Muses in Bankruptcy Court: a look at US arts and cultural institutions finding themselves in bankruptcy and out

By Lesley Sotolongo

Cultural institutions rely on both public and private funding to keep their doors open, however, public funding has become increasingly more difficult to obtain. For example, in 2013, the National Endowment for the Arts (NEA) with a budget of $138.383 million, awarded 2,153 grants totaling $112.734 million to the arts. On March 4, 2014 President Obama released his fiscal year 2015 budget request of $146.021 million for the NEA, the same amount as the current year's budget. In response to this announcement, Senior Deputy Chairman Joan Shigekawa stated “[i]n these challenging economic times, it is heartening that President Obama has put forward level funding for the National Endowment for the Arts, allowing the NEA to continue our mission of providing all Americans opportunities for arts participation." The effects of recent events - such as the government shutdown - has led to budget sequestrations visible throughout the US, as private and public sectors are faced with massive deficits. Consequently, arts and cultural institutions, for profit and nonprofit, that cannot operate within their existing contracts and obligations are finding themselves in Bankruptcy Court.

The requirements under US bankruptcy laws vary depending on the type of entity seeking to file. Common filings for nonprofit applicants are made under Chapter 7 (11 U.S.C.A. § 707) or Chapter 11 (11 U.S.C. § 1109). These sections of the US Bankruptcy Code allow nonprofit organizations to eliminate or repay their debts under the protection of the federal court. Specifically, filing a Chapter 7 bankruptcy allows the entity to liquidate property in order to pay back debt, except for property that is protected by state law. On the other hand, filing a Chapter 11 bankruptcy permits companies, including nonprofits and individuals, to reorganize, cut debt, and continue operating. In other words, Chapter 7 is used to wind down operations while Chapter 11 is used for restructuring purposes. A restructuring plan reorganizes the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs. All organizations seeking to restructure their debt must offer a valid reorganization plan under the governing bankruptcy law and also receive approval from the bankruptcy judge assigned to the case.  Government owned entities, privately owned businesses and individuals have different filing requirements.

Applicants seek bankruptcy protection for a variety of reasons, but regardless of the motive, bankruptcy filings raise important questions regarding the utility of a bankruptcy filing as an effective means of dealing with outstanding liabilities or debt. Issues unique to nonprofits that may arise in bankruptcy cases can range from the nonprofit’s eligibility to file for bankruptcy to more complex matters concerning what assets are properly included as part of the debtor’s bankruptcy estate. Another concern for nonprofit arts organizations in Chapter 11 cases concerns a workable exit strategy, especially if debt repayment funding depends on donor contributions. The guiding case law on this issue stems from a recent Fifth Circuit decision In re Save Our Springs (S.O.S.) Alliance Inc., 632 F.3d 168 (5th Cir. 2011). In that case, the court affirmed the denial of a nonprofits Chapter 11 plan because “voluntary pledges [from donors] alone are too speculative to provide evidence of [plan] feasibility.”  This is relevant because pursuant to Section 1129(a)(11) of the Bankruptcy Code, a reorganization plan may be confirmed only if it meets the feasibility requirement - that there is a “reasonable assurance” of its success.  The following four case studies illustrate notable art/cultural profit/nonprofit bankruptcies filed from 2007 to now.