Charities Seek Bankruptcy Protection

Feb. 20, 2009, The New York Times — On Tuesday, the board of Glass Youth and Family Services in Los Angeles voted to file for bankruptcy protection, unable to overcome falling state reimbursements, rising costs and dwindling donations.

“We did everything we could to keep going,” said Teresa DeCrescenzo, executive director of the organization, which offers social services to gay, lesbian and transgender youth.

Charities rarely go bankrupt, although there have been scattered examples involving nonprofit hospitals and Catholic dioceses facing lawsuits stemming from the priest sexual abuse scandals. Traditionally, insolvent organizations have simply closed their doors and filed a plan of dissolution with the charity regulator in their state.

But in the last six months, nonprofit groups that include cultural institutions and social service agencies have filed to reorganize or liquidate themselves under the bankruptcy code.

While no one has compiled data on how many charities have turned to the courts for protection, experts in the field say it has become more common as nonprofits have been pressured by donors to operate more like businesses.

“Our expectation is that this is just the tip of the iceberg,” said Diana Aviv, president and chief executive of Independent Sector, a trade association for nonprofit groups, pointing to a decline in donations and the difficulty such groups are having in getting loans.

Performing arts groups typically are the nonprofits hit first in economic downturns, as donors devote more of their giving to charities that address basic needs and consumers cut spending on entertainment. Groups like the Baltimore Opera Company and the Spartans Drum and Bugle Corps in Nashua, N.H., are either reorganizing under bankruptcy protection or simply going out of business.

Also among those seeking bankruptcy protection in the last six months are a rape crisis organization in Maine, a low-income housing group in Massachusetts and a nonprofit retirement community in Pennsylvania that took on too much debt.

Under Chapter 11 of the federal bankruptcy code, charities can get relief from creditors, obtain emergency financing, renegotiate leases and draw up a reorganization plan to let them emerge as financially viable.

Some charities, however, have resorted to Chapter 7 of the code, under which organizations liquidate. The American Musical Theater of San Jose, Calif., for instance, took that route.

Michael Miller, the theater’s chief executive and executive producer, said it had used the bankruptcy code rather than simply dissolve itself because it had loans it could not repay and needed a way to deal with creditors, including some 16,500 subscription ticket holders.

“That’s one difference,” Mr. Miller said. “Even a large corporation might have only 100 or 200 creditors, while we have tens of thousands.”

He took over the theater company about four years ago, when it had a $2 million deficit. It worked to increase donations and received a $1 million line of credit from the City of San Jose.

Then it struck a deal to co-produce “Tarzan” and advanced $225,000 to Theater of the Stars in Atlanta, as did Dallas Summer Musicals, a theater company in Dallas.

The Atlanta company “called us in late November and said not only that it didn’t have any money left, it had no production to deliver,” Mr. Miller said.

Nick Manos, president of the Theater of the Stars in Atlanta, said his organization’s own financial straits had forced it to cancel the production. “We have returned all the money to Dallas and made an offer to San Jose to return the money, and they declined,” Mr. Manos said.

But the San Jose theater had already sold more than $800,000 worth of tickets to the show, so recouping its initial investment would not begin to repair the damage, Mr. Miller said. With its subscription renewal period looming and two other shows falling short of revenue goals, the board decided to go dark.

“We’ve gone through all the emotions here — shock, numbness, devastation, anger and tears,” Mr. Miller said. “Not only did everyone have to be laid off, they had to pack up their offices, give me their keys, and I had to change the locks on the doors the day before Thanksgiving.”

Brockton Family and Community Services, a nonprofit group in Brockton, Mass., that deals with domestic violence, filed for Chapter 11 protection in 2007, after the Internal Revenue Service threatened to seize a building it owned because it had not paid payroll taxes.

The organization had moved into rented offices with the hope of selling its building and using the proceeds to meet its tax obligations, said David B. Madoff, its chairman and the lawyer who helped with its bankruptcy. “The sale fell through twice in 2007, and the real estate market began going south,” Mr. Madoff said.

Under court protection, Brockton Family moved back into its building, eliminating the need to pay rent, and it reduced some services. It emerged from bankruptcy protection in November.

Copia, a nonprofit organization founded by the late Napa Valley winemaker Robert Mondavi to cultivate appreciation for fine food and wine, is not so lucky. Conceived as a destination that would draw hundreds of thousands of visitors a year with its organic herb gardens, a demonstration kitchen and a restaurant, it collapsed in November under $78 million of debt and initially sought to reorganize under Chapter 11.

Instead, the presiding judge is forcing it to liquidate.

Glass Youth and Family Services had been living off its credit cards for several months. “The Internet was down for two days last week because we couldn’t pay the bill, and a repo man showed up for one of the vans we use to transport the kids around,” Ms. DeCrescenzo said.

The reasons for Glass’s financial woes are similar to those causing other nonprofits to go bankrupt. Ms. DeCrescenzo said the state of California, which accounts for almost 70 percent of the organization’s revenues, had not raised the rates it pays for services in nine years, while expenses had increased.

Aggravating those problems was a decision Glass made some time ago to allow only six beds in its group homes.

“We have held out for more than a decade against moving to a group home model with 12 beds or more because we thought smaller homes create a family environment that was better for the kids,” Ms. DeCrescenzo said. “That was a mistake.”

American Express has been calling her repeatedly, she said, seeking payment of $100,000 that has been charged to the corporate credit card for hotel rooms for teenagers who had aged out of group homes; the company is also threatening to seek a lien against Ms. DeCrescenzo’s house.

The I.R.S. also wants her house because Glass has failed to pay its payroll taxes.

“The one thing I have is my home,” Ms. DeCrescenzo said, “and now I lay awake at night thinking someone is going to take it away from me.”