Restrictions on the Sale or Transfer of Assets of Not-for-Profit Debtors

Originally published in the New Jersey Law Journal - Vol. 211 - No 5 Monday, February 4, 2013.

In 2012, a number of not-for-profit entities, including religious institutions, filed for bankruptcy relief in New Jersey. While unique and oftentimes altruistic in purpose, these special entities are not immune to the financial woes that plague for-profit enterprises. Not-for-profit entities often benefit from public funding and exemption from taxation and therefore must subscribe to additional state imposed requirements concerning formulation, governance and even dissolution. Special attention must be given when a not-for-profit entity becomes entwined in the bankruptcy process.

One issue that arises is the ability of not-for-profit debtors to sell or transfer assets under a confirmed plan of reorganization, pursuant to section 1123(b)(4) of the Bankruptcy Code, or prior to the confirmation of a plan of reorganization pursuant to section 363(b) of the Bankruptcy Code, absent compliance with state law requirements governing the sale of assets by not-for-profit entities. Generally, not-for-profit entities are created and incor¬porated under state law for specified charitable purposes or to perform public missions that are typically enumerated in their charters and bylaws. Not-for-profit entities, including those that are exempt under section 501(c)(3) of the Internal Revenue Code, can file a voluntary petition for relief under the Bankruptcy Code if they are organized as corporations or “business trusts” within the meaning of section 101(9) of the Bankruptcy Code.

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