MILWAUKEE — A filing by yet another Catholic diocese for financial protection under Chapter 11 of the Bankruptcy Act has raised questions about the best approach for dioceses to take in the wake of sexual-abuse lawsuits.
The Archdiocese of Milwaukee filed for bankruptcy Jan. 4, and on Jan. 10 the Diocese of Wilmington, Del., filed a reorganization plan under the same legislation that would see at least $750,000 awarded to each victim of clergy sexual abuse.
Chapter 11 allows both entities to put together a financial offer that would include not only the victims but other creditors, including employees with pensions, and to retain facilities and stay in operation.
Both dioceses filed on the eve of court actions, prompting critics to accuse them of attempting to avoid courtroom exposure of acts of abuse and neglect by Catholic clergy and of paying fair compensation.
“That kind of charge betrays a lack of understanding of the bankruptcy process,” said Thomas Smith, a law professor at the University of San Diego. “Bankruptcy is all about fairness to all the creditors. That’s why there is a judge involved with very strong powers.”
Smith’s own diocese settled its sexual-abuse claims for $200 million while in Chapter 11 bankruptcy, twice what it had offered initially.
Both Wilmington and Milwaukee are proposing to create compensation funds from the sale of diocesan assets, liability insurance payouts and contributions from other Catholic resources.
The Archdiocese of Portland, Ore., entered Chapter 11 bankruptcy in 2004, one of the first to do so, sparking complaints that it was avoiding trials in several sexual-abuse suits. But it filed a plan that was ultimately approved by the bankruptcy judge and victims’ lawyers that paid $52 million to 177 victims, with another $20 million set aside for potential claimants.
Worth More Alive
Explained Smith: “One of the important things is to provide for future victims, who haven’t even complained yet. If the early cases go to trial, a jury can award a huge amount that leaves nothing for victims who come later.”
Chapter 11 bankruptcies have the advantage of allowing the survival of “a corporation that is worth more alive than dead,” he added. People will continue to go to church and to contribute, so a reorganization that allows this should produce a larger settlement.
The Portland Archdiocese mortgaged land, borrowed and claimed on its liability insurance policies to make a pool to pay off current and potential claimants. But to meet payments on its debts, said spokesman Bud Bunce, it was forced to reduce its operating budget by 25% and eliminate 20 full-time positions.
Bunce said the people of the archdiocese had responded supportively to the crisis.
“We’ve had no downturn in our annual appeal,” he said. The archdiocese kept people informed of the efforts being made to stay in operation and keep the parishes out of bankruptcy. “You look around today, and the sacraments are still being celebrated. The charitable activities are still being done. We’ve started a new capital campaign to raise $50 million for new schools, priests’ retirement, seminary education. But things are still very tight.”
The Wilmington Diocese would keep $3 million in working capital and contribute $30 million from the sale of assets such as the bishop’s residence. Another $69 million would come from “non-debtor” organizations such as the Catholic Diocese Foundation, parishes, schools, Catholic cemeteries and various care facilities which the diocese maintains are distinct legal entities.
This fund would also be shared by pension claimants such as school and diocesan employees, including priests, and parishes and other independent institutions who invested with the diocese, leaving $74 million for sex-abuse victims — about $750,000 apiece, according to the diocesan settlement plan.
Milwaukee filed for bankruptcy after a victims’ group of 24 rejected an offer of $4.6 million, or $191,000 each. The victims insist the amount of the settlement was not the issue; rather, it was the archdiocese’s refusal to release all relevant documents.
Both organizations had already reached settlements with hundreds of victims for tens of millions of dollars.
Earlier settlements from other dioceses averaged $33,000 per victim in Fairbanks, Alaska, $275,000 in Spokane, Wash., $330,000 in Tucson, Ariz., and $410,000 in Portland, Ore.
Some dioceses have settled without bankruptcy: Los Angeles, in 2007, for $660 million; Boston, in 2003 for $85 million.
Smith said that while “there is no doubt there have been abuses, I don’t think they’ve been worse than in any other organization. The difference is that Catholic dioceses are very fat targets to lawsuits. If you are abused in a Mormon church, you can only go after the assets of that church.” But because all the churches and schools in a Catholic diocese are owned “in corporate sole” by the bishop, “my little parish is on the hook for what’s done way on the other side of a very big diocese.”
Milwaukee is insisting the parish church and school properties which constitute the most valuable Catholic properties actually belong to the parishes and are merely held “in trust” by the diocese.
But Gerald Blanchard, a Georgia lawyer specializing in debts and bankruptcy, said that theory was rejected by the Oregon bankruptcy court in the early stages of the Portland Diocese’s Chapter 11 reorganization.
Blanchard wrote in a 2006 article in the Risk Management Association Journal that the bankruptcy court ruled, “Because the parishes are not separate legal entities … all of the parishes and the schools of the archdiocese constitute property of the estate that can be reduced to cash to pay off creditors.”
Blanchard said that the dioceses contradict themselves by assigning part of the fund to each parish to pay off from its own revenues, which is an admission they are part of the diocese.
The legal question is not completely resolved, however. The Oregon court conceded one point advanced by the diocese: that bankruptcy law might infringe “substantially” on the ability of parishioners to practice their faith if it resulted in the sale of parish properties.
This might well violate the Religious Freedom Restoration Act, said the court, but it then refused to decide on the matter unless it became necessary. It never did, because a settlement was reached. Portland incorporated its parishes separately while it was in bankruptcy, something other dioceses should imitate, according to Smith.
Smith added that bankruptcy had a demoralizing effect on his fellow Catholics. “But it is like something bad happening to your family. You don’t quit because of it,” he said. “I’m really sorry for the priests. They are afraid of going out wearing their Roman collar and having someone confront them in a restaurant.”
Register correspondent Steve Weatherbe writes from Victoria, British Columbia.