Non-Profit Institutions: What to Consider Before Filing for Bankruptcy Protection

Non-profit institutions are eligible for Chapter 11 bankruptcy relief, just like their for-profit counterparts, and restructuring may provide substantial benefits to allow a non-profit entity to remain viable when facing financial distress (including restructuring, reduction of debt, and relief from burdensome contracts and leases). There are a number of special considerations that non-profit entities should keep in mind and review with an attorney when contemplating a bankruptcy filing, including: 

• Restricted donations and endowments may not be subject to creditors’ claims in bankruptcy, so it is important to review the applicable documents before filing to determine if the appropriate safeguards are in place.
• Non-profits that are considering bankruptcy must proceed cautiously with donations solicited prior to any bankruptcy filing.
• Creditors cannot force a non-profit into bankruptcy by filing an involuntary proceeding. 
• Creditors cannot force a non-profit to convert its bankruptcy from Chapter 11 reorganization to Chapter 7 liquidation.
• The duties owed by the board of a non-profit in bankruptcy differ from those of the board of a for-profit entity in bankruptcy.
• Prepetition members of a non-profit may be able to retain control of the organization despite the absolute priority rule. 
• Non-profit debtors are subject to additional notice requirements upon filing for bankruptcy and to sell or transfer assets.
• Non-profit entities should consider whether a Chapter 11 reorganization will assist with resolving financial troubles realized during the COVID-19 pandemic or due to other operating difficulties. Dilworth’s bankruptcy group has a specific expertise with respect to non-profit bankruptcy cases and has assisted several non-profit institutions, including museums, orchestras, and educational institutions, with their successful restructuring.

If you have questions or wish to discuss your non-profit restructuring options, please contact Yonit A. Caplow, Anne M. Aaronson, Jennifer L. Maleski, or any of the attorneys in our Bankruptcy Group.