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apply to regulatory enforcement by a governmental unit. Actions that have been
allowed to continue despite a bankruptcy petition have included the revocation of a
nonprofit’s charter and revocation of tax-exempt status. In the matter of Jesus Loves
You, Inc., 40 B.R. 42 (Bankr. M.D. Fla. 1984); Universal Life Church, Inc. v. United States,
128 F.3d 1294 (9th Cir 1997).

Once a petition is filed, a bankruptcy estate is created consisting of all of the
debtor’s property and interests in property. The Bankruptcy Abuse Prevention and
Consumer Protection Act (“BAPCPA”) amended the bankruptcy code to require that
the distribution of property from federally tax-exempt organizations comply with
non-bankruptcy law. One issue, then, for nonprofits in the bankruptcy context is
the identification of the bankruptcy estate. For example, the treatment of
restricted gifts, endowments, pledges and other forms of gifts and donations
carrying limitations on their use may not be clear. The restrictions may prevent the
funds from becoming part of the bankruptcy estate. If restricted gifts and other
assets survive the bankruptcy, the courts can use the doctrine of cy pres to
distribute the gifts in a way that carries out the intent of the donor. Under the cy
pres doctrine, assets are used for another charitable purpose that most closely lines
up with the donor’s intent when the original purpose becomes impossible,
impracticable, or illegal.

Directors and officers should follow the restrictions placed on gifts to the
corporation. Ignoring restrictions was costly to the Allegheny Health, Education and
Research Foundation. The directors and officers of that foundation paid $94
million to settle claims brought by the attorney general. Other risks include
exposing otherwise restricted gifts to creditor claims. (Brody, supra at 487-88;
Robert White, Charities in Distress: Selected Issues, ABI-CLE (July 13-16, 2006).

BAPCPA also amended the bankruptcy code to allow a greater role for the
state and attorney general in bankruptcy proceedings where charitable assets are
at stake. Daniel J. Callaghan, An Overview of the Role of the Attorney General in
Bankruptcy Proceedings Involving Charitable Organizations, ABI-CLE 207 (July 13-16,
2006). Several provisions of BAPCPA are applicable to the bankruptcy of health
care facilities (both profit and nonprofit) including special procedures to protect
patient privacy and an exception to the automatic stay for the Secretary of Health
and Human Services. Nonprofit health care facilities should take special care to
ensure that they are complying with the new bankruptcy requirements.

WASHINGTON NONPROFIT HANDBOOK -294- 2018