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College’s charitable funds at risk in bankruptcy court

Posted on Wednesday, November 28th, 2012 at 8:35 pm    

Lon Morris College in Jacksonville, a liberal arts school located less than 120 miles southeast of Dallas, filed for bankruptcy in July with only $11 million in assets from endowment money. Now, bankruptcy attorneys want the court to use its charitable funds to pay off its bills to creditors. The college, the only United Methodist-affiliated school, is fighting to keep the money.

According to the Wall Street Journal, a lawsuit has been filed by the Texas Methodist Foundation, the holders of the endowments, to protect the money. The foundation argues that the individuals who donated their funds in wills or family trusts did not intend for the money to be spent on creditors. However, where the money goes after bankruptcy is not clearly defined in the Bankruptcy Code.

Similar conflicts arose in the late 1980s and 1990s. The court ruling over Bishop College’s bankruptcy case in 1987 denied bankruptcy attorneys from using the school’s charitable money to pay for its debts, claiming the money was not part of the bankruptcy estate. However, in 1996, a hospital in bankruptcy was forced to use charitable donations to cover expenses.

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