UNITED STATES
Manatt
Authors: Ileana M. Hernandez | Ivan L. Kallick | Jill S. Dodd
This article was previously published in BNA (September 2013).
A charity, fulfilling its charitable mission, is successful in raising money for a variety of worthy projects – rebuilding after a natural disaster, medical education and care, summer camp experiences for disadvantaged children, or financial support for senior centers. Everyone agrees that these are worthwhile charitable endeavors — except perhaps some might suggest, the United States Bankruptcy Courts.
This article examines how assets donated to charitable organizations may be treated if such organizations were ever to file a bankruptcy resulting from significant creditor claims. There is some, yet limited, legal authority determining what is ‘‘property of the estate’’ in a bankruptcy.
I. ‘‘Property of the Estate’’ in Recent Religious and Charitable Organization Bankruptcies
Recent bankruptcy cases filed by Catholic dioceses and archdioceses have raised issues regarding the extent to which the assets of non-bankrupt Catholic entities should be available for payment of creditor claims. Recent bankruptcy cases arise where abuse victims make monetary claims for damages arising out of alleged improper or illegal conduct. The decisions from these bankruptcy cases may have far-reaching implications for charitable institutions that hold donated assets or participate in pooled investment accounts.
In each of these cases, focused on religious institutions and their charitable assets, the bankruptcy courts have been asked to determine whether certain assets held by the debtor are considered ‘‘property of the estate.’’ Courts have consistently held that the scope of the term ‘‘property of the estate’’ is very broad. Property of the estate does not include ‘‘any power that the debtor may exercise solely for the benefit of an entity other than the debtor,’’ 11 U.S.C. § 541(b)(1), or ‘‘[p]roperty in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest . . . .’’ 11 U.S.C. § 541(d). Similarly, the estate does not include property containing ‘‘[a] restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law. . . .’’ 11 U.S.C. § 541(c)(2); see In re Cutter, 398 B.R. 6, 18-19 (9th Cir. BAP 2008). Although the Bankruptcy Code defines what is property of the estate, ‘‘[p]roperty interests are created and defined by state law.’’ Butner v. U.S., 440 U.S. 48, 55; 99 S. Ct. 914, 918 (1979); see also In re Mantle, 153 F.3d 1082, 1084 (9th Cir. 1998) (bankruptcy courts must look to state property law to determine whether property is to be included in bankruptcy estate).
A. Catholic Diocese of Wilmington
1. Structure of the Pooled Investment Account
In 2009, the Catholic Diocese of Wilmington, Inc., which was the secular administrative arm of the Diocese of Wilmington, filed Chapter 11. Soon after, a committee of unsecured creditors (‘‘committee’’) was appointed and was composed of seven members, each of whom had filed a lawsuit against the debtor and other defendants asserting claims arising out of allegations of sexual abuse. In re Catholic Diocese of Wilmington, Inc., 432 B.R. 135 (Bankr. D. Del. 2010).
For many years the debtor ran a pooled investment program that permitted multiple entities to share investment opportunities not otherwise available to them. As of December 2009, the diocese maintained a pooled investment account (‘‘PIA’’) of approximately $120 million. 432 B.R. at 142. The committee argued that all PIA funds were property of the debtor’s estate that should be available for distribution to all creditors. The committee filed a complaint naming the debtor and a host of non-debtors as defendants, which included parishes with funds held in the PIA the Catholic Diocese Foundation, and various educational and service institutions.
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