In re Grace Christian Ministries, Inc.

• Decision Date: 13 December 2002
• Docket Number: Bankruptcy No. 02-30028-BM.,Motion No. 02-6411M.
• Citation: 287 B.R. 352
• Parties: In re GRACE CHRISTIAN MINISTRIES, INC., Alleged Debtor. Strassburger McKenna Gutnick and Potter, Movant, v. James M. Quinn, Edward and Sharon Kalansky, and Harold Marsh, Respondents.
• Court: U.S. Bankruptcy Court — Western District of Pennsylvania

287 B.R. 352

In re GRACE CHRISTIAN MINISTRIES, INC., Alleged Debtor Strassburger McKenna Gutnick and Potter, Movant, v. James M. Quinn, Edward and Sharon Kalansky, and Harold Marsh, Respondents.

Bankruptcy No. 02-30028-BM.

Motion No. 02-6411M.

United States Bankruptcy Court, W.D. Pennsylvania.

December 13, 2002.

Joshua R. Lorenz, Jeannette, PA, for Respondents/Petitioning Creditors.

Mark J. Christman, Pittsburgh, PA, for Movant.

MEMORANDUM OPINION

BERNARD MARKOVITZ, Bankruptcy Judge.

The trustee appointed by the Court of Common Pleas of Allegheny County, Pennsylvania, to manage certain of the affairs of Grace Christian Ministries, Inc. (hereinafter "GCM") has brought a motion on GCM's behalf to dismiss the involuntary chapter 11 petition brought against GCM. He asserts that the petition must be dismissed because the requirements for bringing an involuntary petition found at §§ 303(a) and 303(b) of the Bankruptcy Code have not been satisfied in this instance.

Petitioning creditors insist that these requirements have been satisfied and oppose the motion to dismiss.

For reasons set forth in this memorandum opinion, we will grant the motion to dismiss the involuntary petition.

— FACTS —

First Christian Church of Homestead, Pennsylvania, was incorporated pursuant to Pennsylvania law on April 19, 1905, as a non-profit entity. Its stated purpose was the worship of God in accordance with the faith, doctrines, principles, and usages of the Disciples of the Church of Christ. It operated out of a building it owned that is situated in Munhall, Pennsylvania.

Effective as of November 1, 1995, First Christian Church of Homestead amended its articles of incorporation to change its name to Grace Christian Ministries, Inc. Its registered office was relocated to real property it owned located at 612 Coal Road, West Mifflin, Pennsylvania.

James Quinn contracted with GCM on April 5, 1998, to construct a two-story building at 612 Coal Road to house a church and a day care center known as Noah's Ark Child Care Center. Individuals who use the day care center operated by GCM are charged and pay a fee for services provided. Construction of the day care center was completed by May 15, 1998. The remainder of the project was completed by July 15, 1998.

The original contract price for the project was $887,762.00. The final contract price was reduced to $788,571.00 after change orders and various adjustments. Payments Quinn received from GCM for work he performed in connection with the project totaled $519,520.00, leaving an unpaid principal balance in the amount of $269,051.00.

Edward and Sharon Kalansky loaned $300.00 to GCM on July 19, 1999. Harold and Edna Marsh loaned $2,000.00 to GCM on July 29, 1999. The loans were never repaid.

At some undetermined time prior to November of 2000, James Quinn signed an undated letter drafted by the then-pastor of GCM. Quinn acknowledged in the letter that GCM needed to raise $250,000.00 to qualify for a loan from a financial institution with which to pay its debts and stated that he "was more than willing to help by donating up to $250,000 to you and your group to bolster your end of the agreement".

GCM has not used the building located at 612 Coal Road as a place of worship since at least November of 2000. The day care center, however, continues to operate at that location.

The Court of Common Pleas of Allegheny County issued an order on November 20, 2000, appointing the law firm Strassburger, McKenna, Gutnick and Potter (hereinafter "SMGP") as trustee of a constructive trust "to oversee the operation and finances of Noah's Ark Child Care (Business) and shall be empowered to take all actions necessary to ensure the proper operation of said Business".

The same court issued another order on October 12, 2001. Among other things, the order continued the trusteeship of the day care center and expanded the previous order appointing SMGP to include jurisdiction over the real property located at 612 Coal Road.

An involuntary chapter 11 petition against GCM was filed on September 13, 2002. The petitioning creditors were James Quinn, Edward and Sharon Kalansky, and Harold Marsh.

SMGP brought a motion on behalf of GCM on October 1, 2002, to dismiss the involuntary petition. In support of the motion, SMGP asserted that GCM did not qualify as an involuntary debtor because it was not "a moneyed, business, or commercial corporation" for purposes of § 303(a) of the Bankruptcy Code. As additional support for the motion, SMGP asserted that the involuntary petition should be dismissed because it also did not comply with the requirements of § 303(b) of the Bankruptcy Code.

An evidentiary hearing on the motion to dismiss and the opposition thereto of the petitioning creditors was held on November 19, 2002, at which time both sides were given an opportunity to call witnesses and to offer evidence.

— DISCUSSION —

Section 303(a) of the Bankruptcy Code provides in part as follows:

(a) An involuntary case may be commenced only under chapter 7 or 11 of this title, and only against a person, except a ... corporation that is not a moneyed, business, or commercial corporation, that may be a debtor under the chapter under which such case is commenced.

11 U.S.C. § 303(a).

Section 303(a) expressly provides that an involuntary chapter 7 or 11 petition may not be brought only against a corporation that is not"a moneyed, business, or commercial corporation". This phrase refers for-profit corporations. In re Capitol Hill Healthcare Group, 242 B.R. 199, 202 (Bankr.D.D.C.1999). A corporation, in other words, may not be an involuntary chapter 7 or 11 debtor if it is a not-for-profit corporation.

The legislative history of this provision indicates that "schools, churches, charitable organizations and foundations" are protected from involuntary bankruptcy by § 303(a). See H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 321 (1977); S.Rep. No. 95-989, 95th Cong., 2d Sess. 33 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5963, 6277, 6278, 5787, 5819.

Movant asserts that this involuntary petition must be dismissed because § 303(a) is not satisfied — i.e., because GCM is a not-for-profit entity. Petitioning creditors respond that, despite its incorporation pursuant to Pennsylvania law as a not-for-profit entity, GCM is a de facto for-profit corporation due to certain activities in which it has engaged.

There is long-standing disagreement concerning the appropriate standard for determining whether a corporation qualifies as "moneyed, business, or commercial" for purposes of § 303(a) and hence is susceptible to involuntary bankruptcy. The United States Court of Appeals for the Third Circuit has not addressed or determined the appropriate standard.

Some courts have held that the nature and character of a corporation for the purpose of determining whether it may be an involuntary debtor in bankruptcy depend only on the powers and characteristics imposed upon it by the law of the state of its incorporation. E.g., Union Guarantee & Mortgage Co. v. Van Schaick (In re Union Guarantee and Mortgage Co.), 75 F.2d 984, 985 (2d Cir.1935), cert. denied, 296 U.S. 594, 56 S.Ct. 142, 80 L.Ed. 421 (1935); Clemons v. Liberty Savings & Real Estate Corp., 61 F.2d 448, 450 (5th Cir.1932); Gamble v. Daniel, 39 F.2d 447, 450 (8th Cir.), cert. denied, 282 U.S. 848, 51 S.Ct. 27, 75 L.Ed. 752 (1930); and In re National Mortgage Corporation, 17 F.Supp. 54, 55 (D.N.J.1935).

Other courts have held that the classification of a corporation for the purpose of determining whether it may be an involuntary debtor in bankruptcy depends, in the first instance, on the law of the state of its incorporation. The character and the extent of activities in which it has actually engaged however, may also be considered. E.g., Missco Homestead Association v. U.S., 185 F.2d 280, 282 (8th Cir.1950); Hoile v. Unity Life Insurance Co., 136 F.2d 133, 136 (4th Cir.1943); In re Roumanian Workers Educational Association of America, 108 F.2d 782, 783 (6th Cir.1940); In re Supreme Lodge of the Masons Annuity, 286 F. 180, 184 (N.D.Ga.1923); and In re International Underwriters, Inc., 157 F.Supp. 367, 368 (W.D.Mo.1957).

These cases appear to retain their vitality under the Bankruptcy Code even though they are of relatively ancient vintage and were decided under the former Bankruptcy Act.

SMGP urges us to adopt the standard set forth in the first set of cases cited. Petitioning creditors urge us to adopt the standard se forth in the second set of cases cited. We need not decide which of these competing standards to apply here in determining whether GCM is a "moneyed, business, or commercial corporation" for purposes of § 303(a). The outcome is the same in either case.

If we look to the law pursuant to which GCM was incorporated to determine its nature and characteristics for purposes of § 303(a), we must conclude that GCM is a not-for-profit corporation and therefore may not be an involuntary debtor in bankruptcy. The order of April 19, 1905, issued by the Court of Common Pleas of Allegheny County approved an application to form a non-profit corporation for the worship of God named First Christian Church of Homestead. The articles of amendment effective as of November 1, 1995, changed only the name of the corporation to Grace Christian Ministries. Its status as a not-for-profit entity was not changed in any...