Churches Weigh Going Bankrupt to Escape Suits
Filing could help with money woes, but First Amendment concerns exist

By Marie Beaudette
Legal Times
July 28, 2004

http://www.law.com/jsp/article.jsp?id=1090180184373

Earlier this month, David Slader finally had the Roman Catholic Church where he wanted it -- in a courtroom, on trial. Jury selection for the $25 million lawsuit brought by the Portland, Ore., plaintiffs lawyer was just hours away.

U.S. Conference of Catholic Bishops GC Mark Chopko. Image: Legal Times / Roberto Westbrook

Then Slader was hit with an unpleasant, but not totally unexpected, surprise. The defendant, the Archdiocese of Portland, announced July 6 it was filing for bankruptcy, bringing the proceedings to a dead stop.

"It's shabby treatment," Slader says. "It was tacky."

It's also certain to create a legal maze for the Bankruptcy Court and could land the case in the federal appellate courts and, ultimately, the Supreme Court.

The filing means that, for perhaps the first time, a civil authority -- a bankruptcy judge -- will have unprecedented access to internal church information and control over many major decisions. Canon law may conflict with civil law, and unanswered constitutional questions could be litigated.

"The potential exists that a court could order the archbishop to violate church law," says Mark Chopko, general counsel of the U.S. Conference of Catholic Bishops.

Though the Portland case could ultimately provide a road map for other financially struggling Roman Catholic dioceses, the bankruptcy has earned the ire of victims' rights advocates. They complain the filing is simply an attempt to avoid responsibility and keep abuse details under wraps.

In the Portland case, Slader's client, James Devereaux, claims he was sexually assaulted by the now-deceased Rev. Maurice Grammond, who is suspected of abusing more than 50 boys from the 1950s to the 1980s. Devereaux says the archdiocese was negligent because it kept Grammond in the ministry.

Slader was angry, but not shocked by the bankruptcy filing. Portland Archbishop John Vlazny had raised the possibility of a Chapter 11 filing in the past, but Slader thought it was "extremely unlikely."

The archdiocese says it had no choice. Claiming assets of $10 million to $50 million, the archdiocese had already paid out more than $53 million in settlements and was facing 60 outstanding lawsuits, including one claim for $130 million, that would be halted by a bankruptcy filing.

"We didn't have $130 million to pay out if that claim were to go against us," says archdiocese spokesman Bud Bunce.

In an op-ed article that appeared in The Oregonian of Portland on July 20, Vlazny said bankruptcy was a way out of the archdiocese's "current conundrum."

"Filing for bankruptcy has been described as a 'desperate act.' In some ways, that is true," he wrote.

ACCESS DENIED

The Portland Archdiocese is one of many in the United States in dire financial straits because of the Roman Catholic Church's sexual abuse scandal. Before it sold off pricey land and the archbishop's mansion to pay its massive $85 million settlement, the embattled Boston Archdiocese considered bankruptcy. Bishop Gerald Kicanas of Tucson, Ariz., has said his diocese might also be forced into Chapter 11 proceedings.

"It's not a preferred solution," says the Rev. Ronny Jenkins, an assistant professor at Catholic University's School of Canon Law. "It's never pleasant when a church places its assets before a civil authority."

Portland Archdiocese spokesman Bunce acknowledges that the archdiocese is in "uncharted waters."

"But at the same time, we know the federal Bankruptcy Court is also in uncharted waters," he says.

The filing has the effect of halting all pending litigation, including efforts of plaintiffs to discover information about potential sexual abuse in the church. Barbara Blaine, president of the Survivors Network of those Abused by Priests, says the filing is "a ploy to keep victims from coming forward and to keep the truth hidden. Kids are at risk if we can't file these lawsuits."

But there is a downside to the archdiocese's strategy as well: The U.S. Bankruptcy Court for the District of Oregon will now oversee major financial decisions outside of the archdiocese's day-to-day operations.

For example, the archbishop would have to seek permission from the bankruptcy judge to build a new church or to open a mission. If the judge were to refuse permission, some observers suggest that the First Amendment's free exercise of religion clause would be violated.

The archdiocese's business operations could also come to light. Advocates for sexual abuse victims argue that bankruptcy could be a means of forcing financial transparency on the archdiocese and the entire Roman Catholic Church, famously hierarchical and sometimes secretive.

"We know that the church needs a healthy dose of sunlight on its financial operations," says James Post, president of Voice of the Faithful, a Catholic lay group founded in response to the sexual abuse crisis in Boston. "The lack of transparency has been a very costly factor in the sexual abuse cases."

Although the archdiocese is eager for a solution, spokesman Bunce says it won't make impossible concessions to do so.

"We would hope that we don't reach the point that we have to challenge things on constitutional grounds," says Bunce. "But there are limits to what [the court] can and cannot do."

That challenge might be a difficult one. Frederick Naffziger, a professor of business law at Indiana University South Bend, says that the archdiocese entered into Chapter 11 proceedings voluntarily, knowing the implications and requirements. This, he says, could limit its ability to assert the First Amendment. "A church cannot be forced into bankruptcy," says Naffziger, who has written about the possibility of a church filing for bankruptcy.

But Chopko argues that a Chapter 11 filing isn't tantamount to relinquishing First Amendment rights. "The Supreme Court has never said that the government can act in contravention of an express constitutional limitation," he says.

Bankruptcy lawyers say that Oregon Bankruptcy Judge Elizabeth Perris will likely tread lightly, given the complexity and novelty of this filing. Some plaintiffs lawyers have little faith that the church will be as careful.

"I think if the church doesn't get its way in the Bankruptcy Court, there will be a lot of aggressive litigation," says Mitchell Garabedian, a Boston plaintiffs lawyer who has represented hundreds of abuse victims in litigation against the Boston Archdiocese.

REMOVING THE VEIL

One issue that could spark a federal court battle is disagreement over the value of the archdiocese's assets, which the archdiocese claimed in the bankruptcy filing were between $10 million and $50 million.

That valuation, however, excludes donations held in trust and money and property owned by its 124 parishes.

The Portland Archdiocese, like many other religious organizations in the United States, is a corporation sole, which means the archbishop is the sole "owner" of the corporation and holds most of the assets of individual schools and parishes in his name. Church law bars the archbishop from using the assets for his own purposes.

Plaintiffs lawyers have said that, because of that unusual corporate structure, those assets are fair game. And Slader, the plaintiffs lawyer suing the Portland Archdiocese, says canon law is irrelevant. "Canon law is an internal corporate policy book," he says. "If it's inconsistent with the law of the land, it goes in the garbage can."

Archbishop Vlazny has said he will not use parish assets to fund settlements. An order from Judge Perris to the contrary could force the archbishop to choose between violating the law of the church or federal statutes.

A decision on assets could have larger ramifications for religious entities in the United States as well. To protect themselves from liability, churches may be forced to restructure.

"The day is going to come when the corporate veil is going to be pierced and this legal house of cards is going to collapse," says victims advocate Post.

KEEPING THE FAITH

But using bankruptcy simply to dodge potentially costly lawsuits is something of which courts can take a dim view. David Skeel, a bankruptcy expert and professor at the University of Pennsylvania Law School, calls it "inappropriate."

"Other than this litigation, my understanding is that the Portland Archdiocese is fairly healthy," Skeel says.

Bankruptcy courts can reject filings not made in good faith, Skeel says. He points to the bankruptcy of the SGL Carbon Corp. in 1999. The financially sound company filed for bankruptcy after it was hit with an antitrust class action.

In dismissing the case, the 3rd U.S. Circuit Court of Appeals said that the possibility of financial ruin by litigation alone could not justify bankruptcy.

"If it really is about dealing with this litigation, it's plausible that the judge will say, 'You don't need bankruptcy to deal with this,'" says Skeel.

The majority of the Portland Archdiocese's creditors are the abuse claimants. Although it is facing tort claims in the hundreds of millions, the archdiocese owes its largest commercial creditor, the Key Bank of Oregon, $22.3 million. The rest of the commercial claims total about $125,000.

Skeel says in order to be successful, bankruptcy has to serve a valid reorganizational purpose and, in this situation, is only appropriate if the archdiocese is truly committed to finding a fair solution for the claimants.

"I think a lot will turn on the stance the church takes going into the case," he says. "Anything that looks like ducking responsibility is going to seriously undermine the process."

But James Tancredi, chair of the financial restructuring practice at Hartford, Conn.-based Day, Berry & Howard, says other mass tort bankruptcies, such as those of asbestos companies and Dow Corning, the maker of silicon breast implants, serve as a model for the church to follow.

In the Dow Corning case, a trust was set up to compensate future victims. Tancredi says bankruptcy could be a useful way to ensure that current claims don't foreclose future victims.

That possibility has Portland lawyer Slader optimistic that bankruptcy proceedings could prove to be the best solution for victims. He hopes it could yield a settlement for current victims and a mechanism for resolving future claims.

"I think ultimately, this will provide perhaps an ideal combination of relief," he says.