Faith under stress: Troubled church loans in Missouri

This article will present some key empirical data regarding religious participation in Missouri as well as churches in bankruptcy; consider Missouri law impacting civil court involvement with religious institutions; address key bankruptcy considerations for churches and their lenders; and explore issues to be considered by both lenders and religious organizations when dealing with troubled church loans.

Empirical Data – Churches and Troubled Loans

Knowing the “marketplace” is important for lenders when making loans to religious institutions.² According to the Pew Research Center on Religion and Public Life (see chart on next page), the vast majority of Missouri’s 6.1 million people (82%) say that religion is important in their lives.³ From a belief/denomination perspective, 77% of the population are Christian.⁴ Non-Christian faiths (e.g., Jewish, Muslim, Buddhist, Hindu, etc.) comprise 3% of the adult population.⁵ Approximately 20% of Missouri adults are unaffiliated with any religion, and, of this figure, 3% consider themselves agnostic while 2% are atheist.⁶ The data also reveal a slow move away from organized religion.⁷

Pew Research Center Religious Landscape Study

Description	2007	2014
Absolute or fairly certain belief in God	93%	87%
Religion considered very or somewhat important in one’s life	86%	82%
Weekly attendance at religious services	43%	37%
Monthly/occasional attendance at religious services	30%	34%
Daily or weekly prayer	80%	75%
Weekly or monthly feeling of spiritual peace	65%	74%
Weekly or monthly scripture study	50%	40%

While religious participation is not disappearing, the discernible trend points to a slow erosion of religious observance that must be considered in the loan context. As fewer people attend churches, there will be fewer donations. This in turn will likely increase financial stress on religious institutions. This stress serves as a risk factor in addition to the impact of macroeconomic conditions, such as recessions. Both lenders and church leaders would be wise to pay attention to these “storm clouds on the horizon” and take appropriate precautionary measures as needed.

Church Bankruptcy Filings

The limited data on church bankruptcy filings highlight key issues unique to religious institutions. In 2013, Prof. Pamela Foohey published an empirical study in the Missouri Law Review that examined church bankruptcy filings between 2006 and 2011.⁸ The vast majority of filings (93.4%) came from Christian denominations.⁹ Christian churches with a Congregationalist polity (i.e., churches that are governed locally by a majority rather than a national or international church hierarchy) are much more likely to have financial troubles.¹⁰ A large number of filings were seen in these denominations, including many Pentecostal and Baptist churches.¹¹

Most religious institutions filed for Chapter 11 bankruptcy due to real property mortgage issues.¹² On average, religious institutions in bankruptcy had assets worth $2.8 million with real property constituting almost all ($2.6 million) of that figure.¹³ The average total debt was just more than $2 million, with $1.7 million of that being secured by real property.¹⁴ In total, 72% of the church debtors were balance-sheet solvent.¹⁵ On average, these institutions had operated for 23 years.¹⁶

Church bankruptcy filings are generally driven by two factors: (1) lack of ability to pay debt obligations and (2) too much dependency on key leaders who took actions that adversely affected the church.¹⁷ “[T]he leaders of many of the smaller congregations lacked business acumen, even more so than owners of small businesses. Consequently, these organizations’ 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.”¹⁸

A church’s likelihood of successfully reorganizing under Chapter 11 is not good. For 2008-2015, nationwide 47.3% of all Chapter 11 cases were dismissed, 19.2% were converted to another Chapter, and only 28% were confirmed.¹⁹ The confirmation rate for a faith-based bankruptcy was 26.5%.²⁰

The Line Between Churches and Civil Courts

Churches stand at the intersection of ecclesiastical law and state and federal constitutional and statutory law. To better understand how to deal with troubled church loans, it is first necessary to consider key legal rules pertaining to religious institutions.

General

In addition to the First Amendment, the Missouri Constitution also protects the free exercise of religion and prohibits public aid for religious institutions.²¹ The Supreme Court of Missouri has repeatedly affirmed “‘that the provisions of the Missouri Constitution declaring that there shall be a separation of church and state are not only more explicit but more restrictive’ than the First Amendment.”²² Individuals can associate with whatever church they may, and those who join a particular religious denomination agree to be bound by its rules.²³ “The consent to submit to the discipline of the church, sect, or congregation is one of contract, therefore, between the member and the religious body.”²⁴ “[W]hen a person becomes a member of a church he thereby submits to ecclesiastical jurisdiction in ecclesiastical matters, and has no legal right to invoke the supervisory power of the civil courts.”²⁵

“The United States Supreme Court has recognized that when a church renders a decision on a purely ecclesiastical matter, ‘the Constitution requires that civil courts accept their decisions as binding upon them.’”²⁶ Ecclesiastical matters include doctrines, creeds, forms of worship, church laws and regulations, membership in the church, church discipline, excommunication/expulsion from the church, appointment/removal of a pastor, and employment (hiring, firing, and retention of church employees performing ecclesiastical functions), etc.²⁷ The First Amendment prohibits judicial inquiry into a church’s hiring, ordaining, or retention of clergy members.²⁸ Civil courts also do not have authority to appoint a particular clergy member to a particular position within the church.²⁹ The First Amendment protections extend to statements by clergy members on religious matters. For example, if statements from ecclesiastical leaders are made to or about church members in the context of a religious matter, the Free Exercise Clause creates a jurisdictional bar to the court’s authority that, in turn, becomes a defense to any alleged defamation claim arising from that speech.³⁰

The intersection of constitutional religious protections and state tort laws illustrates the limited involvement that civil courts can have in ecclesiastical matters. “The [Establishment Clause’s] mandate applies to any exercise of state power, including judicial decision on a state’s common law.”³¹ Because of this overriding constitutional directive, “courts may not decide tort claims involving negligent acts if analysis of such claims would require the court to interfere with or interpret church doctrine, policy, polity, practice, or administration.”³² This is because a “court’s involvement in such ecclesiastical matters would violate the Establishment Clause of the First Amendment by resulting in an excessive entanglement in religion.”³³ Thus, the Establishment Clause of the First Amendment bars claims against churches for negligent supervision of clergy,³⁴ and there is no claim for a church’s alleged negligence in hiring, ordaining, or retaining a clergy member.³⁵ “Claims for negligent supervision of clergy . . . and negligent infliction of emotional distress . . . are [also] precluded by the First Amendment.”³⁶ Missouri also does not recognize “breach-of-fiduciary-duty actions against clergy for sexual misconduct.”³⁷

But “[c]lergy and religious organizations are not absolutely immune from civil liability.”³⁸ Missouri has abolished the doctrine of charitable immunity.³⁹ Churches can be held liable for common law torts,⁴⁰ and “[t]he mere status of an individual as an officer of a religious entity does not insulate the individual from all liability for tortious conduct.”⁴¹ Indeed, “[r]eligious conduct intended or certain to cause harm need not be tolerated under the First Amendment.”⁴² Thus “claims of intentional torts are not barred by the First Amendment as these claims can be resolved without excessive intrusion into religious doctrine, polity, and practice.”⁴³ Why is this? “Tort actions against religious groups or persons are not offensive to the First Amendment if based on purely secular activities, unrelated to their religious functions; if the alleged wrongdoing was clearly outside the tenets of the religion, notwithstanding its religious pretext, then it is actionable.”⁴⁴

“Neutral Principles of Law”

While the Missouri Constitution protects a person from being compelled to support or participate in any particular church, it also requires that people who voluntarily contract with a religious organization are required to perform under such an agreement.⁴⁵ Along these lines, numerous Missouri courts have recognized that civil courts have jurisdiction to protect property and civil rights even when the dispute arises out of a religious controversy.⁴⁶ The challenge, of course, is exercising that jurisdiction in a manner that does not run afoul of existing constitutional protections for religious liberties.

To that end, in 1984 the Supreme Court of Missouri adopted “the ‘neutral principles of law’ approach as the exclusive method for resolution of church property disputes.”⁴⁷ This is still recognized today as the prevailing standard for Missouri.⁴⁸ In a nutshell, the “neutral principles of law” means that, when resolving controversies involving religious entities, Missouri courts will apply generally applicable law without relying on religious concepts as the underlying relevant documents are reviewed and interpreted by the court.⁴⁹ Stated differently, a civil court is free to consider various documents (e.g., deeds, trusts, relevant statutes, governing church documents, etc.) but “in scrutinizing religious documents do so in secular terms, rather than relying on religious precepts or concepts.”⁵⁰

Missouri court decisions are replete with examples of applying “neutral principles” to church disputes. To begin, for a church to hold property, it must be properly organized under Missouri law. “[A]n unincorporated religious association is without capacity to hold and pass title to real estate.”⁵¹ Thus, a transfer of marital property to an unincorporated religious association will be of no effect and will remain marital property.⁵² An unincorporated church association cannot be a member of a nonprofit corporation.⁵³ An unincorporated church also cannot “merge” with another church.⁵⁴

The fact that a matter is determined to be “ecclesiastical” in nature does not immediately and wholly bar a civil court from considering the matter. If disputed funds have been interplead, the civil court may still order disbursement of those monies to the governing church body so long as the church uses neutral principles of law in making its determination as to which body is the governing entity.⁵⁵

“Questions concerning property ownership generally do not implicate such ‘ecclesiastical matters.’”⁵⁶ “Courts may consider record title, deed language, relevant statutes, and church documents providing guidance or instruction on the ownership of church property, but must scrutinize the latter in secular terms without relying on religious precepts or concepts.”⁵⁷ In one case, the disassociation of a local church from a governing national church did not create an express or implied trust in the property of the local church where the national church’s constitution did not create any such trust.⁵⁸ In a another similar case, the court relied upon a national church’s constitution, the local church’s articles and bylaws, and the underlying property conveyance documents in determining the property in question was not held in trust for the benefit of the national church even though the national church was a hierarchical denomination.⁵⁹ But in another dispute, a national church was deemed to be the owner of local church property where the property had been conveyed to the legal entity that was created to hold title to property for the national church.⁶⁰ Nevertheless, the civil court imposed a constructive trust and a purchase money resulting trust for the benefit of the local church so as to avoid unjust enrichment by the national church.⁶¹

Occasionally, issues of standing arise in church disputes. Where a deed gave control over church property to the pastor, the parishioners were not entitled to obtain civil court relief regarding the use of that property.⁶² But a clergy member cannot invoke civil court authority to stop certain actions by other church members where the church’s constitution does not provide that clergy member with authority to seek redress of such actions.⁶³

Assuming that there is no question of improper authority or procedure applied, a civil court must accept the expulsion of a person from a religious entity “as conclusive proof that those persons are no longer members of the church.”⁶⁴ But a court, analyzing a dispute under Missouri nonprofit law, will have jurisdiction to ascertain if a clergy member has authority under church bylaws to remove members and appoint directors.⁶⁵ Similarly, a civil court can determine whether directors of a nonprofit corporation that holds assets of a religious congregation are qualified to hold their position due to noncompliance with the applicable articles and bylaws.⁶⁶ A civil court will also not run afoul of the First Amendment by determining who are members of a church when the court considers non-profit law and uses the church’s published list of its members.⁶⁷

The lesson from these cases is clear. In inter-church disputes regarding control of property, a religious entity cannot hope to prevail by relying on religious tenets. Rather, the governing legal documents (such as the by-laws, church constitution, trusts, etc.) will be analyzed and the winning party will be determined by application of neutral principles of law.

Factions and Schisms

Factions and schisms arise from time to time within different denominations. “It is the general rule that, in event of a schism in a church, the right to possession and control of the church property remains in that faction, whether majority or minority, which adheres to the faith, doctrine and established practices of the church as it existed prior to the division.”⁶⁸ But this general rule has an added twist in congregational churches where no hierarchical body exists to resolve doctrinal disputes. In those situations, “the will of the majority must show ‘real and substantial’ departure from the essential theological doctrine of the church before the minority can prevail on the property ownership issue.”⁶⁹ Stated differently, “changes which affect only the business management or temporal control of the church, or the mere form of worship, are not departures within the meaning of the rule that a majority will forfeit its property rights by departing from the fundamental beliefs of the church.”⁷⁰

Religious Institutions in Bankruptcy

With the backdrop of the church-civil court boundaries in mind, it becomes easier to understand how generally applicable bankruptcy laws are applied to religious institutions in bankruptcy.

Limitations

Involuntary bankruptcy filings cannot be filed against nonprofit entities (including religious institutions).⁷¹ A bankruptcy court cannot convert a nonprofit Chapter 11 to Chapter 7.⁷² But a non-profit Chapter 11 debtor can voluntarily convert its case to Chapter 7.⁷³ Bankruptcy courts are barred from reviewing ecclesiastical decisions of churches.⁷⁴ But holding a clergy position does not make one immune from tort liability for matters such as pre-bankruptcy breaches of fiduciary duties (such as self-dealing, paying excessive salaries and bonuses, misusing church funds, etc.).⁷⁵

Property of the Estate

A critical question for any bankruptcy is: What property is part of the bankruptcy estate? If the property used by a religious organization is held in a trust that is separate and apart from the church, then that property will not be deemed property of the estate and will be unavailable to help satisfy creditors’ claims. Once a church files for bankruptcy, the court must determine what property belongs to the bankrupt estate.⁷⁶ Additionally, “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 religious organizations.”⁷⁷ If it is determined that donations (such as tithing) are property of the estate, then those funds can be used to pay creditors’ claims.⁷⁸ This action does not violate the federal Religious Freedom Restoration Act.⁷⁹ It would also likely not be deemed to violate the Missouri Religious Freedom Restoration Act.⁸⁰

Single-Asset Real Estate and Small-Business Provisions

A church bankruptcy filing — even when the only property owned by the church is its place of worship — does not fit the Bankruptcy Code’s definition of a “single asset real estate case.”⁸¹ This is because the church does not simply rent the building to generate cash. Rather, “[f]aith-based institutions conduct ‘substantial business’ in their real property — that is, the ‘business’ of ministering — other than operating the property, and thus technically they are not” single-asset real estate entities.⁸²

A church bankruptcy proceeding also does not fit the Bankruptcy Code’s definition of a “small business debtor.”⁸³ There are three key distinctions between a small-business bankruptcy filing and a church bankruptcy filing:

First, they have operated on average three times longer than the average small business debtor. Second, they own assets of considerable value apart from their leaders’ ability to energize a congregation. In particular, 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.⁸⁴

But if the church has an ancillary operation (e.g., a daycare center or provides education), then it is possible that a bankruptcy court could find that it qualifies as a small business debtor if more than 50% of its revenue is deemed to arise from commercial or business activities.⁸⁵

Reorganizing Under Chapter 11

Not all bankruptcy filings are the same. Some debtors have a better chance of surviving than others. What key factors should be considered when contemplating the likelihood of success?

Absolute Priority. The Bankruptcy Code’s absolute priority rule requires that higher priority classes must be paid in full before lower subordinate classes may receive any distribution.⁸⁶ Surprisingly, most courts that have considered the issue have concluded the absolute priority rule does not apply to nonprofits.⁸⁷ As one commentator noted: “The few courts that have decided absolute priority claims in nonprofit bankruptcies overall hold that the absolute priority rule is categorically satisfied 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.”⁸⁸ This outcome is not so surprising when recognizing 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 government or to a state or local government for a public purpose.”⁸⁹ The filing for bankruptcy does not change or escape the application of that generally applicable law.

“[M]ost 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).”⁹⁰ “[U]nlike in a bankruptcy of a for-profit corporation, managers and directors of a reorganized nonprofit may often retain control of the nonprofit over the objection of an impaired class of creditors.”⁹¹ This reality, in turn, leads to the question of whether the proposed plan of reorganization is feasible.

Feasibility. Nonprofit boards have a duty to ensure that the organization accomplishes its charitable purposes.⁹² But how can this objective be achieved when there are numerous unpaid creditors who can only be paid if revenue is maximized? The debtor must show that a Chapter 11 plan is feasible for it to be confirmed.⁹³ A plan of reorganization will be feasible if “[c]onfirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan.”⁹⁴ Feasibility is not a guarantee of success but rather just a “reasonable assurance of success.”⁹⁵

The debtor must prove feasibility by a preponderance of the evidence.⁹⁶ This is done by showing how certain debts will be satisfied. This, in turn, means the church must show where it will obtain cash. Nonprofit funding typically falls into four categories: “[1] nonprofits that depend entirely on donations; [2] nonprofits that have a mixture of donations and revenue-generating business operations; [3] nonprofits that are entirely dependent on revenue-generating business operations; and [4] nonprofits that survive off of unique sources of funding, such as assessments of members.”⁹⁷ Governmental entities cannot deny funds solely on the basis of religion.⁹⁸ Similarly, a governmental entity also cannot deny a church grant simply because the entity has filed for bankruptcy.⁹⁹

Religious institutions typically derive their revenues through donations. But donations are problematic because a donor’s statement that he or she will donate is not binding or enforceable. Indeed, a debtor cannot force a donation.¹⁰⁰ At most, lenders and creditors are left hoping that sufficient monies will be available to service debt. 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.”¹⁰¹ But anticipated donations are affected by the economy’s health. “[B]ecause nonprofits are often dependent on donor contributions to meet debt service and operating expenses, many nonprofits are particularly vulnerable to economic recession.”¹⁰²

A unique aspect of church bankruptcies is “[c]ongregants [do] not necessarily behave like typical consumers.”¹⁰³ A motivated group of parishioners has the ability to “just come up with” the money that is needed.¹⁰⁴ Conversely, a large group of upset parishioners may simply abandon the church, leaving it without sufficient funds to reorganize.¹⁰⁵

Liquidation

For some churches, the debts are too high, and liquidation is the only viable option. Secured lenders can foreclose on church property on which they have liens to satisfy the outstanding debt. But what happens to the unencumbered property? “[I]n the dissolution process [a] nonprofit cannot give any of its property away to individuals, 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.’”¹⁰⁶ A federal bankruptcy proceeding does not change this result. Applicable non-bankruptcy law must be followed when transferring a nonprofit’s assets during bankruptcy.¹⁰⁷ 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.¹⁰⁸

Addressing Troubled Church Loans

Bankruptcy Psychology

The limited research on the topic reveals that church leaders generally go through a psychological process as they slowly come to the realization that a bankruptcy proceeding is needed.¹⁰⁹ Lenders would be wise to identify where in that “process” the respective church leader is in order to enable the lender to more meaningfully address the situation.

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 approaching creditors themselves. Only when creditors pushed for payment or when members or trusted contacts 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 concerns about what filing would say about themselves and their congregations. Leaders’ social networks also led them to attorneys, who discussed the benefits of reorganization. With this information, leaders rationalized their decisions to file, which allowed them to cope with their continued views of filing for bankruptcy as stigmatized and shameful.¹¹⁰

Notably, the cost of filing for bankruptcy is typically not a stated concern of church leaders.¹¹¹ “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.”¹¹² As one church leader candidly admitted: “Bankruptcy from a spiritual standpoint is a no-no.”¹¹³ But making the moral “leap of faith” to file for bankruptcy does not end the analysis. Some church leaders have “unrealistic expectations about what chapter 11 [can] achieve for their organizations.”¹¹⁴ They may wrongly believe that the filing will resolve their challenges.¹¹⁵ They may also believe that God will provide a donor without any effort on their part. In short, church leaders may still not fully understand what truly needs to be done to financially survive.¹¹⁶

New Loans

The empirical evidence reveals that, “[c]ompared to the asset, debt, and solvency characteristics of other Chapter 11 business debtors, religious organization debtors tend to own much more and owe less.”¹¹⁷ This is very important. Lenders cannot simply rely on traditional business models when loaning to religious institutions. In addition to typical measures, lenders should also thoroughly explore why the loan is needed in the first place. Are the monies sought to simply cover a persistent deficit? Would the loan be simply a bandage temporarily masking a much larger and fundamental financial problem? The lender would also be wise to consider the supporting congregation. What is the level of activity — both on Sunday and other days of the week? Is the congregation growing or declining? What are the reasons for the congregational growth or decline? Is the church heavily reliant on a particular minister?

Of course, there may be additional business reasons to make a modest loan to a church that is not a picture-perfect borrower. A loan made to a church in a low- or moderate-income area might partially satisfy Community Reinvestment Act requirements.¹¹⁸ It certainly makes the lender stand out as an organization that genuinely cares about the community’s success and improvement.

Workout and Forbearance Agreements

Loan workouts often pose unique issues. In addition to extending a note’s maturity date in exchange for a payment of cash, an easy solution to avoiding foreclosure is for the borrower or a guarantor to pledge additional collateral to secure a loan. But the pledge of collateral by an insolvent entity is not without risk, as it could be construed as a constructively fraudulent conveyance under both the Bankruptcy Code and the Missouri Uniform Fraudulent Transfer Act.¹¹⁹ Donated assets may be clawed back through a bankruptcy avoidance action if the transferor later files for bankruptcy.¹²⁰

A lender would be wise to leverage the financial crisis to strongly encourage the church to address structural problems that have resulted in the poor financial condition. This could include amending by-laws to ensure better church financial governance, diversification away from a single pastor on whom the church is too reliant, or liquidation of non-essential assets to “right size” the ship and partially pay down debt.

Bankruptcy or its Alternatives

Despite the statistical risks of bankruptcy, a church may still benefit from a bankruptcy filing. To begin, the automatic stay immediately goes into effect, which presses pause on creditor collection efforts.¹²¹ The accrual of interest on unsecured debt ceases.¹²² The church can reject financially burdensome executory contracts and unexpired leases.¹²³ It can sell property free and clear of liens and encumbrances.¹²⁴ The church can also restructure debts, including changing loan terms.¹²⁵

There are key bankruptcy provisions to which lenders can avail themselves. To begin, the debtor must file its bankruptcy schedules and statement of financial affairs to fully disclose its financial condition.¹²⁶ The debtor must appear and answer questions at the mandatory meeting of creditors.¹²⁷ Creditors can obtain documentation and depositions from the debtor and other third parties.¹²⁸ Secured creditors are entitled to receive adequate protection against the diminution in value of their collateral while the bankruptcy is pending.¹²⁹ The debtor must obtain either the lender’s approval or a court order authorizing use of cash collateral subject to a lender’s security interest.¹³⁰ The debtor must obtain court approval to incur any additional debt.¹³¹ Finally, something definitive must happen to the debtor, such as confirming a plan, having the case converted to Chapter 7, or having the case dismissed. In short, bankruptcy forces the religious entity to confront its financial reality and do something about it.

The Missouri Nonprofit Corporation Act allows for the appointment of a receiver if a lender prefers a receivership over a bankruptcy filing.¹³² Of course, a court-appointed receiver would not have constitutional authority to make ecclesiastical decisions for the church, but rather would be limited to control and disposition of the church’s property. But such an action runs the grave risk of alienating members and substantially causing donations to cease. In such a situation, the receivership would likely turn into a court-supervised liquidation of the religious institution.

Who’s in Charge?

A key area of concern is identifying who oversees the church. Nondenominational 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.”¹³³ Past experience with troubled church loans reveals that an uncertain governance structure to make critical decisions (such as whether to file for bankruptcy) has been a challenge for attorneys.¹³⁴ This problem is particularly acute to congregationalist churches, where the church body must be consulted.¹³⁵ An attorney who is engaged to represent a church would be wise to clearly identify and establish “the chain of command” at the outset of the representation. This may even require an amendment to the church’s by-laws. Doing this can avoid unnecessary headaches, as it will be clear who has authority to make binding decisions for the organization.

Although legal authority to make decisions for a church will be set by the church’s governing documents, an attorney would be wise to not ignore the church’s parishioners. Unlike a small business, the real property securing a church’s debt is emotionally valuable to the congregants — considered sacred by many.¹³⁶ Parishioners may be willing 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.¹³⁷ Stated differently, market forces wrest away a certain amount of leverage from the lender. Foreclosure on a church building — particularly in smaller communities — runs the risk of negative publicity.¹³⁸

Lenders should use good judgment when determining what or what not to liquidate to pay down debt. A potential sore spot for the church will be learning that pre-petition donations (such as tithes and offerings) may be subject to the lender’s security interest.¹³⁹ The realization that a lender can use “sacred funds” to pay down debt may bother both pastors and congregants who do not understand the law. This, in turn, could have an adverse effect on donations.

Finally, as part of any restructuring — whether in the form of a forbearance agreement or bankruptcy reorganization — lenders would be wise to use their leverage to push for the appointment of competent directors and/or the adoption of sound by-laws to govern the financial affairs of the religious institution. Many churches — particularly smaller ones – are directed by well-intentioned people who lack basic business experience needed to successfully operate an organization. Establishing good governance is vitally important so that the institution will be able to service its debt and survive.

Conclusion

As long as faith co-exists with limited resources, one should expect that there will be a need for loans to religious institutions. While civil courts may not intervene in the ecclesiastical affairs of churches, they can exercise jurisdiction and apply neutral principles of law to resolve property disputes. These neutral principles of law plainly apply in the context of debtor-creditor relations. By being cognizant of the applicable law and issues unique to nonprofits, both lenders and religious institutions can better work together to ensure a successful relationship.

Endnotes

1 Michael D. Fielding is a partner in the Kansas City office of Hush Blackwell LLP and represents clients dealing with troubled loans in and out of bankruptcy. Fielding is chair of the University of Missouri – Kansas City School of Law's annual Law & Religious Freedom Conference and is the founding member and moderator of The Missouri Bar’s Religious Entities and the Law Community. He is board-certified in business bankruptcy by the American Board of Certification.

The views expressed herein are solely those of the author and do not necessarily reflect the views of Husch Blackwell LLP or any other organization to which the author belongs. 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, https://www.census.gov/quickfacts/mo (last visited February 23, 2019).

3 “Religious Landscape Study,” Pew Research Center, Washington, D.C. (May 12, 2015), http://www.pewforum.org/religious-landscape-study/state/missouri/ (last visited February 23, 2019).

4 Id.

5 Id.

6 Id.

7 Id. In the fall of 2019, the Pew Research Center issued a new report on Christianity in the United States. See “In U.S., Decline of Christianity Continues at Rapid Pace,” (October 17, 2019), https://www.pewforum.org/2019/10/17/in-u-s-decline-of-christianity-continues-at-rapid-pace/ (last visited December 4, 2019). While the report was not state specific, the results showed a continuing decline in Christian religious participation in the United States. Similarly, the report noted that the religiously unaffiliated population continues to grow.

8 Pamela Foohey, Bankrupting the Faith, 78 Mo. L. Rev. 719, 720 (2013).

9 Id. at 737, Table 2. See also 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 Catholic dioceses. Id.

10 Id. at 737.

11 Pamela Foohey, When Churches Reorganize, 88 Am. Bankr. L.J. 277, 285 (Summer 2014).

12 Foohey, supra note 9 at 726.

13 Id. at 738.

14 Id.

15 Id. at 739.

16 Id. at 738.

17 Id. at 727.

18 Foohey, supra note 12 at 291.

19 Ed Flynn, Bankruptcy by the Numbers: Chapter 11 is for Individuals and Small Business?, Am. Bankr. Inst. J., Vol. XXXVII, No. 12, p. 100, December 2018.

20 Foohey, supra note 13 at 747, Table 4. Table 4 notes there were 471 cases in the study, of which 125 obtained a confirmed plan.

21 Missouri Constitution, Article I (Bill of Rights) §§ 5 and 7.

22 Gibson v. Brewer, 952 S.W.2d 239, 246 (Mo. 1997) (citing Paster v. Tussey, 512 S.W.2d 97, 101–02 (Mo. banc 1974)).

23 Gibson, 952 S.W.2d at 250.

24 Hester v. Barnett, 723 S.W.2d 544, 559–60 (Mo. App. W.D. 1987).

25 Stamps v. Kirkendoll, 689 S.W.2d 111, 114 (Mo. App. E.D. 1985) (citation omitted).

26 Beth Hamedrosh Hagodol Cemetery Ass’n v. Levy, 923 S.W.2d 439, 442 (Mo. App. E.D. 1996) (citing Serbian Eastern Orthodox Diocese v. Milivojevich, 426 U.S. 696, 725, 96 S.Ct. 2372, 2387–88, 49 L.Ed.2d 151 (1976)); see also Jones v. Wolf, 443 U.S. 595, 606–09, 99 S.Ct. 3020, 3026–28, 61 L.Ed.2d 775 (1979).

27 See e.g., B.B. v. Methodist Church of Shelbina, Missouri, 541 S.W.3d 644, 655 (Mo. App. E.D. 2017); Heartland Presbytery v. Gashland Presbyterian Church, 364 S.W.3d 575, 586 (Mo. App. W.D. 2012); Weaver v. African Methodist Episcopal Church, Inc., 54 S.W.3d 575, 580 (Mo. App. W.D. 2001); Beth Hamedrosh Hagodol Cemetery Ass’n, 923 S.W.2d at 442–43 (Mo. App. E.D. 1996); see also Serbian Eastern Orthodox Diocese for the U.S. and Canada, 426 U.S. 696, 708–11, 96 S.Ct. 2372, 2380–88, 49 L.Ed.2d 151 (1976).

28 Gibson, 952 S.W.2d at 246–47; Weaver, 54 S.W.3d at 580; see also Serbian Eastern Orthodox Diocese, 426 U.S. at 708–11.

29 Stamps, 689 S.W.2d 111.

30 State ex rel. Gaydos v. Blaeuer, 81 S.W.3d 186, 196 (Mo. App. W.D. 2002).

31 B.B., 541 S.W.3d at 651.

32 Id. at 653; see also Gibson, 952 S.W.2d 239 (Mo. 1997); D.T. v. Catholic Diocese of Kansas City-St. Joseph, 419 S.W.3d 143 (Mo. App. W.D. 2013); Nicholson v. Roman Catholic Archdiocese of St. Louis, 311 S.W.3d 825 (Mo. App. E.D. 2010).

33 B.B., 541 S.W.3d at 653.

34 Id. at 644.

35 Gibson, 952 S.W.2d at 247.

36 B.B., 541 S.W.3d at 655–56 (citation omitted).

37 Id. at 657 (citing H.R.B. v. J.L.G., 913 S.W.2d 92, 98 (Mo. App. E.D. 1995)).

38 H.R.B., 913 S.W.2d at 98 (Mo. App. E.D. 1995); see also Gibson, 952 S.W.2d at 246 (Mo. 1997); Hester, 723 S.W.2d at 552.

39 Garnier v. St. Andrew Presbyterian Church of St. Louis, 446 S.W.2d 607, 608 (Mo. banc 1969).

40 Gibson, 952 S.W.2d at 246.

41 State ex rel. Gaydos v. Blaeuer, 81 S.W.3d 186, 192 (Mo. App. W.D. 2002).

42 Gibson, 952 S.W.2d at 248.

43 B.B., 541 S.W.3d at 653–54; see also Gibson, 952 S.W.2d 239.

44 H.R.B., 913 S.W.2d at 98.

45 Missouri Constitution, Art. II, § 6.

46 See e.g., Executive Bd. of Missouri Baptist Convention v. Carnahan, 170 S.W.3d 437, 446 n.4 (Mo. App. W.D. 2005); Reorganized Church of Jesus Christ of Latter Day Saints v. Thomas, 758 S.W.2d 726, 731 (Mo. App. W.D. 1988); Stamps v. Kirkendoll, 689 S.W.2d 111, 113 (Mo. App.1985); Fast v. Smyth, 527 S.W.2d 673, 676 (Mo. App. 1975); Williams v. Wilder, 397 S.W.2d 696, 703 (Mo. App. 1965).

47 Presbytery of Elijah Par. Lovejoy v. Jaeggi, 682 S.W.2d 465, 467 (Mo. 1984).

48 See e.g., Spirit & Truth Church v. Barnaby, 428 S.W.3d 764, 768 (Mo. App. E.D. 2014); Heartland Presbytery, 364 S.W.3d at 580–81; First Missionary Baptist Church of Ballwin v. Rollins, 199 S.W.3d 823, 827 (Mo. App. E.D.2006); Reorganized Church of Jesus Christ of Latter Day Saints, 758 S.W.2d at 729; Stamps, 689 S.W.2d at 113.

49 Colonial Presbyterian Church, 375 S.W.3d at 196.

50 Reorganized Church of Jesus Christ of Latter Day Saints, 758 S.W.2d at 729; see also Jones, 443 U.S. 595, 602–604.

51 In re Marriage of Haugh, 978 S.W.2d 80, 88 (Mo. App. S.D. 1998); see also Trinity Pentecostal Church of Joplin, Mo., Inc. v. Terry, 660 S.W.2d 449, 456[6] (Mo. App. S.D.1983) (citing Farm & Home Savings & Loan Ass’n v. Armstrong, 337 Mo. 349, 357, 85 S.W.2d 461, 465–66 (Mo. 1935)).

52 In re Marriage of Haugh, 978 S.W.2d 80.

53 Executive Bd. of Missouri Baptist Convention v. Windermere Baptist Conference Ctr., 280 S.W.3d 678 (Mo. App. W.D. 2009).

54 Trinity Pentecostal Church, 660 S.W.2d 449.

55 Rolfe v. Parker, 968 S.W.2d 178 (Mo. App. W.D. 1998).

56 Heartland Presbytery, 364 S.W.3d at 586.

57 Missouri Dist. Church of the Nazarene v. First Church of the Nazarene of Caruthersville, 312 S.W.3d 428, 430 n.4 (Mo. App. S.D. 2010); see also Reorganized Church of Jesus Christ of Latter-Day Saints, 758 S.W.2d at 729.

58 Presbytery of Elijah Par. Lovejoy, 682 S.W.2d 465.

59 Colonial Presbyterian Church, 375 S.W.3d 190.

60 Reorganized Church of Jesus Christ of Latter Day Saints, 758 S.W.2d 726.

61 Id.

62 Struemph v. McAuliffe, 661 S.W.2d 559 (Mo. App. E.D. 1983).

63 Shannon v. Hines, 21 S.W.3d 839 (Mo. App. E.D. 1999); Moore v. Graham, 863 S.W.2d 347 (Mo. App. W.D. 1993).

64 Beth Hamedrosh Hagodol Cemetery Ass’n, 923 S.W.2d at 443.

65 Spirit & Truth Church, 428 S.W.3d 764.

66 Beth Hamedrosh Hagodol Cemetery Ass’n, 923 S.W.2d 439.

67 First Missionary Baptist Church of Ballwin, 199 S.W.3d 823.

68 Mills v. Yount, 393 S.W.2d 96, 100 (Mo. App. 1965); see also Zaiser v. Miller, 656 S.W.2d 312, 316–17 (Mo. App. S.D. 1983); Lewis v. Wolfe, 413 S.W.2d 314, 319 (Mo. App. 1967).

69 Zaiser, 656 S.W.2d 312, 316-17 (Mo. App. S.D. 1983).

70 Lewis, 413 S.W.2d at 319.

71 11 U.S.C. § 303.

72 11 U.S.C. § 1112(c).

73 11 U.S.C. § 1112(a).

74 In re Archdiocese of Milwaukee, 515 B.R. 579 (Bankr. E.D. Wis. 2014).

75 In re Heritage Vill. Church & Missionary Fellowship, Inc., 92 B.R. 1000 (Bankr. D.S.C. 1988).

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

77 Id. at 854.

78 Id. at 842.

79 42 U.S.C. § 2000bb–1(a).

80 Mo. Rev. Stat. §§ 1.302-1.307.

81 11 U.S.C. § 101(51B).

82 Foohey, supra note 9 at 769.

83 11 U.S.C. § 101(51D). Where a church is primarily used for non-profit activities such as worshipping, preaching, etc. it will not be engaged in “commercial or business activities” and will thus fall outside of the Bankruptcy Code’s definition of “small business debtor.” 11 U.S.C. § 101(51D).

84 Foohey, supra note 9 at 772.

85 The Small Business Reorganization Act of 2019, which was signed by President Trump on August 23, 2019, and becomes effective on February 19, 2020, made some minor revisions to the Bankruptcy Code’s definition of “small business debtor.” 11 U.S.C. § 101(51D). The most notable change was the inclusion of language that at least 50% of the debtor’s debt must come from commercial or business activities of the debtor. Consequently, if a church has an outreach ministry that could be deemed to be commercial in nature and which accounts for more than 50% of the Bankruptcy Code’s statutory debt cap, then the church could be deemed a “small business debtor” for purposes of the Bankruptcy Code and subject to the newly enacted provisions regarding small business bankruptcies.

86 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).

87 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). Not all lower courts hold this way. See Amelia Rawls, Applying the Absolute Priority Rule to Nonprofit Enterprises in Bankruptcy, 118 Yale L.J. 1231, 1233-34 (2009).

88 Pamela Foohey, Chapter 11 Reorganization and the Fair and Equitable Standard: How the Absolute Priority Rule Applies to All Nonprofit Entities, St. John’s L. Rev. 31, 59 (2012).

89 Internal Revenue Service, Charity – Required Provisions for Organizing Documents, https://www.irs.gov/charities-non-profits/charitable-organizations/charity-required-provisions-for-organizing-documents (last visited December 10, 2018); see also National Council of Nonprofits, Dissolving a Nonprofit Corporation, https://www.councilofnonprofits.org/tools-resources/dissolving-nonprofit-corporation (last visited December 10, 2018).

90 Evan C. Hollander and Scott K. Brown, Confirming a Plan of Reorganization for a Nonprofit Debtor, Norton Annual Survey of Bankruptcy Law, 2016 Edition, p. 102.

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

92 Id.

93 11 U.S.C. § 1129(a)(11).

94 Id.

95 In re Gentry, 807 F.3d 1222, 1225 (10th Cir. 2015).

96 Id. at 1226.

97 Hollander and Brown, supra note 91 at p. 110.

98 Trinity Lutheran Church of Columbia, Inc. v. Comer, 137 S. Ct. 2012, 198 L.Ed.2d 551 (2017).

99 11 U.S.C. § 525.

100 11 U.S.C. § 365(c)(2).

101 Hollander and Brown, supra note 91 at p. 110.

102 Id. at 91.

103 Foohey, supra note 9 at 297.

104 Id.

105 Id.

106 National Council of Nonprofits, https://www.councilofnonprofits.org/tools-resources/dissolving-nonprofit-corporation (last visited December 10, 2018).

107 11 U.S.C. §§ 363(d)(1) and 1129(a)(16).

108 Supra note 107.

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

110 Id. at 1323-24.

111 Id. at 1361.

112 Id. at 1352.

113 Id.

114 Foohey, supra note 12 at 297.

115 Id.

116 Id. at 298.

117 Foohey, supra note 9 at 740.

118 12 U.S.C. § 2901 et seq.

119 See 11 U.S.C. § 548; § 428.005 et seq., RSMo (2018).

120 In re Zarling, 70 B.R. 402 (Bankr. E.D. Wis. 1987).

121 11 U.S.C. § 362(a).

122 11 U.S.C. § 502(b)(2).

123 11 U.S.C. § 365.

124 11 U.S.C. § 363(f).

125 11 U.S.C. § 1129.

126 Fed. R. Bankr. P. 1007.

127 11 U.S.C. § 341.

128 Fed. R. Bankr. P. 2004.

129 11 U.S.C. § 361.

130 11 U.S.C. § 363(b).

131 11 U.S.C. § 364.

132 Section 355.736, RSMo 2019.

133 Foohey, supra note 12 at 285.

134 Id. at 291-92.

135 Id.

136 Id. at 293.

137 Id. at 294.

138 Id.

139 Id. at 295-96.