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BANKRUPTCY Jul-13-2004 (1,350 words) Backgrounder. xxxn
Archdiocese enters uncharted waters in church bankruptcy filing
By Jerry Filteau
Catholic News Service
WASHINGTON (CNS) -- When the Archdiocese of Portland, Ore., filed for Chapter 11 federal bankruptcy protection July 6, it began a journey into largely uncharted waters.
Among the most difficult issues to be faced will be First Amendment concerns as a secular bankruptcy court scrutinizes church finances and oversees reorganization of the archdiocese, holding veto power over major archdiocesan decisions.
As the first bankruptcy filing in history by a U.S. Catholic diocese, the process ahead could set a number of precedents. Observers will be watching closely to see what impact decisions of the bankruptcy judge may have on lowering or strengthening traditional walls of church-state separation.
Some such decisions might be seen as uniquely applicable to a bankruptcy proceeding and therefore not affecting constitutional questions of church and state in any other context.
"The U.S. Supreme Court has made clear that bankruptcy is a privilege, not an entitlement," wrote a leading U.S. bankruptcy expert, David A. Skeel, in an article last year after the Boston Archdiocese began exploring the idea. "When individuals or entities file for bankruptcy, or file pleadings in a bankruptcy case, they waive their right to insist on many of the protections that might otherwise be available to them."
Some decisions a bankruptcy judge makes in the case could be appealed by the archdiocese or its creditors or claimants, possibly reaching the U.S. Supreme Court.
Despite such unknowns, Portland's lead could soon be followed by one or more other dioceses. Bishop Gerald F. Kicanas of Tucson, Ariz., said in June that his diocese may have to enter Chapter 11 proceedings before two clergy sex abuse lawsuits go to trial in September.
Mark Chopko, general counsel to the U.S. Conference of Catholic Bishops, said, "Lots of questions have not yet been explored about how much authority and jurisdiction a bankruptcy court actually can exercise over a church."
"I don't know that this is necessarily a problem," he said, but as the case unfolds "from the standpoint of the Catholic dioceses, these are all new questions and they will require careful analysis and communication about where the proper lines are drawn."
Archbishop John G. Vlazny of Portland announced the bankruptcy decision as two lawsuits seeking restitution for childhood sexual abuse by a now-deceased priest of the archdiocese were about to go to trial. One plaintiff was seeking $130 million. The other wanted $25 million.
"I am committed to just compensation," the archbishop said in a letter sent to parishes. "These demands go beyond compensation. With 60 other claims pending, I cannot in justice and prudence pay the demands of these two plaintiffs." Altogether those claims amount to well over $300 million.
The archdiocese and its insurers have settled more than 130 other claims for $53 million since 1950, most of it in the last four years. This includes $21 million of its own money the archdiocese spent on claims last year after insurers balked at contributing to further settlements.
Chopko said one of the archdiocesan assets a bankruptcy court would look at is its liability insurance coverage; the court could determine whether insurers have further obligations regarding the claims against the archdiocese.
One of the first challenges the archdiocese faces is to have its Chapter 11 filing accepted by the U.S. Bankruptcy Court for the District of Oregon.
Skeel, a University of Pennsylvania law professor and author of numerous articles and books on bankruptcy law, analyzed the ins and outs of a church bankruptcy filing in a 2003 article in the Boston College Law Review.
He said a Catholic diocese falls within the legal definition of a corporation to be covered by the Bankruptcy Code, but the court has to determine whether a particular bankruptcy filing "serves a valid reorganizational purpose" or should be dismissed because it is an attempt "merely to obtain tactical litigation advantages."
Courts allowed bankruptcy proceedings in the face of massive liability litigation for asbestos manufacturers in the 1980s, he noted, but rejected SGL Carbon's attempt in 1998 to seek Chapter 11 protection when it faced massive anti-trust litigation from the steel industry for alleged price-fixing.
In the asbestos cases and others, bankruptcy courts have supported the formation of trusts, "funded with much of the value of the company," to compensate victims without destroying the company, Skeel said.
Chopko said a diocese entering bankruptcy proceedings may seek a similar approach, proposing payment of the tort claims over a period of time or working out a mechanism of long-term loans to find the necessary funds to pay the claims "in a way just to everybody."
He said the court would also need to have a mechanism to determine the merits of the claims against the diocese, weeding out false claims.
One advantage to a bankruptcy filing, he said, is that it can set a deadline on new claims for past liability, giving the diocese certainty that the claims brought forward mark the end of the line.
The court would allow the filer to give public "notice to all persons with claims or potential claims to come forward by a certain date," he said, and those who do not do so by the deadline "are forever barred" from pursuing a claim.
Another key question a bankruptcy court may face is whether to consider parish properties as part of a diocese's assets. In church law, each parish is a public "juridic person" with full ownership of any property it has legitimately acquired.
What happens, however, if the diocese is listed in civil records as the owner of the property, as is the case in the Portland Archdiocese? Will a bankruptcy judge recognize the church position that the diocese only holds that property in trust for the parish, which is the true owner? Can a court reverse church law without engaging in impermissible secular intrusion on internal church governance?
Attorneys for the plaintiffs in Portland have said they regard the parish properties as part of the archdiocese's assets. In its filing, the archdiocese estimated that its assets were worth between $10 million and $50 million. But plaintiffs' attorneys, including parish properties in their estimates, claim archdiocesan assets total $300 million to $500 million.
Chopko said that, while church law is clear that the parish itself owns parish property, in civil law "there are four or six dominant models for how parishes are structured, depending how you count," and there is "no (single) right answer to the civil law question."
Skeel wrote that a diocese cannot be forced to liquidate its assets to satisfy creditors. When a for-profit corporation seeks Chapter 11 protection, creditors can seek to convert that filing to forced liquidation under Chapter 7, but "nonprofit corporations cannot be thrown into bankruptcy involuntarily," he wrote.
While a court handling a Chapter 11 proceeding can appoint a trustee to manage the corporation in certain circumstances, Skeel thought it "quite unlikely that a bankruptcy court would ever agree to inject itself into church affairs this directly." On the other hand, he said that simply by filing for bankruptcy a diocese would be "consenting to a significant lowering of the wall of separation between church and state."
Such an issue would arise, for example, if the court were to tell a diocese that its reorganization must include funding cutbacks or cutoffs for services the diocese sees as an integral part of its religious mission.
Filing for bankruptcy is a "last resort" for a diocese, Chopko said. He said the church's first obligation is to serve the worshiping community and the needs of people in the larger community.
Bankruptcy is an option only if the diocese is confronted with such large tort claims that it can no longer fulfill its mission of service and at the same time "offer justice and compensation to people hurt by those no longer in power," he said.
"It's an inability to find just and charitable settlements" that can force a diocese into bankruptcy, he said. "You don't see Portland unwilling to settle. They've put a lot of their own resources on the line" to settle more than 100 other cases.
END
Copyright (c) 2004 Catholic News Service/U.S. Conference of Catholic Bishops. The CNS news report may not be published, broadcast, rewritten or otherwise distributed, including but not limited to such means as framing or any other digital copying or distribution method, in whole or in part without the prior written authority of Catholic News Service.
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