FARGO — Lutheran Social Services of North Dakota has entered the final phase of its dissolution with the filing of a bankruptcy petition for an orderly distribution of assets to creditors for the state’s largest private social services provider.

Lutheran Social Services filed a petition for a Chapter 11 bankruptcy on Thursday, May 13, four months after the organization’s board of directors determined it wasn’t able to continue operating.

Administrators have blamed heavy debts from Lutheran Social Services Housing, which provided affordable housing in rural areas, for the 102-year-old organization’s financial failure.

Lutheran Social Services invested $16 million and borrowed another $45 million for its housing program, which grew significantly during the 2010s in response to an urgent need for affordable housing in the Oil Patch during the Bakken boom.

The organization owned 20 housing projects and managed another 14 facilities in 22 communities in North Dakota, which provided housing for about 1,400 residents.

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But the housing program’s expenses exceeded revenues, and some projects never earned enough revenue to support themselves, Bob Otterson, Lutheran Social Services’ chief executive, said in a statement accompanying the bankruptcy filing.

Money will be available to pay unsecured creditors, but it wasn’t apparent from the filing how much would be available to pay unsecured obligations totaling almost $413,000, according to debts listed in the bankruptcy filing.

The documents did not provide a total for secured debts held by banks, but include a foreclosure lawsuit seeking $8.3 million filed by First International Bank & Trust owed for the 124-unit Prairie Heights apartment complex in Watford City.

Several other banks have filed lawsuits seeking loan repayments, as previously reported by The Forum.

Alerus Financial Corp. said Lutheran Social Services Housing still owes more than $4.7 million on a 2017 loan for a housing project in Stutsman County, and Cornerstone Bank said it owes more than $7.5 million on a 2016 loan for a project in Watford City, according to court documents.

Other secured debts, according to the bankruptcy filing, include a $5.6 million loan owed to the city of Maddock and a federal Payroll Protection Program loan of more than $2.5 million, for which Lutheran Social Services has applied for forgiveness.

Lutheran Social Services also owes Gate City Bank $591,975 and American State Bank & Trust $149,991, according to bankruptcy filings.

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In the bankruptcy petition, Lutheran Social Services seeks approval from a judge in U.S. Bankruptcy Court in Fargo to use cash collateral to pay expenses as the organization continues what Otterson has described as an “orderly wind down,” which includes liquidating assets, paying creditors and transferring key programs to other organizations.

One important program is Luther Hall in Fargo, which provides residential treatment for children aged 10 to 17. Luther Hall has been sold to Nexus Family Healing, a nonprofit group that specializes in outpatient therapy, residential treatment and foster care for children with emotional and behavioral health problems.

Most employees were told their jobs were being eliminated when Otterson announced on Jan. 15, the day the board decided that Lutheran Social Services couldn’t continue to operate, that the organization was being dissolved. The organization had 283 employees as of mid-January.

Several major real estate holdings are being sold off. Lutheran Social Services has an agreement to sell its Fargo headquarters, near the interchange of Interstates 29 and 94, for $4.9 million to Great Hall Partners, a real estate holding company based in Fargo.

In a May 14 letter to former employees, Otterson notified them that they were receiving payments, minus deductions, for unused vacation days. The payments were made possible by the sale of Lutheran Social Services’ Bismarck program center, which enabled the organization to make payments to its primary lender, Bremer Bank, he said.

“Many people invested their careers here,” Otterson wrote in the letter. “Many people turned to LSS in times of need. Unfortunately, decisions made two, four, even 10 years ago brought down this agency and forced hundreds of people to seek healing, help and hope from other sources.”

Otterson took the helm of the agency on Dec. 1, 2020 — six weeks before the board decided to cease operations — and has spent most of his tenure “winding down” the organization.

In a separate legal proceeding, the assets of Lutheran Social Services Housing, a subsidiary nonprofit, are going through receivership. The receiver, Lighthouse Management, is running the properties and will decide whether to sell housing assets, he said.