“Where a charity’s endowment money goes after a bankruptcy filing is a gray area for the Bankruptcy Code, and it’s rarely explored.” It’s a statement made this month by the Wall Street Journal that highlights the issue some Texans have been having with Lon Morris College recently.

The problems began when the college was struggling to pay the mortgage on its dorms. It wasn’t until after the school’s collapse that bankruptcy lawyers suggested that they pay off their final bills using charitable funds located in the school’s endowment fund. Though this would likely solve many of the school’s financial problems, this is unlikely the wish many people had when they left the school approximately $11 million in various wills and family trusts.

Despite the fact that the money could right the school’s financial situation, the Texas Methodist Foundation, which holds the money, has filed a lawsuit to protect some of the endowment money stating that spending the money on creditors “‘is not consistent with the charitable intent’ of the endowment.”

This isn’t the first time that courts have had to decide on whether an endowment, left by people in their wills and trusts, can be used to bail organizations out of bankruptcy. In fact, in 1987, a court denied a request from a college’s bankruptcy attorney to take charitable money declaring that it was not property of the bankruptcy estate.

As for the recent case, the attorney for the Texas Methodist Foundation says that “each of the endowments was created with the intent and the purpose of furthering educational, charitable and religious endeavors” not to pay off the school’s debts. It is unclear who the court will rule in favor of at this time.

Source: The Wall Street Journal, “College’s Bankruptcy Lawyers Target Endowment Money,” Katy Stech, Nov. 26, 2012