Mike, I agree, because you'd have the barganing power to basically force KRM to bend to your will. On the other hand, the Monopoly Man really doesn't exist, and probably won't be driving by New Haven, KY anytime soon. The real problem is that there is no donor confidence in the organization. I mean, would you donate $100; $1,000; $10,000 or even $100,000 to KRM if they already have shown to not be responsible stewards of their money and the museum?



That is my whole point in these discussions. We need to learn from this, because how we govern ourselves is important to railway preservation surviving in the long term. Sadly, KRM isn't alone, but it is an organization that has made just about every bad and wrong decision it can.

I have no personal vendetta against KRM, its directors and officers. I blame the membership, in general (including msyelf) for letting this continue as long as it did, but I also blame those in charge because they should have known better. I feel, on the balance, they have done a poor job and this is backed up by reviewing the IRS Form 990s, the "annual report" and the UCC filings, and by simply driving down there and looking around. Unfortunately there is too much evidence of things done wrong to simply ignore this or chalk this up to me being some crank.

I think we are talking past each other. There will be no donations to the organization, because they have failed, whether by the leadership, or membership. Somebody mentioned
Chapter 11 bankruptcy, but the result is the same: Reorganization. Since this is now outside the bankruptcy arena (being a straight secured loan), the only likely resolution will be for somebody to sack the existing board and reorganize KRM as a corporation OR to create a new corporation, buy the note and effectively toss KRM out onto the street.

I would really hope somebody on the KRM board is reading this and understands just how serious their situation is. If not, well hopefully somebody else is and it taking positive steps in the matter.

Not sure of Kentucky bank law, but if real estate is held as collateral, wouldn't that mean they have mortgaged their land? Mortgages tend to be separate filings. If the land is not mortgaged or held as collateral, then the scrappers clear everything off and the property becomes available for reuse. The status of the land title is a very big unknown for anybody wanting to reorganize, by whatever mechanism, KRM or it's collection.

Michael Seitz
Missoula MT

Mike, I see your point.

For any successor oganization, the debt is about $600k. You'd have to have some serious cash or pledges for cash just to be able to approach the bank about buying the note.

Even if you could buy the note at full payoff value, you've just raised $600k to essentially start from scratch. Not an evious position for anyone.

Not quite---you also get the entire collection and everything that "should" go with it. Obviously a change like this would be considered a "hostile takeover" by the existing management and it could get seriously ugly. It would behoove any group looking at this to have a positive PR and marketing plan in place and implement it early on.

The $600K is actually the easy part, salvaging the organization and retaining it's more desirable resources will be a true challenge.

For all this though, much the same was being said about VMT just a couple years back, so there is hope. However hope is always best backed by a measure of pragmatism.

Michael Seitz
Missoula MT

I'd make an argument that the collection is probably more a liability than an asset.......providing you intend to behave as a museum and pay what it costs to preserve it as a collection of artifacts in perpetuity.

dave

I think that pretty much applies to nearly all railroad, and probably many other museums as well. Happily (I hope) we don't do this in the hopes of having appreciating asset values. Perhaps Superheater could give some thoughts on this.

Still, preservation is it's own reward. Being organized to reap the benefits is the never ending challenge.

Michael Seitz
Missoula MT

Exactly Mike, but it does put the interests of a legitimate museum and the lender at odds from the get-go.

dave

My understanding of the larger museum world is that the collection is never capitalized (on the books of account as an asset). Only the land, buildings, machine tools, vehicles and similar large investments would be part of the capital accounts.

This is the long held view and when the accounting standards group wanted collections to be capitalized the American museum community successfully fought back a decade or two ago -- one of the very few times this standards group back away from an accounting change.

You form another nonprofit, and you do it Right Frickin Now, and you submit the Form 1023 ASAP, so you qualify for donations from some parties who will not donate while your 1023 is still pending.
The 1023 has a check box for "We are a successor organization", however I'm not sure you'd use it in this case, and probably not without consent of the nonprofit whose bones you plan to pick.

This is a really good case for "Asset Protection". That is the trade name for a legal craft of structuring your assets so that they are protected. The rest of this post shall be a discussion on that issue.

Just to be clearer let me describe some basic asset protection strategies for any person.
1. In many states, some equity in your home is protected from lawsuit/bankruptcy as a "Homestead", but only if you register it as a homestead. Do that.
2. Money in a 401(K) is immune from lawsuit and bankruptcy. Don't use it to pay lesser debts.
3. In many states, IRA money is not thusly protected. So don't casually roll 401K's over into IRAs.
4. Sadly, student loans are also immune from lawsuit and bankruptcy. Prioritize those.

Now, to companies.

The whole point of a corporation is if the business goes bankrupt, they can't come after you as an owner. This is the oldest and most basic asset protection. An LLC lets non-corporations do the same. You are protected if your company's widget gives somebody cooties.

What about the other way around? You personally get sued. Can they take your shares of a corporation? YES. How about an LLC? No, because busting up the company would be unfair to the other legitimate owners; they simply intercept your share of profits when (if!) they are distributed. What if it's a 1-man LLC and there are no innocent owners? Then they bust it up.

Did a bell go off in your head? Did you think "Have a is have a second innocent owner"? Yes, you're getting asset protection!

On to nonprofits.

You may be familiar with a Restricted Fund. If I give you $10,000 for a carbarn, you can't spend it on something else. A judge will enforce that. Now what happens if the museum is sued for something unrelated? The judge would be hesitant to do so, but he MIGHT invade that restricted fund.

Endowments are a permanent restricted fund, you invest it and draw off 4-7% a year to assure an income stream in perpetuity. Would a judge invade that? Maybe.

OK, now what if the endowment sits in a separate organization, e.g. a Community Foundation? It's clearly better protected. But how well? Might a judge say "This money exists only to serve the debtor, therefore..."? Possibly.

I also think there are possibilities in the realm of supporting organizations, or several different nonprofits operating in the same space. Hypothetically if PLA got into financial trouble, none of GGRM's assets would be in any danger.

So, there are some of the basic building blocks, and how liability flows, or does not. Build structures that are reasonable on their own, and have asset protection as side effects. The classic one is buying property. You create an LLC which buys the property. Why? It's easier and cheaper to sell an LLC than property. As a side-effect you also get a liability firewall against slip-and-fall accidents, dioxin discovery, etc.

We museums could stand to do a lot in the area of asset protection. A lot.

By failing to act by election the membership has indicated they are just fine with letting it die. Let's not stand in their way.

dave

Either that or they have solidified the idea that the membership just doesn't care....or doesn't want to hurt the feelings of the current administration.....


I would like to think that they aren't that oblivious, but then again, why would they conciousely make the decision to doom the museum?


This is one of those times where it may too hard (for some) to just "let is die". Maybe letting it die in this encarnation would be the best thing for the collection? I'm inclined to agree with getting a new NFP set up as soon as is practicable, and get everything in place to pick up the pieces.

Who will be the new NFP? Same usual suspects who let it happen this time? Insanity can be defined as doing the same thing over and over with the expectation of a different result.........I just can't imagine who is going to get involved locally that isn't already involved and therefore partly culpable.

I'd suggest that dispersal (and partial triage) to other existing stable responsible parties would provide a lot of the collection with a better long term future than another startup in the same place. I'd base that on not only the current situation in this place with these people, but the limitation of potential serious bidders to groups with the resources to come up with legitimate bids, which in itself is a better approximation of prima fascie eveidence of competence. Also, they'd only get what they have deicded they need and can maintain - rational collecting.

Open to other good arguments to the contrary, but not based on emotional involvement.

Dave

Robert,

As a followup to your asset protection post, I have been concerned about this very issue for some time. How can a non profit protect its collections/assets in the event of a lawsuit?

We have a small industrial museum here in Youngstown, OH. We own an acre of land and upon that land sits 500 tons of equipment, all owned free and clear with no debt. We have a $2,000,000 general liability policy on our operations and we do open for the public.

Now, what if at some future point one of our guests is injured, and sues our organization. The award is greater than what our insurance covers. So the insurance company pays up to the limit and then I suppose the plaintiff would then go after our collection. 500 tons at $300 per ton would net another $150,000 in value to plunder to pay the injured party. Add to that our land and building which is worth $50,000.

How can we protect our assets and the real estate those assets sit on, so we may be well assured that this historic equipment is never subjected to even the threat of being cut up or evicted to satisfy a judgement?

Your assumption is correct, if there is ever a verdict in excess of the policy limits, you are personally liable, whether you are a non profit, or just you. The same holds true for your personal automobile insurance policy.

Having sufficient liability insurance is usually the best "asset protection." You can't really hide your assets, and protecting your assets usually involves having enough insurance and being capitalized to the point to cover any additional losses.

In the end, most plaintiff's attorneys are going to be loathe to go through the process of scrapping out a steel mill just to satisfy the judgment. Sure your an turn the deed to the property over to them, but they have to turn it into money. Just the trouble of going after a non profit and turning their "scrap" assets into cash may be enough to scare away most from trying to enforce a judgment far in advance of your policy limits. As an attorney who has practiced insurance law for a number of years, I have rarely seen a case where the plaintiff's attorney wants to take an excess verdict. More often than not, they will settle for full policy limits.

$2million is a good number for most contingencies. If and when you decide to open to the general public, you may want to further investigate with your agent/broker whether additional coverage is easy.

I'm going to have to agree with Dave here. As far as the current membership is, the number who have woken up to the ongoing failure and impending total failure of the organization are small, probably less than five. If they can't get others to wake up, who do you staff your replacement organization with? Who do you go after donation wise?

Failure may be the best option here, forcing any successor organization to look at what it can care for in the long term, what its mission should be, and how it can achieve those goals.

The current course of KRM will lead it to total failure. Not even the current financial crisis within the museum has woken up the membership, brought about new and better leadership, or led to the development of a business plan and a fundraising plan. Absent any of these, total failure is only a matter of when, not if.

As I said before, the only way to possibly save this village is to burn it.