Sheltering Arms Children and Family Services: NYC Nonprofit Wind-Down
ElevenFlo Research
March 16, 202613 min read
Sheltering Arms Children and Family Services, Inc., one of New York City's oldest nonprofits, filed chapter 11 in the Eastern District of New York on March 7, 2024, after years of chronic government payment delays, pandemic-driven enrollment losses, and pension and litigation liabilities. The organization had already ceased operations and transferred its programs to other providers before the petition date, entering bankruptcy to complete an orderly liquidation of remaining assets and resolve an estimated $30 million in unsecured claims.
Founded in 1823 as Episcopal Social Services of New York, Sheltering Arms operated foster care, juvenile justice residences, developmental-disability programs, and early-childhood services across four boroughs. At its peak in fiscal year 2020, the organization reported $106.4 million in annual revenue and employed more than 1,700 people. The chapter 11 case is structured as a wind-down, with no reorganization plan filed and the estate now reduced to four employees managing residual asset sales, records disposition, and contested claims.
Debtor
Sheltering Arms Children and Family Services, Inc.
Court
U.S. Bankruptcy Court, Eastern District of New York
Sheltering Arms traced its origins to 1823 and served 17,000 children and families annually through programs spanning youth homeless shelters, foster care, mental health treatment, and housing assistance in every borough except Staten Island. The first-day affidavit described the organization's mission as helping children and families across New York City "succeed and thrive", with programs encompassing juvenile justice residences, developmental-disability residences and day programs, and early-childhood education. The youth homelessness operation alone maintained 44 shelter beds and 102 federally funded apartments, services that the Coalition for Homeless Youth described as a "national model."
The organization's revenue grew from $48.5 million in fiscal year 2013 to a peak of $106.4 million in 2020, driven largely by government contracts with the New York City Department of Education, the Department of Youth and Community Development, and the Administration for Children's Services. Government contracts accounted for nearly all of that revenue. The nonprofit took in roughly $99.2 million that year, mostly from government contracts, and spent all but approximately $66,000 -- razor-thin reserves for an organization of that scale.
Government Payment Delays and Financial Collapse
The first-day affidavit filed by Judith Pincus attributed the closure to a combination of pandemic-era disruption, reduced enrollment in early childhood and other programs, chronically slow government reimbursements, staffing losses, and cost inflation. The pandemic hit particularly hard: a $2 million budget gap forced the organization to cut its daycare programs in 2022, and low enrollment across early-childhood and other programs continued to reduce the cash flow tied to attendance-based government reimbursement formulas. New York City Department of Education contracts tied reimbursement to enrollment and attendance, and the DOE agreed to reimburse only 75% of the organization's spending in the year before closure, leaving Sheltering Arms millions behind on rent, insurance, and payroll.
Fiscal year 2022 ended with a $7.6 million cash shortfall, and outside consultants determined by late 2022 that the organization was unlikely to have enough cash to meet payroll through the end of the year. CEO Elizabeth McCarthy: "If I were building a bridge for the city and they stopped paying me for 18 months I would stop building the bridge," she told reporters. "They're mission-driven businesses, but they're still businesses."
Sheltering Arms was not an isolated case. A 2021 report by the city's Human Services Recovery Task Force found that more than 1,800 nonprofits were in danger of closing, with revenues down an average of $9.1 million and late payments averaging around $8 million per organization. A Nonprofit Finance Fund survey found that 32% of NYC nonprofits receiving government funding reported being paid more than 90 days late, compared to only 10% of nonprofits nationally; only 19% were paid on time, versus 47% nationally. To cope with the delays, 45% of surveyed NYC nonprofits took on debt, 29% delayed payment to their own vendors, and 12% had to pause or reduce services entirely. In 2024, over 90% of the human services contracts that NYC government had with nonprofits were registered late, with first payments arriving an average of 6.5 months after the contract start date. The NYC Comptroller's office reported over 7,000 unpaid invoices totaling more than $1 billion across the city's nonprofit service providers as of April 2025. Michelle Jackson, executive director of the Human Services Council, called the problem systemic: "The Adams administration inherited a system that was beyond repair."
By the second half of 2022, Sheltering Arms concluded it could not safely continue long-term operations. The organization began transitioning and closing programs over the following year, transferring services to Rising Ground, Inc. and other providers. Rising Ground pledged to offer jobs to existing Sheltering Arms staff to maintain continuity for residents. The DYCD immediately began mobilizing other nonprofits and the state to reassign Sheltering Arms' contracts, and agency representatives stated that the "residential and drop-in network will not lose capacity."
Pension Plan and PBGC Litigation
Sheltering Arms maintained a defined benefit pension plan that had been frozen since June 30, 2008. The plan covered approximately 205 participants and held $5.67 million in assets, but the Pension Benefit Guaranty Corporation estimated the plan was underfunded by $2.9 million when the nonprofit ceased operations on March 31, 2023.
On December 18, 2023, the PBGC sent Sheltering Arms a termination agreement seeking to appoint the agency as statutory trustee, but the organization did not sign. After Sheltering Arms missed two minimum required contributions of $129,240 each in October 2023 and January 2024, citing "financial challenges," the PBGC filed a complaint on March 4, 2024 in U.S. District Court for the Eastern District of New York -- three days before the chapter 11 petition -- seeking to terminate the plan, appoint the PBGC as statutory trustee, and compel Sheltering Arms to deliver all plan records, assets, and property to the agency.
In October 2024, Sheltering Arms moved to approve a stipulation resolving the PBGC's claims. Under the agreement, PBGC's proofs of claim were withdrawn and replaced with an allowed $3,000,000 general unsecured claim plus a $20,000 administrative-priority claim, subject to a potential reduction mechanism for certain terminated benefits. The stipulation effectively resolved the parallel district court litigation and fixed one of the estate's largest quantified unsecured liabilities.
Asset Liquidation and Property Sales
Sheltering Arms entered chapter 11 with total scheduled assets of $10.09 million, including $9.33 million of personal property and $769,828 of real property. The debtor's real estate interests included 2749 University Avenue and 1980 Morris Avenue in the Bronx, units 4A and 4B at 305 7th Avenue in Manhattan, and a leasehold at 2 Park Avenue. Scheduled secured claims against these assets included $1,724,440 owed to 25 Broadway Office Properties, LLC secured by a letter of credit, $405,172 owed to First Commerce LLC secured by the University Avenue property, $14,542 owed to First Commerce LLC secured by the Morris Avenue property, and $547,800 owed to Morgan Stanley Private Bank secured by U.S. Treasuries.
The principal asset sale involved the University Avenue property. In November 2024, Sheltering Arms sought approval to sell 2749 University Avenue to Rising Ground, Inc. for $1,175,000, with a $50,000 deposit. Rising Ground was already the existing occupant under a triple-net lease. The debtor argued that a private sale was appropriate because the transaction grew out of arm's-length negotiations with Rising Ground and the New York State Office for People with Developmental Disabilities, rather than a conventional auction. After satisfying the existing First Commerce mortgage, the estate expected more than $750,000 of excess value from the sale.
The court approved the sale on January 5, 2025, finding Rising Ground to be a good-faith purchaser and authorizing a free-and-clear transfer with liens attaching to net proceeds. The order included broad successor-liability protections and was immediately effective.
Records disposition. As the wind-down progressed, Sheltering Arms needed to dispose of hundreds of thousands of business, medical, and program records containing protected health information and sensitive child-welfare data. With no operating platform remaining to store them, the debtor moved in October 2025 for authority to transfer records to MetalQuest for permanent custodial storage. The arrangement carried a $200,000 aggregate price, paid in four installments, and provided for secure long-term storage and eventual destruction. The court approved the agreement on November 23, 2025.
Claims Landscape and Child Victims Act Exposure
The court set a general claims bar date of July 31, 2024 and a governmental bar date of September 3, 2024. Beyond the PBGC pension claims, the estate faces estimated exposure from approximately 20 Child Victims Act lawsuits alleging abuse during the 1960s through the 1980s, which the first-day affidavit identified as part of roughly $30 million in total unsecured liabilities including trade debt, staffing-related claims, and lease obligations. The CVA suits were filed against the organization under its current name and its predecessor name, Episcopal Social Services of New York, Inc., reflecting abuse allegations spanning decades of operations.
Insurance disputes. NJM Insurance Group filed repeated reservations of rights beginning in June 2024, responding to monthly and interim fee applications across the case. The reservations appeared on at least six separate docket entries between June and October 2024, addressing coverage for both estate administration expenses and the underlying CVA claims. The persistent insurance sensitivity suggests that the ultimate resolution of the CVA litigation will depend in significant part on whether the estate's insurance policies respond to the decades-old abuse allegations.
Rule 2004 motion practice. In February 2026, certain personal-injury creditors represented by Stuart Mermelstein filed a Rule 2004 motion seeking documents on corporate governance, insurance policies, financial assets, and abuse reports to assess the debtor's financial position and insurance coverage in connection with CVA claims. The scope of the discovery request -- targeting governance records, financial assets, and historical abuse reports alongside insurance coverage -- indicated that CVA creditors were evaluating both the estate's capacity to fund recoveries and the potential for insurance-backed distributions. The motion triggered a sequence of procedural steps: a withdrawal motion followed on February 13, 2026; the court entered an order granting the Rule 2004 motion on February 19, 2026; and the court vacated that order on February 25, 2026. CVA-related proceedings remain pending.
Financial Position and Wind-Down Status
The court entered interim and then final first-day relief between March 15 and April 22, 2024, covering wages, utilities, cash management, and confidentiality procedures to stabilize the estate during the initial wind-down phase. The schedules and statement of financial affairs were filed on April 18, 2024.
The January 2026 monthly operating report shows the estate deep in residual wind-down mode. Sheltering Arms reported only 4 full-time employees, $4,663 of receipts, $78,434 of disbursements, and negative monthly cash flow of $73,771. The estate's monthly burn rate reflects the cost of maintaining four staff members to manage residual asset dispositions, records transfer, and claims administration while the CVA and insurance disputes remain unresolved.
The same report showed $5,350,128 of ending cash, total assets of $7,479,967, and total liabilities of $23,964,189, with a monthly net loss of $206,771. Cumulative asset sale proceeds stood at $906,249, with no additional out-of-ordinary-course sales during the month. The gap between remaining assets of roughly $7.5 million and total liabilities approaching $24 million underscores the wind-down posture: absent substantial insurance recoveries on the CVA claims, distributions to general unsecured creditors will depend on the pace of remaining asset monetization and the resolution of contested claims.
Professional fees. Garfunkel Wild, P.C., serving as general bankruptcy counsel, sought approval in March 2025 for $260,463.60 in fees and $199.00 in expenses for the September 2024 through January 2025 period, after requesting $385,621.65 in prior periods. The Wagner Law Group, acting as special pension and benefits counsel, sought $55,095.50 in fees and $109.38 in expenses for the October through December 2024 period, bringing cumulative requests to $267,367.00. Together, cumulative professional fee requests through early 2025 exceeded $900,000, an ongoing estate administration cost that will reduce the pool available for unsecured creditor distributions.
Key Timeline
Date
Event
March 7, 2024
Chapter 11 petition filed in the Eastern District of New York
March 15 -- April 22, 2024
Court entered interim and final first-day relief covering wages, utilities, and cash management
April 18, 2024
Schedules and SOFA filed; total scheduled assets of $10.09 million
June 13, 2024
Court set claims bar dates: July 31, 2024 (general) and September 3, 2024 (governmental)
October 1, 2024
Debtor moved to approve PBGC stipulation fixing $3 million unsecured claim
November 22, 2024
Debtor sought approval to sell University Avenue to Rising Ground for $1.175 million
January 5, 2025
Court approved University Avenue sale free and clear
October 29, 2025
Debtor moved for authority to transfer records to MetalQuest
November 23, 2025
Court approved MetalQuest records agreement
February 6 -- 25, 2026
CVA creditors filed Rule 2004 motion; court granted then vacated the order
Key Timeline
Frequently Asked Questions
What happened to Sheltering Arms?
Sheltering Arms Children and Family Services, a 200-year-old New York City nonprofit, ceased operations in 2023 after years of chronic government payment delays, pandemic-driven enrollment losses, and a growing cash shortfall. The organization transferred its programs to Rising Ground, Inc. and other providers before filing chapter 11 on March 7, 2024 to complete an orderly liquidation of remaining assets.
Who is the claims agent for Sheltering Arms?
Epiq Corporate Restructuring serves as the claims and noticing agent. The firm maintains the official claims register and distributes case notifications to creditors and parties in interest.
Why did Sheltering Arms file for bankruptcy?
The first-day affidavit attributed the filing to a combination of reduced program enrollment, chronically late government contract payments, pandemic-era funding disruptions, staffing losses, and cost inflation. Fiscal year 2022 ended with a $7.6 million cash shortfall, and consultants determined the organization could not sustain payroll. By the petition date, all programs had already been transitioned or closed.
What is the status of Child Victims Act claims against Sheltering Arms?
The estate faces approximately 20 Child Victims Act lawsuits alleging abuse during the 1960s through the 1980s. In February 2026, CVA creditors filed and then withdrew a Rule 2004 motion seeking financial and insurance discovery. The court briefly granted, then vacated, that order. CVA-related proceedings remain active.
This article was researched and written with AI assistance, using court filings, public records, and news sources. AI-generated content can contain errors. Verify all information against primary sources before relying on it. This is not legal or financial advice. Read our full disclaimer.
