The following are some of the highlights from the session on Nonprofits in Distress at the 2020 Western Conference on Tax Exempt Organizations (WCTEO), presented by Erin Bradrick (NEO Law Group), Ofer Lion (Seyfarth Shaw), Tania Moyron (Dentons), and Stephanie Petit (Adler Colvin):
Zone of Insolvency, Bankruptcy, and Debt Restructuring
- Under California law, directors do not owe a fiduciary duty to creditors solely by virtue of the corporation operating in the zone of insolvency.
- Bankruptcy law requires that that sale of property owned by nonprofit entities be in accordance with applicable non-bankruptcy law. One implication of such law is that mission may be considered when determining the best purchase offer.
- While bankruptcy law allows creditors to commence a bankruptcy case against a involuntary potential debtor, this right does not apply against a nonprofit.
- Certain models of fiscal sponsorship can be valuable tools: Model A (comprehensive) and Model F (technical assistance).
- Model A could allow for continuation of a successful program of a distressed charity, or a whole entity’s operations to take advantage of economies of scale and infrastructure at sponsor. See also Nonprofits in Trouble: The Fiscal Sponsorship Option.
- Model F could provide cost-savings to a distressed charity to outsource some tasks rather than have its own staff (but the fiscal sponsor should consider unrelated business income tax implications).
Resource-sharing, Cost-sharing, and Joint Ventures
- Joint venture arrangements can be a great way to achieve economies of scale to reduce costs, but for nonprofits, joint ventures with for-profits, need to be entered into carefully and properly informed. See also Nonprofit Joint Ventures: Basics.
- Joint venture exit strategies are key considerations from the start: (1) in the event the joint venture is unsuccessful or (2) if a “pivot” to non-exempt (e.g., commercial) purposes is required to avoid financial losses or pursue greater financial returns.
Corporate Transactions, Structures, and Tax Impact
- Nonprofit to for-profit conversions typically triggered by the need for capital / equity investors or the ability to recruit and retain talent with stock options and/or other profit-based incentive compensation.
- Mergers. See also Nonprofit Mergers: Motivations; Nonprofit Mergers: Common Risks; Nonprofit Mergers: Tips & Traps.
- Attorney General (CA) approval or notice may be required for certain corporation transactions. See Nonprofit Transactions Requiring Notice Or Attorney General Approval.
- Dissolutions require multiple steps and considerations including board approval of the wind up, dissolution, and plan for distribution of remaining assets; payment of all debts; completion or assignment of all obligations; notice to creditors; tail insurance to cover claims post-dissolution; notice to the Attorney General (CA); distribution of remaining assets; filing of the certificate(s) of dissolution; final filings with tax authorities; submission of final dissolution package with the Attorney General (CA).