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arrangement and the likelihood of expensive attorney’s fees, most nonprofits of modest meanswould be better off attempting to work out their debts on their own.The second specific kind of workout, called a ―deed in lieu of foreclosure‖ (―DLF,‖ or,occasionally, a ―friendly foreclosure‖), involves a nonprofit mortgagor (i.e., a borrower) using adeed instrument to convey all of its interest in a piece of real property to the mortgagee (i.e., alender, usually a bank) to satisfy a secured debt. The driving force behind the DLF is thedifference between the value of the security and the amount of the secured debt. In certaincases, the secured creditor/lender is willing to forgo collection of a part of the secured debt inexchange for the convenience and finality of the nonprofit signing away its rights to theproperty. Of course, as with any workout agreement, if the nonprofit is not able to work out itsother debts, the fact it is able to resolve a debt with one lender might not be enough to avoidbankruptcy. In addition, while a DLF might be a financially viable option to the nonprofit, thelender may not always agree, especially if the property is encumbered by another mortgage orlien or the formal foreclosure process would be cheaper or more effective. Generally, the onusis on the nonprofit wishing to pursue this option, as the lender may not be permitted to do sodue to various debt collection laws. As with the ABC, while a DLF is a potential alternative tobankruptcy, it can be quite complicated, so legal counsel is usually required.Merger and ConsolidationTwo more options to consider for a nonprofit experiencing cash flow issues are: (1) a mergerwith another organization, whereby two or more nonprofit corporations merge into one of thecorporations, known as the ―surviving corporation;‖ or (2) the consolidation of two or morenonprofits, whereby an entirely new corporation is formed for the purpose of acquiring theassets and liabilities of the consolidating corporations. While these changes are drastic, if thestruggling nonprofit can find a willing and able partner that is fully prepared to take on thefinancial challenges associated with a merger or consolidation, the pooling of resources has thepotential to make both organizations better. If, on the other hand, the struggling nonprofit islooking for a financial savior but has no intention of contributing to the union, it is very likelythat both organizations will end up suffering and possibly even being forced to dissolve.In fact, the greatest challenge to organizations planning to merge or consolidate is themanagement of the personal relationships and office politics between the key people involved.While the needs of the charitable organizations, and the communities they serve, should beparamount, even the best laid plans can be derailed if personal feelings are ignored, especiallythose belonging to the struggling nonprofit’s employees who may feel they are losing control oftheir baby. Accordingly, there are numerous legal and personal questions that need to beresolved when contemplating a merger or consolidation, such as what the new organizationwill be called; how the newly formed organization will be governed; which, if any, programswill be cut and which, if any, will be expanded; whether the merger affects the continuedviability of funding sources or the enforceability of any contracts; and what effect the merger orconsolidation will have on the newly formed corporation’s federal tax exempt status, thedeductibility of contributions, and the way it is treated by various state agencies. In addition,special rules come into play when one of the parties to a merger or consolidation is not anIllinois corporation or a for-profit entity. Lastly, it is important to understand that a merger orconsolidation does not necessarily resolve the struggling nonprofit’s debts. Creditors can eithercontinue to seek to recover those debts as if the merger never happened, or it can substitute the64
newly formed organization and seek recovery of those debts from the new entity. Even still,ensuring that the surviving corporation or consolidated corporation maintains a revenue streamis just as important as satisfying the organizations’ creditors. As a result, mergers andconsolidations often involve careful negotiations with significant creditors of both organizationsas well as open communication with donors.Mergers and consolidations are complex and time-consuming and can be expensive. While adetailed discussion of the technical requirements for a successful merger or consolidation,including the formation and adoption of a plan of merger or consolidation and the execution ofarticles of merger or consolidation, is outside the scope of this article, it is worth noting that thefailure to carefully comply with the applicable law can result in a court finding an entire mergeror consolidation to be invalid. As a result, competent legal counsel should be retained to assistin the merger/consolidation process. Depending on the complexity of the transaction, counselmay also be needed after the process is complete to ensure continued compliance with state andfederal law.Corporate DissolutionThe alternatives discussed thus far all apply to nonprofits experiencing cash flow problems,with each alternative offering a potential way for the nonprofit to correct the problem, restoreliquidity, and move on. But what happens if none of the above options works, or none is evenavailable in the first place? For a nonprofit experiencing balance sheet insolvency, withliabilities exceeding assets, one of the only alternatives to bankruptcy is to dissolve thecorporation under state law. Illinois law provides for three different kinds of dissolution: (1)voluntary dissolution; (2) judicial dissolution; and (3) administrative, involuntary dissolution.Before addressing the specifics of each, it is important to note that corporate dissolution is notthe same thing as the liquidation of the corporation’s assets. Dissolution is a formal legalprocess that ends the nonprofit’s legal existence. Liquidation, on the other hand, is theconversion of the nonprofit’s assets to cash to pay the nonprofit’s creditors (and, if anything isleft over after all creditors are satisfied, to distribute such remaining assets to other nonprofitsin accordance with the nonprofit’s governing documents). Liquidation of a nonprofit’s assetscan occur either before or after it is formally dissolved.Voluntary DissolutionIllinois law provides, in the case of a nonprofit with no members entitled to vote on dissolution,that a majority of the nonprofit’s board of directors can vote to voluntarily dissolve so long as―[n]o debts of the corporation remain unpaid‖ and proper notice is given. In the case of afinancially distressed nonprofit, this restriction is troubling, as the source of the distress isalmost always the nonprofit’s inability to pay its debts. Nevertheless, the provision is valid andpresents a significant issue that must be grappled with by a nonprofit considering its options.In the case of a nonprofit with members entitled to vote on dissolution, on the other hand, suchmembers are permitted to consent to or vote in favor of dissolution. In both of these situations,the organization’s ability to pay its debts is not a prerequisite for the members to take suchaction. The tension created by these provisions is palpable. By creating a situation in whichonly the members of an insolvent nonprofit can voluntarily dissolve the corporation, the Illinoislegislature seems to invite a last minute resolution by a desperate board of directors to change anonprofit that never had members to one with members to avoid administrative or judicial65
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GUIDE TO BANKRUPTCY ISSUES FOR ILLI
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Reorganize, or Liquidate?After a th
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CommitteesThe existing committee st
Page 13 and 14: Commitment and CompositionWe talked
Page 15 and 16: these requirements as it begins to
Page 17 and 18: the appointment of a committee is m
Page 19 and 20: Property of the EstateOnce a debtor
Page 21 and 22: Next, the Bankruptcy Code lists a n
Page 23 and 24: Executory Contracts and Unexpired L
Page 25 and 26: ule is clear: bankruptcy seeks to m
Page 27 and 28: In addition to the bankruptcy petit
Page 29 and 30: Compensation and reimbursement of p
Page 31 and 32: payments to the telephone company a
Page 33 and 34: provision of the Code may require t
Page 35 and 36: entitled to priority over other uns
Page 37 and 38: This discussion will also involve t
Page 39 and 40: in the ordinary course, non-ordinar
Page 41 and 42: While the debtors and the committee
Page 43 and 44: into an involuntary Chapter 11 fili
Page 45 and 46: grants to assess whether or not the
Page 47 and 48: the nonprofit in completing its cou
Page 49 and 50: (4) The proposed modifications must
Page 51 and 52: administrative expense priority. Fu
Page 53 and 54: companies in the S&P 500 maintainin
Page 55 and 56: ight to payment under a benefits pl
Page 57 and 58: applicable non-bankruptcy law. The
Page 59 and 60: egarding the quality of patient car
Page 61 and 62: ankruptcy proceeding should consult
Page 63: the nonprofit should approach its c
Page 67 and 68: period of time, to the issuance of
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