Type to search

Church Philanthropy Uncategorized

Bankruptcy Case Forces Churches to Repay Hundreds of Thousands of Dollars in Donations

The federal bankruptcy laws don’t protect churches and nonprofits from trustees seeking to claw back donated money.

Avatar photo

St. Andrew’s Methodist Church in Cullman, Alabama, had to refinance its building to give back nearly half a million dollars in donations it received nearly 10 years ago.

Photo via Facebook

As part of a large bankruptcy case, dozens of churches and nonprofit groups are being pursued for funds they received from shareholders in a now-bankrupt entity, Health Diagnostic Laboratory (HDL) in Richmond, Virginia.

According to the facts in the case, HDL was engaged in “improper and illegal business practices.” BlueWave Healthcare Consultants acted as the sales agent for HDL, so the bankruptcy trustee was able to secure a $220 million judgment against BlueWave in 2021.

Robert Bradford “Brad” Johnson was a shareholder in HDL and an owner of BlueWave so he received funds from HDL and BlueWave. However, he declared personal bankruptcy in 2016.

In an effort to recover the $220 million judgment, the bankruptcy trustee Richard Arrowsmith filed a complaint under section 550 of the federal bankruptcy code against St. Andrew’s Methodist Church because it received about $700,000 in donations from Johnson between 2012 and 2014.

After discovery and a 10% reduction offered by the trustee, the church settled for $468,000 but had to refinance its church building and pay the settlement out of its equity. The church had reduced its debt burden to $458,000, but now the congregation of about 150 members owes $920,000.

“The bank loan will cut deep into our missions and ministry funds because our mortgage payment went up a substantial amount. Now we are doing fundraisers to make sure we have money for mission and ministry,” St. Andrew’s pastor Rev. Robert Lancaster told MinistryWatch.

Most of the gifts Johnson gave to St. Andrew’s were designated for specific purposes such as an Easter event and providing Christmas gifts to the needy in the area.

Lancaster said when he got the first letter regarding the bankruptcy proceedings, he threw it away thinking the law must protect a church from being forced to return donations it received so long ago.

“This was just wrong to make us pay back almost half a million dollars,” Lancaster said. He reached out to the United Methodist conference to which it belonged because the conference held the deed to the church, but received no help.

No “safe harbor”

Section 548 has a “safe harbor” provision that protects churches who receive donations directly from the debtor. So if HDL had given the donations directly to the churches, the donations may have been protected under Section 548 if all the necessary requirements were met.

However, in this instance, the trustee sued under 550 to recover donations. HDL paid BlueWave, owned by Johnson, who then made donations to transferee St. Andrew’s, as attorney for the church Kevin Funk explained to MinistryWatch. No safe harbor provision exists in Section 550.

“These cases have been the most egregious injustice I have seen in 20 years of practicing law,” Funk said. “It is also (in my humble opinion) an abuse of the trustee’s discretion. I am not aware of any cases where a trustee has gone after such a remote party, particularly where the money was spent to benefit third parties and is gone.”

Dozens of churches were named, many of which settled. Funk said the churches felt obligated to settle after a test case was held in October. That church, First United Methodist Church in Centre, Alabama, had the best set of facts for the defense. When it lost, the other churches knew they should agree to settlements.

Access to MinistryWatch content is free.  However, we hope you will support our work with your prayers and financial gifts.  To make a donation, click here.

At the bench trial for Centre Methodist Church in October, the judge ruled in favor of the trustee, declining to accept the church’s defense that it provided something of value in exchange for the donations.

“The defendant claimed that Johnson received positive, altruistic feelings in exchange for performing good works. The Court holds that value under section 550(b) requires the receipt of a quantifiable economic benefit,” the court wrote in its opinion.

The church also asserted a “changed circumstances defense” that “given the changed circumstances it would be inequitable now to require it to repay more than what it had remaining of the money it had received from Johnson.”

However, the court pointed out that section 550 does statutorily allow for the equitable “changed circumstances defense.”

“Section 550 is concerned with returning fraudulently transferred property to the estate; it does not consider potential hardship to … a subsequent transferee.”

Pursuing nonprofits

Along with the dozens of churches, the trustee pursued recovery from nonprofit groups such as Voice of the Martyrs, Child Evangelism Fellowship, the Wounded Warrior project, and Fellowship of Christian Athletes (FCA).

It appears from the online docket report in the case, the actions against Wounded Warrior, Voice of the Martyrs, and Child Evangelism Fellowship were dismissed. However, actions against FCA and the Southern Baptist Theological Seminary appear to be ongoing.

FCA declined to comment on how the case is proceeding.

Moving forward

St. Andrew’s former finance chair Gary Turner said the church located no resources about how to avoid such an issue in the future. The church is working on policies about accepting donations and is creating forms to keep better records of how the donations are used.

Funk isn’t sure how to advise a church on the matter either. “It is so difficult because people want to do good with the donated money to meet needs. I’m not sure I know how to advise churches other than to reject a donation.”

MinistryWatch sought comment from the trustee’s counsel Robert Westermann about why the trustee pursued recovery from so many churches and nonprofits, but Westermann declined to comment due to ongoing litigation.

TO OUR READERS:  Do you have a story idea, or do you want to give us feedback about this or any other story? Please email us: [email protected]

Avatar photo
Kim Roberts

Kim Roberts is a freelance writer who holds a Juris Doctorate from Baylor University. She has home schooled her three children and is happily married to her husband of 25 years.