

In reality the lender is hoping that there will be sufficiently large stream of donations to service the debt.

Given the large reliance on donations, a church that hopes to viably reorganize in Chapter 11 needs to show what do-nations may legitimately be expected. A practical issue for religious institutions is how will they show what donations will come? Simply getting oral pledges that donations will come—particularly when the pledgor has questionable finan-cial ability—likely will not cut it. But even if a prospective donor has the financial wherewithal to make necessary con-tributions, a debtor nonetheless cannot force a donation.116

Generally speaking, nonprofit entities “that have a proven record of year over year donations or revenue from business operations appear to have a greater chance of confirmation than those that do not.”117 But a stellar donation record also needs to be viewed from the perspective of the overall status of the economy. “[B]ecause nonprofits are often dependent on donor contributions to meet debt service and operating expenses, many nonprofits are particularly vulnerable to eco-nomic recession.”118

One very unique aspect to religious institution bankrupt-cies is “[c]ongregants [do] not necessarily behave like typical consumers.”119 Assuming that the church has a sufficiently large critical mass of members and assuming that they are properly motivated, a congregation has the ability to “just come up with” the money that is needed.120 In sharp contrast, if the parishioners are disillusioned by the situation (such as church mismanagement or improper deeds by a key pastor), they may simply abandon the church very quickly ending any hope of generating sufficient funds to reorganize.121



Liquidation and Dissolution

Whether in or out of bankruptcy the harsh reality is that some churches have incurred too much debt and do not have the wherewithal to repay it. Consequently, liquidation and dissolution are the only viable options. If the church pledged real property as collateral for a mortgage then the lender will be entitled to foreclose upon the property or enter into a deed-in-lieu of foreclosure. But even after the secured debt is satisfied the church may still have real or personal property. What becomes of that property in the event of dissolution or liquidation?

As noted above, the general rule is that a charitable “orga-nization’s assets must be permanently dedicated to an exempt purpose. This means that if an organization dissolves, its assets must be distributed for an exempt purpose described in sec-tion 501(c)(3) [of the Internal Revenue Code], or to the fed-eral government or to a state or local government for a public purpose.”122 Stated differently, ““in the dissolution process [a] nonprofit cannot give any of its property away to individu-als, including board members, other volunteers, employees or those served. The nonprofit can, however, sell its assets, as long as the individual or entity purchasing the asset is paying a reasonable amount, ideally the ‘fair market value.’”123

Federal bankruptcy law does not change these general rules. Any transfers of a nonprofit debtor’s property during bank-ruptcy must be in accordance with applicable non-bankrupt-cy law.124 In addition to legal restrictions, the distribution of assets from a charitable organization must also be done in a manner consistent with the organization’s bylaws or articles of incorporation.125 Thus, while applicable state and federal law would permit the distribution of Church A’s assets to Church B (where A and B are of diametrically different faiths), the governing bylaws or articles of incorporation must also be considered (which very well could require that the assets of Church A be transferred to another church of the same faith and sect as itself ).

V. Key Considerations for Troubled LoansThe rules discussed above provide the framework under

which troubled church loans are to be resolved. But simply knowing the rules is not enough. Rather, both churches and lenders need to have a good game plan in place if they hope to successfully emerge from the contest.

The psychology of filing for bankruptcy At first blush it may seem odd to consider the psychology of

what drives bankruptcy filings. But the limited research on this topic is illuminating for both debtors and lenders as they wres-tle with resolving a distressed church loan. To begin, it must be noted that “[r]eligious organizations are part of insular commu-nities, and thus their leaders may presume that members and others will help during times of distress, causing leaders not to

see their institutions’ financial problems as legal problems.”126 The fact that faith-based leaders may not see their problems as legal is a critical insight because “[r]esearch shows that most legal conflicts are resolved outside of the legal system.”127 In other words, leaders of financially troubled religious institu-tions will initially be very opposed to seeking legal help to resolve their problems. Stated differently, the likelihood of bankruptcy filing at the beginning of the troubled loan is very low.

Building upon her empirical research of faith-based Chap-ter 11 bankruptcy filings, Professor Foohey noted a psycho-logical pattern that precedes church bankruptcy filings.

Consistent with research regarding how individuals experience their justiciable problems, leaders initially chose to do nothing about their organization’s financial problem or to turn to self-help techniques, such as ap-proaching creditors themselves. Only when creditors pushed for payment or when members or trusted con-tacts brought law to their attention did their thoughts and actions begin to change. Leaders then turned to other pastors, congregants, and friends to confirm that the situations were legal problems and to discuss con-cerns about what filing would say about themselves and their congregations. Leaders’ social networks also led them to attorneys, who discussed the benefits of reor-ganization. With this information, leaders rationalized their decisions to file, which allowed them to cope with their continued views of filing for bankruptcy as stig-matized and shameful.128

Significantly and “similar to how lower and moderate in-come individuals discuss their justiciable problems, [religious] leaders rarely mentioned concerns about the cost of filing under chapter 11 as a dominant factor in their decision to file.”129 This analysis provides lenders with greater ability to predict how a church-based institution will react to continued pressure once they are able to determine where they are in this “realization cycle.”

“Even if religious organizations’ leaders understood that financially declaring bankruptcy represented the most viable remaining option, they still needed to decide that trying to reorganize was a socially and morally acceptable path for their congregation.”130 As one ecclesiastical leader so bluntly stated: “[B]ankruptcy from a spiritual standpoint is a no-no.”131 Pas-tors also may not seek bankruptcy because of their fear of the impact of the faith of their parishioners’, worries about dona-tions drying up, or concerns about fears and rumors.132

“Leaders most often justified their churches’ [bankruptcy] filings by discussing how they did not want to lose buildings that their members had built themselves or to which their congregants had emotional ties….. Leaders also justified the filings by noting that their organizations were community-



outreach driven and describing how the churches provided services to underserved populations.”133 “[T]he religious organiza-tion leaders’ journeys from financial distress to bankruptcy indicate that the leaders inte-grated their conceptions of themselves and their actions into their churches’ situations. Leaders spoke of what their churches’ finan-cial problems and filings under chapter 11 meant for their own feelings of self-worth.”134

Unfortunately, a church leader’s decision to file for bankruptcy does not result in an immediate epiphany where they understand the situation with perfect clarity. Indeed, church leaders may have “unrealistic expecta-tions about what chapter 11 [can] achieve for their organizations.”135 They may incorrectly assume that the filing will solve all their prob-lems.136 They may also think that, without any effort on their part, God will mirac-ulously provide a needed donor.137 They may not fully realize what needs to be done to cut expenses so as to survive financially.138

Loan life cycle

Troubled loans do not just happen in a vacuum. Rather, they are a result of several factors. By briefly considering key issues at various phases of the loan life cycle both lenders and religious institutions can become better prepared to success-fully address a troubled loan.

New loan When considering whether to make a new loan to a church,

Kansas lenders would be wise to generally consider what has happened with other churches. “Compared to the asset, debt, and solvency characteristics of other Chapter 11 busi-ness debtors, the religious organization debtors tend to own much more and owe less.”139 This is a critical point. When making loans to churches and other religious-based institu-tions lenders cannot blindly rely on traditional small business models because the underlying dynamics of the borrowers are very distinct (most notably a business has the objective of maximizing profits while a nonprofit does not have that goal). When they are approached by a faith-based institution for a loan, lenders should approach the church with the same rigor that they would in evaluating whether to make a comparably sized loan. In doing this one key consideration is asking why the church needs the loan. Has the organization continued to operate with a persistent deficit? Is the loan being sought simply as a temporary means of postponing an inevitable de-mise? Topping off underlying structural problems with more debt only pushes an entity closer to the brink of bankruptcy. Also, if the lender is willing to make the loan, it should defini-

tively confirm that the people procuring the loan on the church’s behalf have the legal authority to consummate that trans-action and bind the church

When considering making (or restruc-turing) a loan, lenders would also be well-advised to take a very hard look at the individual congregation and its ability to attract members. How many people are actively involved with the church? What is known about their socio-eco-nomic background (i.e., their ability to donate)? What are the trends in weekly and monthly attendance? Is that atten-dance correlated with a single pastor? Or is the religious community more tied to the church as an organization? It is es-sential that lenders work with the church to identify these “micro” statistics given that the answers to these questions can have a big impact on how the loan per-

forms—particularly when the church goes through a finan-cially challenging time or when an economic recession hits the local area.

While the potential downsides to a loan should be rigor-ously considered, the lender would also be wise to consider the upside to making the loan. For example, a loan made to a church in a low or moderate-income area may help satisfy requirements under the Community Reinvestment Act.140 It also raises the profile of the lender as being a “community player” who is truly committed to improving the area.

Workout and forbearance agreement risks Workout situations pose unique challenges for Kansas lend-

ers. One possible way to avoid a foreclosure is for the bor-rower (or a guarantor) to pledge additional collateral to secure the lender’s loan. But if the entity pledging the collateral is insolvent, such an action would constitute a constructively fraudulent conveyance under both the Bankruptcy Code and the Kansas Uniform Fraudulent Transfer Act.141 To illustrate this point, if a church has a subsidiary entity with unencum-bered property and the church directs that, to save its own financial condition with its lender, the subsidiary grants a mortgage in the real property thereby rendering it insolvent, such an action would constitute a constructively fraudulent conveyance and the lender would risk having that mortgage set aside in the event the subsidiary were to file for bankrupt-cy. Thus, a short-term solution for the lender’s problem could ultimately be undone to the lender’s great dismay. Similarly, the fact that land is donated to a religious institution does not prevent it from being clawed back through bankruptcy avoidance powers following the subsequent bankruptcy filing of the transferor.142

Faith and

Finance



Any lender approaching a possible workout should start with some triage. Ask why the church is dealing with a trou-bled loan. Is there a recession that is impacting giving? Was the congregation tied to a particular pastor who left or com-mitted an indiscretion? Did someone at the bank get a little too generous and loan too much money? Or did lack of fiscal discipline and good governance lead to the problem? The an-swers to these questions may identify the problem. It is critical to address the root problem rather than simply striking the weeds that grow out of that problem.

The practical reality is that the longer a workout drags on the more likely a bankruptcy is to occur. Accordingly, when-ever lenders prepare church forbearance agreements they would be well-advised to draft discrete and unmistakably clear benchmarks coupled with church concessions if those milestones are not met (the object, of course, being to avoid a bankruptcy filing).

Bankruptcy or its alternatives There are several benefits that a religious institution may

obtain from a bankruptcy filing. First, the automatic stay is immediately imposed providing critical breathing room for the debtor to reorganize its financial affairs.143 Additional-ly, the bankruptcy filing will stop the accrual of interest on unsecured debt.144 The debtor can reject burdensome execu-tory contracts and unexpired leases.145 The debtor can also sell property free and clear of liens and encumbrances.146 The debtor can restructure its debts, including changing loan re-payment terms.147

But bankruptcy is not necessarily a win for the debtor and a loss for the lender. Lenders also can avail themselves of key provisions of the Bankruptcy Code and Federal Rules of Bankruptcy Procedure. For example, a bankruptcy petition means the debtor must file its bankruptcy schedules and state-ment of financial affairs fully disclosing its financial condi-tion.148 The debtor has to appear at a mandatory meeting of creditors where it must answer under oath questions regarding its finances and ability to reorganize.149 Creditors may obtain documents and depositions from both the debtor and other third-parties on matters relating to the financial condition of the debtor.150 The debtor must provide its secured creditors with adequate protection against the diminution in value of their collateral during the pendency of the bankruptcy pro-ceeding.151 The debtor cannot use cash collateral subject to a lender’s security interest without the lender’s consent or a court order.152 The debtor cannot incur additional debt with-out approval of the bankruptcy court.153 And ultimately, the debtor must either confirm a viable plan of reorganization, liquidate itself (either through Chapter 11 or a voluntary con-version to Chapter 7) or have its case dismissed when it will then be subject to the lender’s normal state law rights. In oth-er words, a bankruptcy filing forces the religious institution to take substantive steps to address its financial condition. Fur-

thermore, once a religious institution files for bankruptcy, it no longer fully controls its own destiny. While it can certainly try to steer where the ship goes, bankruptcy judges and other creditors can take steps that ultimately generate unintended results for the debtor.

Of course, both lenders and churches may want to avoid bankruptcy for a variety of reasons. In those situations can a lender avail himself of Kansas receivership law? The short an-swer is yes. On their face, the Kansas receivership statutes do not bar the appointment of a receiver for a religious institu-tion.154 Rather, in such a situation a civil court would simply need to follow the church-state boundaries delineated above.

But the biggest practical danger with appointing a receiver is the impact such an act will have on the congregation. Receiv-ers simply manage assets. They are not spiritual leaders. Di-vesting a spiritual leader of control of the church’s assets runs the risk of alienating church members and creating the im-pression that the world is overcoming the church. Of course, the opposite could also be true. Parishioners may dearly love the church they have attended for decades, but feel the current leadership is grossly mismanaging it. As such, appointment of a receiver may bring greater trust by preserving assets and simultaneously enabling the church to work through their in-ternal governance structures for choosing leaders who will be supported by membership and will address the church’s fiscal problems in a responsible manner.

Who’s in charge? Another practical problem when dealing with financially

troubled churches is knowing who is in charge. Nondenomi-national and congregationalist churches are particularly at risk for troubled loans not only because they lack strong financial assistance from an overarching body, but also because their structures often have “ineffective internal governance.”155 In-deed, several attorneys who have represented financially trou-bled churches have struggled with knowing what exactly was the governing structure and who had the authority to make critical decisions such as whether to file for bankruptcy.156 This challenge may be particularly acute in congregationalist churches where the church body must be consulted.157

When an attorney begins representation of a religious in-stitution—particularly a congregationalist denomination—it is essential that the attorney clearly identify at the beginning who’s in charge and who ultimately has the final say in making critical decisions. When there is no clear chain of command an attorney can find him or herself spending far too much time consulting with a cadre of non-professional volunteers wrestling amongst themselves trying to come to a consensus on matters crucial to the church’s debt problems. This puts the attorney in a very bad predicament—essential decisions must be made but because of the client inability to decide the attorney may be left making determinations that really should



1. The views expressed herein are solely those of the author and do not necessarily reflect the views of Husch Blackwell LLP, the Kansas Bar Association, the Religion Law Section of the Kansas Bar Association or any other organization to which the author be-longs. This article is intended for educational purposes only and should not be relied upon as legal or other professional advice.

2. United States Census Bureau website, https://www.census.gov/quickfacts/ks (last visited December 8, 2015).

3. “Religious Landscape Study.” Pew Research Center, Washington, D.C. (May 12, 2015) http://www.pewforum.org/religious-landscape-study/state/kansas/ (“Trends” tab, last visited December 8, 2018).

4. Id. 5. Id. 6. Id. 7. Id. 8. Id.

9. Id. 10. Id. 11. Pamela Foohey, Bankrupting the Faith, 78 Mo. L. Rev. 719, 720

(2013). 12. Id. at 725. 13. Id. at 737, Table 2.14. Id. at 731-32. The study “identified a total of 516 cases and 473

unique religious organization debtors.” Id. at 731. Seven of these cases were from a Catholic diocese. Id.

15. Id. at 737. 16. Pamela Foohey, “When Churches Reorganize,” 88 Am. Bankr. L.J.

277, 285 (Summer 2014).17. Pamela Foohey, Bankrupting the Faith, 78 Mo. L. Rev. 719, 725

(2013). 18. Id. at 737; see also Pamela Foohey, “When Churches Reorganize,”

88 Am. Bankr. L.J. 277, 285 (Summer 2014) (“Similar to nondenomina-

be handled by the church’s governing body. In a similar vein, when lenders seek to resolve a troubled loan they too need to clearly establish who has the chain of command such that dispositive decisions can be made. Lenders and attorneys who wrestle with these issues would be well-advised to review gov-erning church documents and applicable law discussed above such that any negotiations that occur are done with the duly authorized church representatives.

Questions of “control” or “authority” of a church are not just limited to legal authority. Rather, the parishioners—most of whom have no legal authority regarding the church—can have a huge impact on what ultimately happens with the case. One very unique issue about a church bankruptcy filing is that, unlike with a small business, the real property securing the debt is emotionally valuable to the congregants—consid-ered sacred by many.158 There may be very strong feelings on the part of parishioners to do whatever it takes to save their place of worship. Unlike other commercial properties, church buildings are typically unique, making them more difficult to sell in the event of a foreclosure.159 In other words, market forces wrest away a certain amount of leverage from the lend-er. Also, foreclosure on a church building—particularly in a smaller community—runs the risk of negative publicity.160 Indeed, when their church is threatened with severe financial challenges, pastors and other church members may begin to equate the lender with the devil.161

Additionally, while it is true that a bankruptcy filing pre-vents a lender’s pre-petition security interest from attaching to property acquired post-petition by the estate,162 a potential sore spot for the religious institution will be learning that pre-petition donations (such as tithes and offerings) may be sub-ject to the lender’s security interest.163 Learning that a lender may use “sacred funds” to pay off debt may be troubling to pastors and church parishioners who do not understand how the law works. To avoid the negative fallout from emotional bombs such as this, lenders should use good judgment when determining what or what not to liquidate to pay down debt.

A major challenge for nonprofits—particularly smaller nonprofits—is establishing good governance and oversight. Smaller nonprofit organizations are often directed by volun-teers who lack professional experience in corporate adminis-tration. The work required for nonprofits can also be time consuming. Because many of the positions are unpaid due to lack of funding, the volunteers often do not put in the neces-sary time to ensure that the organization is properly run and monies are appropriately used for their intended purposes. Yet frequently these same people are the ones who are prone to remain in place following a chapter 11 reorganization. Lend-ers must be cognizant of this reality and use their leverage to insure that the organization appoints competent directors as part of any reorganization (whether in or out of bankruptcy).

VI. ConclusionAs long as there is both faith and a lack of resources, one can

expect that there will be a continual supply of church loans. But one lesson is abundantly clear: church loans cannot be treated like standard commercial loans. They are unique given both the boundaries between civil courts and faith-based in-stitutions and the fact that these are non-profit entities largely dependent on donations for their survival. By keeping these fundamental dynamics in mind and properly anticipating the issues that likely will arise, both lenders and faith-based insti-tutions can successfully navigate the challenges presented by troubled church loans.

About the Author

Michael D. Fielding is a partner in the Kansas City office of Husch Blackwell LLP and represents clients dealing with troubled loans in and out of bankruptcy. Mr. Fielding is president and founding member of the Religion Law Section of the Kansas Bar Association. He is Board Certified in Business Bankruptcy by the American Board of Certification.

[email protected]



tional churches, Congregationalist churches typically are not subject to an overarching denominational governing structure, particularly one to which they can turn for financial assistance.”)

19. Pamela Foohey, Bankrupting the Faith, 78 Mo. L. Rev. 719, 726 (2013).

20. Id. at 726. 21. Id. at 744.22. Id. at 738. In doing her analysis, Professor Foohey removed 19 cases

from the dataset including seven cases involving Catholic dioceses and related entities. Id. at 731.

23. Id. at 738. 24. Id. at 741. 25. Id. at 739. 26. Id. at 738.27. Id. at 727. 28. Id. at 726.29. Pamela Foohey, “When Churches Reorganize,” 88 Am. Bankr. L.J.

277, 291 (Summer 2014).30. Pamela Foohey, When Faith Falls Short: Bankruptcy Decisions of

Churches, 76 Ohio St. L.J. 1319, 1346 (2015) (citations omitted). 31. Pamela Foohey, Bankrupting the Faith, 78 Mo. L. Rev. 719, 744-49

(2013). 32. Id at 753. 33. Ed Flynn, “Bankruptcy By the Numbers: Chapter 11 is for Indi-

viduals and Small Business?”, Am. Bankr. Inst. J., Dec. 2018, Vol. XXX-VII, No. 12, p. 100.

34. Pamela Foohey, Bankrupting the Faith, 78 Mo. L. Rev. 719, 747, Table 4 (2013). Table 4 notes there were 471 cases in the study of which 125 obtained a confirmed plan.

35. In re Will of Keys, 40 Kan. App. 2d 503, 515, 193 P.3d 490, 498 (2008) (citing K.S.A. 17–1701).

36. Id. (citing Gospel Tabernacle Body of Christ Church v. Peace Publishers & Co., 211 Kan. 420, 423, 506 P.2d 1135, reh. denied 211 Kan. 927, 508 P.2d 849 (1973)).

37. K.S.A. § 17-1726. 38. Heartland Presbytery v. Presbyterian Church of Stanley, Inc., 53 Kan.

App. 2d 622, 640, 390 P.3d 581, 593 (2017) (Citing Venable v. Baptist Church, 25 Kan. 177, 182 (1881)).

39. Kennedy v. Gray, 248 Kan. 486, 492, 807 P.2d 670, 675 (1991). 40. Heartland Presbytery v. Presbyterian Church of Stanley, Inc., 53 Kan.

App. 2d 622, 637, 390 P.3d 581, 591 (2017).41. Heartland Presbytery v. Presbyterian Church of Stanley, Inc., 53 Kan.

App. 2d 622, 637–38, 390 P.3d 581, 591 (2017) (citing Serbian Orthodox Diocese v. Milivojevich, 426 U.S. 696, 713, 96 S. Ct. 2372, 49 L. Ed. 2d 151 (1976)); see also King v. Smith, 106 Kan. 624, 189 P. 147, 147–48 (1920).

42. Kennedy v. Gray, 248 Kan. 486, 493, 807 P.2d 670, 676 (1991) (cit-ing Serbian E. Orthodox Diocese for U. S. of Am. & Canada v. Milivojevich, 426 U.S. 696, 725, 96 S. Ct. 2372, 2387–88, 49 L. Ed. 2d 151 (1976)).

43. See Kennedy v. Gray, 248 Kan. 486, 494, 807 P.2d 670, 676 (1991) (“When the majority has spoken in a fairly-conducted congregational meeting held after proper notice to the membership, then the governing body of the church has expressed its will and, as in the case of an hierarchi-cal church, its decision is constitutionally immune from judicial review.”).

44. Bryce v. Episcopal Church in the Diocese of Colorado, 289 F.3d 648, 657 (10th Cir. 2002).

45. Church of God in Christ v. Bd. of Trustees of New Jerusalem Church of God in Christ, 26 Kan. App. 2d 569, 572–73, 992 P.2d 812, 815 (1999).

46. McAtee v. St. Paul’s Mission of Marysville, 190 Kan. 518, 376 P.2d 823 (1962).

47. Skrzypczak v. Roman Catholic Diocese of Tulsa, 611 F.3d 1238, 1244–45 (10th Cir. 2010).

48. Kedroff v. St. Nicholas Cathedral of Russian Orthodox Church in

North America, 344 U.S. 94, 73 S. Ct. 143, 97 L. Ed. 120 (1952). 49. Kennedy v. Gray, 248 Kan. 486, 494, 807 P.2d 670, 676 (Kan.

1991) (citation omitted). 50. United Brethren, etc. v. Mount Carmel Community Cemetery Ass’n,

152 Kan. 243, Syl. ¶ 1, 103 P.2d 877 (1940).51. Heartland Presbytery v. Presbyterian Church of Stanley, Inc., 53 Kan.

App. 2d 622, 641–42, 390 P.3d 581, 594 (Kan. App. 2017). 52. Kreshik v. Saint Nicholas Cathedral, 363 U.S. 190, 80 S. Ct. 1037,

4 L. Ed. 2d 1140 (1960).53. Heartland Presbytery v. Presbyterian Church of Stanley, Inc., 53 Kan.

App. 2d 622, 642, 390 P.3d 581, 594 (2017).54. Id. at 53 Kan. App. 2d 641, 390 P.3d 593 (2017) (citing Kennedy v.

Gray, 248 Kan. 486, 494, 807 P.2d 670, 676-77 (1991)). 55. Kennedy v. Gray, 248 Kan. 486, 495, 807 P.2d 670, 677 (1991). 56. Id.57. Gospel Tabernacle Body of Christ Church v. Peace Publishers & Co.,

211 Kan. 420, 422, 506 P.2d 1135, 1137, opinion adhered to on denial of reh’g, 211 Kan. 927, 508 P.2d 849 (1973).

58. Hughes v. Grossman, 166 Kan. 325, 330, 201 P.2d 670, 673–74 (1949).

59. Gospel Tabernacle Body of Christ Church v. Peace Publishers & Co., 211 Kan. 420, 422, 506 P.2d 1135, 1137, opinion adhered to on denial of reh’g, 211 Kan. 927, 508 P.2d 849 (1973).

60. Hughes v. Grossman, 166 Kan. 325, 330, 201 P.2d 670, 673–74 (1949).

61. In re Will of Keys, 40 Kan. App. 2d 503, 515–16, 193 P.3d 490, 498 (2008) (citation omitted).

62. Gospel Tabernacle Body of Christ Church v. Peace Publishers & Co., 211 Kan. 420, 422–23, 506 P.2d 1135, 1137–38, opinion adhered to on denial of reh’g, 211 Kan. 927, 508 P.2d 849 (1973).

63. Gospel Tabernacle Body of Christ Church v. Peace Publishers & Co., 211 Kan. 420, 422–23, 506 P.2d 1135, 1137–38, opinion adhered to on denial of reh’g, 211 Kan. 927, 508 P.2d 849 (1973).

64. Presbyterian Church in U.S. v. Mary Elizabeth Blue Hull Mem’l Pres-byterian Church, 393 U.S. 440, 449, 89 S. Ct. 601, 606, 21 L. Ed. 2d 658 (1969).

65. Gospel Tabernacle Body of Christ Church v. Peace Publishers & Co., 211 Kan. 420, 423, 506 P.2d 1135, 1138, opinion adhered to on denial of reh’g, 211 Kan. 927, 508 P.2d 849 (1973).

66. Id at 211 Kan. 424; 506 P.2d 1138-39.67. Id. at 211 Kan. 424, 506 P.2d 1139. 68. Id. at 211 Kan. 425, 506 P.2d 1140.69. Church of God in Christ v. Bd. of Trustees of New Jerusalem Church

of God in Christ, 26 Kan. App. 2d 569, 579, 992 P.2d 812, 818 (1999) (citation omitted); see also Church of God in Christ, Inc. v. Bd. of Trustees of Emmanuel Church of God in Christ, Wichita, 47 Kan. App. 2d 674, 687, 280 P.3d 795, 804 (2012).

70. Church of God in Christ v. Bd. of Trustees of New Jerusalem Church of God in Christ, 26 Kan. App. 2d 569, 580–81, 992 P.2d 812, 819 (App. 1999).

71. Miller v. Stoppel, 172 Kan. 391, 241 P.2d 488 (1952). 72. Bd. of Trustees of Kansas Annual Conference of Church of United

Brethren in Christ v. Mount Carmel Cmty. Cemetery Ass’n, 152 Kan. 243, 103 P.2d 877, 877 (1940).

73. Watson v. Jones, I80 U.S. 679,20 L. Ed. 666, 13 Wall. 679 (1871).74. Heartland Presbytery v. Presbyterian Church of Stanley, Inc., 53 Kan.

App. 2d 622, 639, 390 P.3d 581, 592 (2017).75. Whipple v. Fehsenfeld, 173 Kan. 427, 432, 249 P.2d 638, 642 (1952)

(citing Hughes v. Grossman, 166 Kan. 325, 201 P.2d 670, Syl. 4 (1949)); see also Simpson v. Mullineaux, 188 Kan. 139, 141, 360 P.2d 893, 895 (1961).

76. Simpson v. Mullineaux, 188 Kan. 139, 141, 360 P.2d 893, 895 (1961).

77. Hughes v. Grossman, 166 Kan. 325, 330, 201 P.2d 670, 674 (1949).



78. Church of God in Christ v. Bd. of Trustees of New Jerusalem Church of God in Christ, 26 Kan. App. 2d 569, 572–73, 992 P.2d 812, 815 (1999); see also Church of God in Christ, Inc. v. Stone, 452 F. Supp. 612 (D. Kan. 1976); Jackson v. Jones, 130 Kan. 488, 491, 287 P. 603 (1930); Heartland Presbytery v. Presbyterian Church of Stanley, Inc., 53 Kan. App. 2d 622, 641, 390 P.3d 581, 593–94 (2017).

79. See e.g., Bouldin v. Alexander, 82 U.S. 131, 21 L. Ed. 69, 15 Wall. 131 (1872).

80. Jones v. Wolf, 443 U.S. 595, 603, 99 S. Ct. 3020, 61 L. Ed. 2d 775 (1979).

81. In re Roman Catholic Archbishop of Portland in Oregon, 335 B.R. 842, 862 (Bankr. D. Or. 2005).

82. See e.g., K.S.A. §§ 17-1732 – 1734 (German Baptist Brethren church); K.S.A. §§ 17-35 – 1737 (Church of the Nazarene); K.S.A. §§ 17-37a – 1737c (Swedish evangelical mission association); K.S.A. §§ 17-1753 – 1755 (Free Methodist Church of North America); K.S.A. §§ 17-1756 – 1757 (Assembly of God Church). Fortunately, however, the merger or consolidation of charitable corporations or associations does not cause a lapse of any gift, devise or bequest that was made to one of the merging or consolidating entities. K.S.A. § 17-1738.

83. 11 U.S.C. § 303.84. 11 U.S.C. § 1112(c). 85. 11 U.S.C. § 1112(a). 86. In re Archdiocese of Milwaukee, 515 B.R. 579 (Bankr. E.D. Wis.

2014). 87. In re Heritage Vill. Church & Missionary Fellowship, Inc., 92 B.R.

1000 (Bankr. D.S.C. 1988), subsequently aff’d, 944 F.2d 901 (4th Cir. 1991), and subsequently aff’d sub nom. New Heritage Acquisition Corp. v. Bakker, 944 F.2d 902 (4th Cir. 1991).

88. 11 U.S.C. § 362(a). 89. 11 U.S.C. § 362(a). 90. In re Congregation Birchos Yosef, 535 B.R. 629 (Bankr. S.D. N.Y.

2015). 91. In re Roman Catholic Archbishop of Portland in Oregon, 335 B.R.

842 (Bankr. D. Or. 2005). 92. Id at 854. Presumably such an action would also not violate the

Kansas Constitution, Bill of Rights, § 7 which protects religious liberty. 93. Religious institutions are exempt from the Kansas Charitable Or-

ganizations and Solicitations Act. K.S.A. § 17-1759, et seq.; see also K.S.A. § 17-1762(k).

94. In re Roman Catholic Archbishop of Portland in Oregon, 335 B.R. 842 (Bankr. D. Or. 2005).

95. Id.; 42 U.S.C. § 2000bb–1(a).96. K.S.A. § 60-5301, et seq.97. 11 U.S.C. § 101(51B). 98. Pamela Foohey, Bankrupting the Faith, 78 Mo. L. Rev. 719, 719,

769 (2013).99. 11 U.S.C. § 101(51D). 100. Pamela Foohey, Bankrupting the Faith, 78 Mo. L. Rev. 719, 772

(2013). 101. 11 U.S.C. § 1129(b)(2)(B)(ii); Bank of America National Trust

and Savings Association v. 203 North LaSalle Street Partnership, 526 U.S. 434, 119 S. Ct. 1411 (1999); Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 108 S. Ct. 963 (1988).

102. In re Gen. Teamsters, Warehousemen & Helpers Union, Local 890, 365 F.3d 869 (9th Cir. 2001); In re Wabash Valley Power Ass’n, 72 F.3d 1305 (7th Cir. 1995). To be certain, not all lower courts hold this way. See Ame-lia Rawls, “Applying the Absolute Priority Rule to Nonprofit Enterprises in Bankruptcy,” 118 Yale L.J. 1231, 1233-34 (2009) (discussing split in authority among lower courts).

103. Pamela Foohey, “Chapter 11 Reorganization and the Fair and Eq-uitable Standard: How the Absolute Priority Rule Applies to All Nonprofit Entities,” 86 St. John’s L. Rev. 31, 59 (2012).

104. Internal Revenue Service, https://www.irs.gov/charities-non-prof-its/charitable-organizations/charity-required-provisions-for-organizing-documents (last visited December 10, 2018); see also Schedule N of Form 990; National Council of Nonprofits, https://www.councilofnonprofits.org/tools-resources/dissolving-nonprofit-corporation (last visited Decem-ber 10, 2018).

105. Evan C. Hollander and Scott K. Brown, “Confirming a Plan of Reorganization for a Nonprofit Debtor,” Norton Annual Survey of Bank-ruptcy Law, 2016 Edition, p. 102.

106. Dana Yankowitz Elliott and Evan C. Hollander, “Navigating a Nonprofit Corporation through Bankruptcy,” Nonprofit Quarterly, April 29, 2014.

107. Id.108. 11 U.S.C. § 1129(a)(11).109. 11 U.S.C. § 1129(a)(11).110. Evan C. Hollander and Scott K. Brown, “Confirming a Plan of

Reorganization for a Nonprofit Debtor,” Norton Annual Survey of Bank-ruptcy Law, 2016 Edition, p. 108.

111. In re Gentry, 807 F.3d 1222, 1225 (10th Cir. 2015). 112. Id at 1226. 113. Evan C. Hollander and Scott K. Brown, “Confirming a Plan of


114. Trinity Lutheran Church of Columbia, Inc. v. Comer, 137 S. Ct. 2012, 198 L. Ed. 2d 551 (2017) (A church’s free exercise rights are denied where a state denies on the basis of religion a church’s application for a state funding grant.)

115. 11 U.S.C. § 525. 116. 11 U.S.C. § 365(c)(2).117. Evan C. Hollander and Scott K. Brown, “Confirming a Plan of


118. Id at 91. 119. Pamela Foohey, “When Churches Reorganize,” 88 Am. Bankr.

L.J. 277, 297 (Summer 2014).120. Id. 121. Id. 122. Internal Revenue Service, https://www.irs.gov/charities-non-prof-

its/charitable-organizations/charity-required-provisions-for-organizing-documents (last visited December 10, 2018); see also Schedule N of Form 990; National Council of Nonprofits, https://www.councilofnonprofits.org/tools-resources/dissolving-nonprofit-corporation (last visited Decem-ber 10, 2018).

123. National Council of Nonprofits, https://www.councilofnonprof-its.org/tools-resources/dissolving-nonprofit-corporation (last visited De-cember 10, 2018).

124. 11 U.S.C. §§ 363(d)(1) and 1129(a)(16) ; see also Dana Yankow-itz Elliott and Evan C. Hollander, “Navigating a Nonprofit Corporation through Bankruptcy,” Nonprofit Quarterly, April 29, 2014.

125. National Council of Nonprofits, https://www.councilofnonprof-its.org/tools-resources/dissolving-nonprofit-corporation (last visited De-cember 10, 2018).

126. Pamela Foohey, When Faith Falls Short: Bankruptcy Decisions of Churches, 76 Ohio St. L.J. 1319, 1322 (2015).

127. Id at 1325.128. Id at 1323-24. 129. Id. at 1361. 130. Id. at 1352.131. Id. 132. Id. at 1349.133. Id. at 1356. 134. Id. at 2362.135. Pamela Foohey, “When Churches Reorganize,” 88 Am. Bankr.



L.J. 277, 297 (Summer 2014).136. Id.137. Id. at 298.138. Id.139. Pamela Foohey, Bankrupting the Faith, 78 Mo. L. Rev. 719, 719,

740 (2013). 140. 12 U.S.C. § 2901 et seq.141. See 11 U.S.C. § 548; K.S.A. § 33-201 et seq.142. In re Zarling, 70 B.R. 402 (Bankr. E.D. Wis. 1987) (conveyance

of farm property to religious society was a constructively fraudulent con-veyance).

143. 11 U.S.C. § 362(a). 144. 11 U.S.C. § 502(b)(2). 145. 11 U.S.C. § 365. 146. 11 U.S.C. § 363(f ).147. 11 U.S.C. § 1129.148. Fed. R. Bankr. P. 1007.

149. 11 U.S.C. § 341. 150. Fed. R. Bankr. P. 2004. 151. 11 U.S.C. § 361. 152. 11 U.S.C. § 363(b). 153. 11 U.S.C. § 364. 154. See K.S.A. §§ 16-1301 – 1305.155. Pamela Foohey, “When Churches Reorganize,” 88 Am. Bankr.

L.J. 277, 285 (Summer 2014).156. Id. at 291-92. 157. Id.158. Id. at 293.159. Id. at 294. 160. Id. 161. Id. 162. 11 U.S.C. § 552(a).163. Pamela Foohey, “When Churches Reorganize,” 88 Am. Bankr.

L.J. 277, 295-96 (Summer 2014).

Ingrams.com | April 2019

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K A N S A S C I T Y ’ S N E X T M A Y O R | H E A L T H C A R E I N D U S T R Y O U T L O O K | I N S U R A N C E T R E N D S

| April 2019

The 21st Class 21st Class 21st Class2019.04 April cover.indd 1

4/11/19 1:47 PM

Congratulations to KBA President

Sarah E. Warner

• The Principal at Thompson Warner, at age 39. • President of the Kansas Bar Association, at age 38. • President of the Kansas Assn. of Defense Counsel (KADC). • Board member of the Kansas Board for Discipline of Attorneys. • J.D. from Ave Maria School of Law, in Michigan, • Teaches at Washburn University School of Law.• At her own litigation practice, Warner focuses on resolving state and

federal constitutional claims, contract disputes, eminent domain issues, land use and real estate disputes, and bodily injury claims.

• Gov. Laura Kelly’s nominee for the Kansas Court of Appeals.

“In Kansas, where state government has one of the lowest rates of attorney participation in elected leadership positions in history, lawyers entering the practice have a vested interest in guiding the development of policy for years to come.” Sarah E. Warner

Named to Ingram’s prestigious 40 Under Forty for 2019

churches, lenders & troubled loans in kansas bar... · 2020. 5. 21. · faith” and...

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