In 2022, a letter arrived at St. Andrew’s Global Methodist Church in Cullman, Alabama, demanding $700,000. The letter came from the trustee of a bankruptcy case and indicated the church had 10 days to respond. Church staffers thought the note was a scam.
Actually, the church was in trouble, though it had done nothing wrong. Years earlier, St. Andrew’s had accepted several large donations from a wealthy businessman who worked with a Richmond startup.
The startup, called Health Diagnostic Laboratory Inc., was a skyrocketing business before it was accused of offering kickbacks to doctors. The company crumbled, declared bankruptcy in 2015 and was sold off.
Unbeknownst to the staff at St. Andrew’s, some of the company’s money eventually ended up in church coffers. The staff members at St. Andrew’s were in disbelief.
The weren’t the only ones. About 100 churches in Alabama had been given tainted money and were being told to repay it.
It’s unusual for the trustee of a bankruptcy to go after innocent churches and nonprofits so far removed from the debtor, said Kevin Funk, a Richmond lawyer who represented some of the churches.
Funk questions why it was necessary for wealthy companies to seek money from small churches and whether federal law needs to be changed. It’s also a cautionary tale for philanthropic organizations that accept donations — gifts can be rescinded.
The rise and fall of HDL
In 2008, Tonya Mallory founded Health Diagnostic Laboratory, or HDL, to develop blood tests for early detection of cardiovascular disease, diabetes and other illnesses. The company was a massive success.
It grew to nearly 900 employees in five years and generated $100 million in annual profits. It moved into a downtown office in the Bio+Tech Park.
In2014, the federal government accused the company of paying kickbacks to doctors that used its services. HDL’s fall was faster than its rise. Mallory resigned, the company was sued several times, and layoffs commenced. It paid $47 million to the U.S. Department of Justice to settle the kickback allegations and, in 2015, HDL declared Chapter 11 bankruptcy and sold its assets.
Nine years later, the bankruptcy case is ongoing — it’s expected to wrap up next year. Hundreds of creditors have sought more than $600 million. The trail from HDL to the churches began with a company called BlueWave Healthcare Consultants, which HDL hired to sell the blood tests to doctors. HDL paid BlueWave $220 million over seven years. One of BlueWave’s two co-founders, Robert Bradford Johnson, took several million dollars of his earnings from HDL and other ventures and donated it to about 100 churches in northern Alabama, where he lived. He gave St. Andrew’s, where he attended for a time, about $800,000 between 2012 and 2014. To Centre First United Methodist, where he went as a child, he gave $1 million over five years.
He donated to churches to which he had no connection, said Funk, the Richmond lawyer. Johnson was known for showing up at church parking lots and handing over $50,000. If he liked how the church spent the money, he’d give more. He did not respond to requests for comment for this story.
The gifts were sincere, Funk said. Johnson received no tangible benefits in return and, at St. Andrew’s, hamade his gifts anonymously, said Gary Turner, the church’s finance chairman. Only a small group of people at the church, including the pastor and the secretary, knew who wrote the checks. Turner never knew.
St. Andrew’s spent all of the money it got on its community in Cullman. It dispatched 50 of its members to buy gifts and boxes of food for needy families at Christmas. It hired a youth ministry director, a position Johnson funded for two years. When a storm hit Dauphin Island off the coast of mainland Alabama, the church organized a mission trip to help clean up.
One project idea came directly from Johnson, and it was over the top. St. Andrew’s hired a helicopter to drop plastic Easter eggs for kids to grab and pry open. Sometimes, the service projects did not match what the church wanted, Turner said.
St. Andrew’s, which dates to the 1800s, has a full-time staff of five and draws about 400 churchgoers each Sunday. Its community, Cullman, has a median household income of $58,000, according to the U.S. Census Bureau, nearly equal to Richmond’s.
Centre First, which Johnson attended as a child, spent its money by rounding up volunteers to give Christmas gifts to more than 700 needy people. The church bought clothing, toys, food items and space heaters. It hosted holiday meals and gave away meal kits so needy families could eat together in their homes. It bought hundreds of backpacks, notebooks, pens and pencils for students. Centre’s generosity became So well-known that the nearby high school set up a liaison with the church. Whenever the school learned of a student or family in need, the school turned to the church, and the church provided. When a family’s house burned down, the church sent money. When prom season came, the church bought a dress for a girl who couldn’t afford one.
At the beginning of HDL’s bankruptcy, the court appointed Richard Arrowsmith to serve as the trustee, whose job is to recover as much money as possible belonging to HDL, known as the debtor, and distribute it to the people and companies owed money, called creditors.
A law firm representing Arrowsmith, Hirschler Fleischer, claimed HDL improperly paid $200 million to BlueWave, which paid a portion to Johnson, who donated a portion to the churches. Because most of Johnson’s money came from HDL, the churches had to pay back most of what they received.
There was just one problem for St. Andrew’s. It did not have $700,000.
In October, the case against Centre First went to trial. The church claimed it was an innocent recipient of the donations. But a federal bankruptcy judge in Richmond, Kevin R. Huennekens, ruled in favor of the trustee. Centre First had to pay back roughly $570,000.
Huennekens called the facts of the case “unfortunate.” The law is “concerned with returning fraudulently transferred property to the estate,” he wrote in his judgment. “It does not consider the potential hardship to, or the particular circumstances” of the churches that received the donations.
In cases such as these, he said, one side is guaranteed to suffer a hardship, because either the creditor or the recipient of the donation will lose money. The law says the recipient of the donation must suffer the hardship, and it is not up to the court to say if the law was written fairly. Arrowsmith and his lawyer, Robert S. Westermann, declined to comment. Westermann referred to the judge’s ruling in the case.
After Centre First lost its trial, the other churches Funk represented decided to settle. The judge determined St. Andrew’s owed about $520,000 — slightly more than its annual budget. The trustee offered to knock off an additional 10% if the churches paid quickly, Funk said. The churches started scrambling to cobble together the necessary money.
“I look at their numbers and I wonder how they’re ever going to pay it,” Funk said. “It’s painful to watch.”
The money ultimately ends up in the hands of the creditors — the people and companies that did business with HDL and were not fully paid. Some of the creditors that are owed the largest sums are public and private insurance providers, including Aetna, Cigna and the Centers for Medicare and Medicaid Services. Spokespeople for Aetna and CMS declined to comment. A representative for Cigna did not respond to a request for comment.
The trustee, his lawyers and other consultants get paid, too. In the fourth quarter of last year, Arrowsmith earned $45,000, and nine other companies made a combined $874,000.
Funk, the lawyer who defended the churches, says he understands the need for recovering money from BlueWave and its shareholders. But going after churches so far removed from the original debtor does not sit right with him. He has never seen it before, he said.
The law “can be abused by an aggressive lawyer” and should be changed, he said. Congress can add limitations to protect innocent bystanders that do not deal directly with the debtor, he said.
In other instances, the law protects charitable and religious organizations. If a debtor donates a small percentage of its income, or if the debtor made consistent donations, the charitable organization is protected. A different law was applied in this case because a judge deemed HDL had fraudulently transferred money to BlueWave.
St. Andrews has become more suspicious of donors, said Turner, the finance chairman. Generally, churches do not keep large amounts of savings. Whatever they get, they spend. They are not prepared to have those gifts rescinded.
“Churches don’t look a gift horse in the mouth," said Turner, who was chief financial officer at a hospital before he retired. “It’s a problem churches have, and generally you don’t get caught up in a mess like this.”
Michele McKinnon, a McGuireWoods lawyer specializing in nonprofits, said it is somewhat rare for charitable organizations to be forced to pay back their gifts. Churches and other nonprofits should know who their donors are and where they do business. They should pay attention to the news to know which companies are facing financial difficulty. Most charities are not thinking about this sort of thing, McKinnon said — they tend to believe their gifts are permanent. “Trustees are getting more aggressive, particularly when lots of money has gone to charity,” she added.
To cut a check for about $520,000, St. Andrew’s needed help. It took out a loan using its property’s equity and refinanced its mortgage. Its monthly payment ballooned from roughly $4,000 to $7,000. It will take the church 15 years to pay off the mortgage.
Church leadership explained to the congregation what happened. To save costs, it stopped buying choir music and slashed the staff’s raises. To bring in more money, it started hosting spaghetti dinner nights. Turner told the congregation that it had to adjust to a new reality.
