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Troubled Nonprofits Face Unique Challenges

Guest Editor

Nonprofits are big business, 
with more than 1 million entities contributing 5 percent of the 
U.S. gross domestic product. The 
size and prevalence of nonprofits are 
also visible in the donations of time 
and treasure. Last year, more than 
63 million Americans volunteered 
their services to nonprofits, and 
$389 billion was donated to charities, a 4.2 percent increase over 2015.1 

Because of growth in the sector, turnaround professionals are working with increasing numbers of nonprofits with increasing frequency. In addition, many turnaround professionals serve in leadership positions at nonprofits, such as on boards of directors. Although much of a turnaround professional’s skill set and knowledge base acquired working with for-profit entities applies to nonprofits, there are important differences. These contrasts become more apparent when nonprofits are in financial distress. 

This edition of the Journal of Corporate Renewal addresses some of the unique challenges turnaround professionals encounter when helping nonprofits navigate financial challenges.

Eric Monzo and Brenna Dolphin of Morris James LLP discuss the impact bankruptcy filings may have on nonprofits’ endowment funds and dedicated donations, and specifically whether those funds may be available to the organizations’ general creditors. They also provide specific guidelines to follow to ensure donated funds are used for the purposes intended.

Patrick Finn, CTP, of Lighthouse Management Group provides insight into the minds of fraudsters, particularly those who misappropriate funds from nonprofit institutions. He notes that nonprofits are victims in one-sixth of all major embezzlements, explains the fraudster’s motivation, and suggests concrete processes nonprofits can implement to guard against fraud.

My article describes the fiduciary duties that directors owe to nonprofits and explains how those duties change when nonprofits become insolvent in ways that contrast with for-profit institutions. I also provide practical guidance for directors and advisors of insolvent nonprofits in managing situations ranging from cash-flow challenges and distressed asset sales to minimizing personal liability. 

Kimberly Lowe of Avisen Legal P.A. explains how state regulatory oversight comes to bear on nonprofits attempting to sell assets or liquidate. Because nonprofits do not have equity holders to whom management owes fiduciary obligations, a state agency is designated to oversee such transactions.

In addition to our articles on nonprofits, Robyn Forman Pollack of Trellis Consulting LLC explains how companies that ignore factors such as leadership, employee engagement, and diversity in their workforces can lose the ability to recognize and adapt to fast-changing business conditions. A failure to establish and maintain a healthy internal operating environment can significantly impact a company’s bottom line and make it irrelevant and ultimately unsustainable in the marketplace.

Finally, in light of the increasingly precarious financial position of Sears, Edi M. Grgeta and Konstantin A. Danilov of Analysis Group and Christopher M. Colorado of Friedman Kaplan Seiler & Adelman LLP discuss the 2015 sale-leaseback transaction the retailer entered into that has generated renewed interest related to a potential Sears bankruptcy. Observers wonder if the deal, which provided Sears with a $2.7 billion injection of capital, would withstand a challenge as a fraudulent transfer. Such a challenge could be instructive for the many distressed retailers that use asset sales to increase liquidity in the current environment.  

  1. “Charitable Giving Statistics,” National Philanthropic Trust, found at nptrust.org/philanthropic-resources/charitable-giving-statistics.
Ryan Murphy

Ryan Murphy

Fredrikson & Byron, P.A.

Ryan Murphy is a shareholder at Fredrikson & Byron, P.A., and chair of its Bankruptcy, Restructuring & Workouts department. He represents companies and individuals in Chapter 11 bankruptcies and workouts and also represents receivers, assignees, and other parties in receiverships and assignments for the benefit of creditors. Murphy is a past president of the TMA, Minnesota Chapter and past chair of the Minnesota State Bar Association, Bankruptcy Section. Murphy can be contacted at 612-492-7310 or RMurphy@fredlaw.com.

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