Diocesan Bankruptcies: A Feast for Lawyers

Catholic Exchange.com ^ | 12-04-04 | Samuel J. Gerdano

[Salvation]

by Samuel J. Gerdano, Esq

Other Articles by Samuel J. Gerdano, Esq

Diocesan Bankruptcies: A Feast for Lawyers

12/04/04

Bankruptcy filings by various Catholic dioceses are now the rage. The Archdiocese of Portland (Oregon), faced with $155 million in tort claims — after paying some $53 million to settle 100 cases — filed for court protection under Chapter 11 of the Bankruptcy Code on July 6.

This was soon followed by a similar bankruptcy by the Tucson Diocese on September 20. The Diocese of Davenport, Iowa averted a bankruptcy only after paying $9 million in late October to settle some 37 claims of priest misconduct. Now comes word that the Spokane (Washington) Diocese will be the next to file within weeks; others that have considered bankruptcy include Boston, Dallas, Santa Fe and Covington (Kentucky).

Is bankruptcy the best option for a diocese to try to heal the wounds caused by priest sexual abuse and for a just and fair compensation to those who have suffered? Can a Federal law such as the US Bankruptcy Code accommodate our Canon Law, consistent with fundamental religious liberty? What impact will such cases have on parishioners and the faithful? The early returns in these cases are not encouraging.

On one level, there is some appeal to a bankruptcy filing under the current stressful circumstances: bankruptcy stops all litigation in its tracks, allows the diocese the opportunity to try to consolidate known claims and compensate deserving victims in a fair manner, while bringing some measure of finality to what would otherwise be limitless legal exposure.

However, a diocesan bankruptcy presents grave dangers. Voluntarily submitting to the jurisdiction and control of the bankruptcy court means a diocese risks assets held in trust for parishes, loses institutional control over the claims process and perhaps even church finances, and submits to the vagaries of the secular legal system, including limitless transaction and legal costs, along with distractions caused by parties who frankly care little about fairness or closure.

Significantly, the “burn rate” (fees and expenses charged by various professionals before and since the filing) will likely exceed tens of millions of dollars — money from the faithful far better spent on deserving claimants and our religious mission. (In Spokane, even before filing, the diocese spent some $400,000 on “public relations” fees.)

Already the Portland case is showing signs of the feeding frenzy by lawyers on all sides, and an army of psychologists, psycho-therapists, “suppressed memory” consultants and committees of various past, present and future victims — all billing the diocesan estate thousands of dollars per day. Each dollar spent reduces the chance for a meaningful recovery by legitimate victims of abuse. The lead plaintiff counsel charges the estate (i.e. the diocese) $500 per hour. This lawyer, a professor at Cardozo Law School in New York, does not hide her agenda to tear down what she calls the “male dominated” and “hierarchical” structure of the Catholic Church, which she believes is the root cause of the abuse scandal.

The theory supporting a bankruptcy strategy is that, faced with insurance companies that refuse to pay claims and having exhausted mediation alternatives, there is no option. It is hoped that bankruptcy courts, as courts of equity, may be able to make order from the chaos of state court litigation. Counsel representing the various dioceses hang their legal hat on Canon Law, which generally defines Church assets to belong to individual parishes rather than the diocese.

Canon 1256, for example, provides that these assets are separate, cannot be commingled between these juridical persons and that a diocese cannot seize parish assets to pay debts. Another canon (515) limits a bishop’s ability to close parishes to pay debts. The parallel legal argument is that the Free Exercise Clause of the US Constitution prohibits civil courts from exerting control over Church assets acquired by the faithful for the purpose of practicing our religious beliefs.

But bankruptcy law will likely view all assets as property of the diocesan bankruptcy estate, under a legal doctrine called substantive consolidation. This is especially true when the diocese and parishes have not strictly followed corporate formalities in the holding of assets in trust under state law. In the Portland case, for example, the diocese holds the legal title to over 600 properties, including churches and schools, with deeds duly recorded in its name. The diocese has stipulated in other legal proceedings that they operate schools and facilities through their local parishes that otherwise have no legal identity. Pending is a court motion to simply declare these properties as mere unincorporated divisions of the diocese, making them part of the bankruptcy estate.

Once a diocese voluntarily submits to the jurisdiction of a Federal court, it risks having its structure and practices second-guessed in a way that may not withstand careful scrutiny. Ominously, each of the legal issues (in the Portland and Tucson cases) will be litigated and relitigated before the notoriously liberal and frequently reversed US Court of Appeals for the Ninth Circuit — a hostile forum at best.

The result is that parish assets are at risk. The most extreme of the tort claimant’s view holds parishioners as “co-conspirators” in the priest scandal because parishioners “tolerated” the hierarchical structure that led to the abuse. The claimants also argue in alternative that the mere act of filing for bankruptcy is in bad faith, done solely to delay litigation where there are ample assets (once all parish assets are combined) to pay claims in full.

In short, there is much to fear in the collision of civil and Church law in the diocesan bankruptcies. Bishops and archbishops considering this option should reconsider all of the direct and indirect impacts, and seek knowledgeable bankruptcy counsel.

© Copyright 2004 Catholic Exchange


Samuel J. Gerdano is Executive Director of the American Bankruptcy Institute and a parishioner at St. James in Falls Church, Virginia. These views are his own and not necessarily those of the ABI.

[Salvation]

An interesting read. Any comments?

[Salvation]

Portland, OR
Tuscon,


Considering bankruptcy:
Boston,
Dallas,
Santa Fe
Covington (Kentucky)
and now Spokane

Are there others in the works??

[Salvation]

**In the Portland case, for example, the diocese holds the legal title to over 600 properties, including churches and schools, with deeds duly recorded in its name. The diocese has stipulated in other legal proceedings that they operate schools and facilities through their local parishes that otherwise have no legal identity. Pending is a court motion to simply declare these properties as mere unincorporated divisions of the diocese, making them part of the bankruptcy estate.**

Anyone have info on this?

[Salvation]

In Oregon, I heard last week that an 80 + year old man is suing the Archdiocoese. Makes me wonder?

[DBeers]

Are there others in the works??

Look to the liberal blue meccas.

Maybe the Catholic Church should stop locating Diocesan offices in liberal blue 'Sodom & Gomorrah' meccas?

[AskStPhilomena]

"Maybe the Catholic Church should stop locating Diocesan offices in liberal blue 'Sodom & Gomorrah' meccas?"

But bishops and cardinals feel most at home in liberal blue "Sodom and Gomorrah" meccas.
You don't expect them to sacrifice their Dignity interfaith luncheons, do you?

[broadsword]

This would not be happening if the Church hadn't been infiltrated by a bunch of Sodomites who like to feast on little boys. Satan's Sodomite minions do not belong in the priesthood of Jesus Christ.

[AskStPhilomena]

With all the lawsuits heading his way, hopefully Mahony's days are now numbered....
http://www.latimes.com/news/local/la-me-priest4dec04,0,2297246.story?coll=la-home-headlines
Then again, the only action the Vatican are likely to take is to promote Mahony to cardinal-archpriest of some major Roman basilica - just like Cardinal Law - keeping them out of the media spotlight yet keeping them in the lifestyle to which they have become accustomed.

[thor76]

What I find most interesting are the Canon Law quotes........seperating parish from Diocesan assets.....saying that a bishop me not readily plunder parish assets to pay for diocesan legal settlements, etc.

I am forwarding that info to those who are fighting the church closing in the Arch of NY. I would advise those who know of or are involved in similar battles elsewhere to do the same.

[thor76]

Here we go back to a pitched battle I fought with another Freeper in other threads over the onership of parish properties. The truth is that - Canon Law notwithstanding - there are wide variances in who owns what from Dioces to Diocese.

In some cases, each (or most) parishes are independant corporations, utilixing an interlocking directorate for overall diocesan control. In others, the diocese may literally own all the cookies.........in others, the parishes are member corporations of the umbrella corporation. It can greatly vary.

While in all cases parishes have their own bank accounts, in some diocese, the diocese is holding the endowments funds of certain parishes in trust. In others the parish corporation owns everything - including the buildings.

It poses problems which would cross a rabbi's eyes!

[Salvation]

**wide variances in who owns what from Dioces to Diocese.**

To me this speaks of the individuals Bishops' business and legal savvy.

[Robert A Cook PE]

Sobering reality! (Do not ever ignore the "virtuous" hatred of the Catholic Church by three groups who are careful to keep their motives hidden: homosexual activists (those specifically representing the priests who abused the boys and seduced the teenagers and those who sympathize with those homosexual priests or any homosexual!), the anti-life/pro-death media who despise the Church's pro-life stances, and (finally) the anti-Christian liberal socialists who hate and fear anything Christian/conservative/male/capitalistic (such as the plaintiff's lawyers here!) ....

And of course, the lawyers, consultants, and get-rich-quick "plaintiffs" who are getting their memories re-constructed and wallets filled through these lawsuits.

(Good writer! Good, concise analysis!)

[Salvation]

I think the lawyers are mixed in with your three groups.

Good summary of Catholic haters there.

[thor76]

To me this speaks of the individuals Bishops' business and legal savvy."

You got that right........much of this has nothing to do with sound administration, and has everything to do with street smarts and issues of control.....in the sense of meglomania