When attorneys for bankrupt Wordsworth Academy go before a judge Thursday in the case's first hearing, they will present a highly unusual proposal to fund the human-service agency's operations during the early stages of its bankruptcy: a $1.5 million loan from another nonprofit that leases space from it.
The lender, Play & Learn, an operator of preschools, was once affiliated with Wordsworth and had a member of its board, Gerald Schatz, in common with Wordsworth until Schatz resigned from the Wordsworth board shortly before the bankruptcy filing Friday. Wordsworth operated a residential treatment facility in West Philadelphia where a teenager died last fall in a struggle with staffers.
Lawrence G. McMichael, a Dilworth Paxson bankruptcy attorney representing Wordsworth, acknowledged that the proposed financing arrangement was unusual, but said it was appropriate.
"Despite substantial efforts, the debtors have been unable to secure alternative financing from any source other than Play and Learn in the time frame required," Wordsworth said in a motion Friday asking U.S. Bankruptcy Judge Ashley M. Chan to approve the loan.
"Play and Learn is obviously not a traditional lender, but has mobilized quickly to solve the debtors' immediate liquidity crisis. Without Play and Learn, the viability of debtors' Chapter 11 cases would be jeopardized," the filing said.
A traditional financing package is in the works from Siena Lending Group that would supplement the proposed loan from Play & Learn. But the current arrangement illustrates the difficult financial position Wordsworth was in before it resorted to bankruptcy, coupled with a plan to be acquired by Public Health Management Corp. (PHMC), a Philadelphia nonprofit that provides health and community services.
"It's not as bad as it seems," McMichael said Saturday.
Like many businesses, Wordsworth faces a gap between when it has to pay its bills, such as payroll, and when it gets paid. That gap is typically covered by a line of credit, and Wordsworth had a $5 million line of credit with M&T Bank. A month ago, McMichael said, M&T froze the line of credit while it had a zero balance.
"That was one of the reasons for this bankruptcy," McMichael said. Other reasons include numerous lawsuits after a decade of allegations and charges of sexual and physical abuse at what was Philadelphia's only residential treatment center for troubled youth, as chronicled by the Inquirer and Daily News in April.
Wordsworth, which provides education, behavioral health, and child welfare services to children and youth and is now being managed by PHMC, still owes $4.7 million to M&T on a separate loan.
The board, including Schatz, approved the bankruptcy filing June 12.
Schatz and other representatives of Play & Learn, which was founded in 1981 by Wordsworth educators and psychiatrists, could not be reached for comment Saturday.
Until about a decade ago, Schatz was president of Wordsworth, which was founded in 1952. The website of Wyncote Academy, a private school in Elkins Park, describes Schatz as founder of Wordsworth Academy, Play & Learn Children's Centers, and Wyncote Academy. The latest available 990 tax return for Play & Learn, for the year ended June 30, 2015, lists Schatz as president.
As part of the proposed loan agreement, PHMC will negotiate with Play & Learn on the possible sale of the property Play & Learn occupies on Wordsworth's Fort Washington campus, which a bank appraised at $9.35 million in 2014.
"We have aligned interests. Where they are getting the $1.5 million, I don't know," McMichael said.
The 990 shows that Play & Learn had $7.7 million in investments two years ago.
Laura Otten, executive director of the Nonprofit Center at La Salle University, said a nonprofit is permitted to make such a loan as long as it is from unrestricted money and the board approves it, though she wondered how Play & Learn has that level of liquid assets.