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.
