Chapter 11 Plan Feasibility For Nonprofit Debtors Requires More Than Successful Fundraising Track Record

The enduring impact of the Great Recession on businesses, individuals, municipalities, and even sovereign nations has figured prominently in world headlines during the last three years. Comparatively absent from the lede, however, has been the plight of charitable and other nonprofit entities that depend in large part on the largesse of donors who themselves have been less able or less willing to provide eleemosynary institutions with badly needed sources of capital in the current economic climate.

Nonprofits have sometimes resorted to bankruptcy protection as a form of financial triage, but with mixed results. Nonprofit bankruptcies are relatively rare—in most cases, a financially strapped nonprofit will simply close its doors and file a plan of dissolution with its state regulatory authority. Even so, certain nonprofit bankruptcy cases have achieved notoriety in the last 15 years, including: (i) no fewer than eight of the 194 Catholic archdioceses in the U.S., which filed for bankruptcy as a means of managing sexual abuse litigation exposure; (ii) the National Benevolent Association, a 117-year-old charitable organization that once managed more than 70 facilities financed by the U.S. Department of Housing and Urban Development and owned and operated 18 other facilities, including residential homes for seniors, at-risk children, and the disabled; and (iii) Allegheny Health, Education, and Research Foundation, once the largest nonprofit health-care chain in Pennsylvania, which filed for chapter 11 in 1998 to liquidate its assets amid allegations (later proved) that management raided more than 350 charitable endowments to prop up the nonprofit's ailing system.

Nonprofits seek bankruptcy protection for a variety of reasons. Regardless of the motive, however, the filings raise important questions regarding the utility of a bankruptcy filing as an effective means of dealing with the woes of nonprofits. Issues unique to nonprofits that may arise in a bankruptcy case can range from something as basic as the company's eligibility to file for bankruptcy to more complex matters concerning which assets are properly included as part of the debtor's bankruptcy estate and whether the debtor's business may be sold in bankruptcy notwithstanding nonbankruptcy regulatory rules making such transactions the exclusive province of the regulatory agency.

Another challenge confronted by nonprofits in chapter 11 cases concerns a workable exit strategy, especially...