In bankruptcy proceedings for the Archdiocese of Portland, the key question is whether parish churches and schools are actually the property of the archdiocese.

By Brian K. O'Neel
Catholic World News
October 31, 2004

http://www.cwnews.com/news/viewstory.cfm?recnum=33162

Oct 2004 (CWR) - When the Archdiocese of Portland declared bankruptcy on July 6, it came as a shock. The move shocked many veteran observers of Catholic affairs, who had been certain that a different solution would be found. It shocked the plaintiffs whose sexual-abuse lawsuits were supposed to have opened in court later that week. It shocked experts in the bankruptcy field, because this was the first time in US history—and possibly world history—that a religious entity of such size had filed for debtor protection.

The archdiocese’s legal case raises a host of fascinating questions. First is the issue of ownership. Canon law and civil law take two different views regarding the ownership of parish property. The Portland archdiocese claims to operate under canon law, which holds that parishes are separate corporate entities. Civil law says that the archdiocese is the sole corporate entity, and thus it owns all parish property. Which view will prevail?

There are other Church-state ramifications to the case. In a normal bankruptcy proceeding, the court has the right to move in and veto any decisions made by the company’s executive. It can appoint a trustee to monitor every move the business takes. However, the debtor in this situation is the Roman Catholic Archdiocese of Portland, a strictly religious body. Since the US Constitution explicitly states the government may make no law concerning the establishment of religion, where does that leave the bankruptcy court?

Then there are more practical matters. If the court decides that the archdiocese is the actual owner of the parishes and schools within its purview, and orders them to be sold, what provisions can be made for parishioners and students? What will become of the retirement accounts for priests and religious held by the archdiocese, not to mention its many charitable funds?

And now that the Portland archdiocese has been the first to test the waters of bankruptcy protection, will others follow suit? As this issue of CWR was going to press, the Dioceses of Tucson, Arizona (with 24 pending sex-abuse lawsuits) and Santa Rosa, California (with 16 pending cases), were mulling bankruptcy as a last option. In the case of Tucson, an insolvency filing seems all but assured.

Perhaps the most intriguing question is what will happen if the bankruptcy court ultimately throws out the Portland claim? The court might determine that the archdiocese had filed for protection not to reorganize its finances, but to obtain a tactical advantage in litigation; in that case, the court could refuse to grant bankruptcy protection.

But while this case raises many difficult questions, the one question that is easily answered is how the archdiocese came to this point.

Simply put, the cause of Portland’s problems is the sex-abuse scandal.

THE COST OF ABUSE

To date Portland has paid out $53 million to more than 130 claimants in sex-abuse settlements. The insurance company that covers the archdiocese recently told Church officials that it would no longer pay settlements, arguing that the repeated claims are not covered by liability insurance. And the archdiocese still has 60 more cases pending.

Most of the remaining cases—including one suit asking for $130 million in damages and another, $25 million—involve the deceased Father Maurice Grammond, and the charges span nearly three decades. So far, 50 of his alleged victims have come forward, although experts believe there are certainly more.

Grammond served as a priest at a home for troubled boys, and at several different parishes. Most of the allegations against him date from his term in the town of Seaside, Oregon, where he served until his forced retirement in 1988. “I’d say these children abused me,” said Father Grammond in a deposition shortly before his death in 2002. “They’d dive in my lap to get sexual excitement.”

There is strong evidence that the archdiocese was aware of the charges against Grammond, but while he served for more than 30 years in the priesthood, archdiocesan officials did nothing to stop him; he was moved from place to place, and when questions arose his own assurances were taken as final. The story is now sickeningly familiar. And so the lawsuits have come. And come. And come.

“Nothing else seems to prod the bishops toward change besides the threat of a large jury verdict or settlement,” says David Clohessy, executive director of the Survivors Network of those Abused by Priests (SNAP). “In the Grammond case, I’ve met probably two dozen of his victims. I know that Church leaders had repeated, clear warnings of his behavior going back decades. It is absolutely among the most egregious cases, in terms of how many Church leaders knew how long ago.”

“They knew it was going on,” agrees plaintiff attorney Daniel J. Gatti, a lapsed Catholic. This “wasn’t an isolated incident. This was not a renegade priest. They knew it was going on, they hid it, and this is the price the Church pays for allowing crimes to be committed.”

But with total claims over $350 million, archdiocesan director of communications Bud Bunce says: “That is too great a burden for the archdiocese.” The archdiocese claims just $50 million in assets, he explains. “If the judgment went against us, not only would it make it impossible for the archdiocese to continue its mission, but impossible to reach settlements with the other plaintiffs still out there… So the option was bankruptcy before the trial or bankruptcy after the trial.”

THE MONEY MOTIVE

Portland Archbishop John Vlazny made the decision to file for bankruptcy before the trial, declaring, “The pot of gold is pretty much empty.”

That comment incensed the alleged victims and their solicitors. They saw it as both insensitive and dishonest, since they firmly assert the archdiocese has assets totaling $500 million: counting parishes, schools, trust funds, priest retirement accounts, and the like. “We have excluded from our estimate anything dedicated to such things as charitable ministry, for example, if they have money in a dedicated fund for missions in El Salvador,” says Gatti. “We don’t want to bankrupt the Church, but we don’t want them to hide their assets, either.”

When asked what it would mean for parishioners whose parish priests were never involved in the scandals, and who could nonetheless face the closings of their children’s schools and the churches where entire families have been baptized, confirmed, married, and buried, Gatti is sympathetic. “The effect on the parishioners could be profound,” he concedes. “I feel bad for the parishioners. But I have clients I feel bad for, too. These people are in such pain. Just last night, at 2:40 am, I got a call from one who I had to talk down from committing suicide.”

For Gatti and several of the victims who have been quoted in local press reports, money is not the real motive but simply a means to an end. Gatti says:

If [the archdiocese] came clean and said, "All right, this is what happened. This is what we did. This is what we’re willing to pay," and it was a fair settlement, I think it could encourage settlement in 95 percent of the cases. But unless the Church opens its books and comes clean with what they did to these people, my clients, we won’t settle in court. They want their stories told. They want the Church to put its story out there, to have them say, "This is what we did, and it will never happen again."

Plaintiff lawyer David Slader, who is handling one of the largest cases against the archdiocese, is also looking for full disclosure. In the latest legal showdowns, he says: “One thing we have insisted on is that bankruptcy will not be used as a device by the archdiocese to conceal what it knew."

Slader argues that the legal strategies employed by the archdiocese have consistently been used to hide the truth:

For example, look at the files of Father Grammond and [convicted pedophile] Father Laughlin, and clearly they’ve been purged. We have eyewitnesses—including a priest—who are willing to testify that [the late] Archbishop Dwyer [1966-74] met personally with children who’d been abused by Grammond, and there is no record of any action or mention of it in Grammond’s personnel file. Either an intentional decision was made not to record these incidents, or they were purposely purged. There must have been full reports of his abuse, and yet his file is absolutely clean as a whistle now. There is no question at all that an active cover-up took place, including the destruction of records… The archdiocese is more afraid of disclosing the truth than they are of the financial consequence of their conduct.

Spokesman Bud Bunce is emphatic in rejecting the claim that the archdiocese has deliberately withheld information. Responding to Slader's charges, he says:

We have provided all files we were asked to provide. Keep in mind, we’re dealing with cases that are 30, 40, 50 years old, so what we’re suggesting is that his hypothesis that there are missing files is just that, an hypothesis on his part. We have no idea if there are files missing, indeed no idea if anyone took a written record of that meeting. It’s impossible to disprove what seems like a publicity-minded legal stunt.

PARISHES AT RISK

Bankruptcy expert David Skeel, visiting professor of Law at Georgetown University, does not believe parishes and schools will be closed as a result of Portland's filing. Instead, he thinks that the value of parish properties will be factored into the total of archdiocesan assets. Then he predicts that a deal will be struck between Portland and the victims, with a trust fund established to pay settlement costs.

Slader generally agrees with this assessment. But if he and Skeel are wrong, and parishes are indeed sold, Slader does not see any unique injustice in the situation. He likens the case to that of the Enron Corporation, whose shareholders lost their investments when the company crashed:

Did they do anything wrong? No, they were just investors, but they still got wiped out because the corporation in which they invested was engaging in criminal conduct. That was unfair, but the world is unfair. Innocent people are potentially going to get hurt, but it’s because they have been donating to a religious corporation that was sheltering known pedophiles.

Loyal lay Catholics in Portland feel trapped in the middle of the legal arguments. Says Steve Moffitt, executive director of KBVM-FM, the first lay-owned Catholic radio station in the country, “Primarily they’re still in shock. This is not what any Catholic would ever have believed or dreamed their Church would have to face."

Patrick Sangster, a parishioner at St. Joseph in Salem and an employee of the Oregon Department of Education, says that the bankruptcy filing did not surprise him, and adds that it "was a good decision to protect the Church. It’s a big target, and that makes it easier to go after.” However, he expresses a certain disdain for the amounts victims are asking for:

The people who have been victimized, they should get just compensation. But $130 million? Gee whiz, how’s that going to take anything back? That’s vengeance... I’m not condoning the priests’ abuse, but it makes me wonder if it’s really justice or is it a vendetta that clouds the mind in the pursuit of justice.

Steve Moffitt agrees: “A few people want to take for themselves everything the diocese has monetarily, which will leave thousands of people without the services the archdiocese provides for them. The demands [of $130 million] are in no way just.”

COURT APPEARANCES

For now the case is proceeding in bankruptcy court. On August 6 Archbishop Vlazny, his finance officer, and his director of business affairs answered questions from the various debtors and their attorneys. They were questioned closely about the finances of the archdiocese, its investments, and other questions that would, in any normal case, be the routine business of a bankruptcy case.

At the hearing Archbishop Vlazny said that as he made the decision to enter the unprecedented bankruptcy plea, “I had a feeling the Holy Spirit was working.”

When asked whether the Vatican knew about the filing beforehand, Vlazny simply replied that his talks with the Holy See were “appropriate, satisfactory, and within the law,” but that, “in the end, it becomes my decision” to file for bankrupcty. Later his spokesman Bud Bunce said the Vatican had known beforehand that the archbishop was going to take the step. Other informed sources contradict this claim; one official in Rome states flatly that "the Vatican did not know." Catholic World Report was unable to determine, as this story went to press, which claim was accurate.

On August 10, federal bankruptcy court Judge Elizabeth Perris set a date by which claimants’ attorneys had to file motions on the relationship between the archdiocese and parish property. She later set a tentative date of December 31 as the deadline for anyone planning to file a fresh sex-abuse claim against the archdiocese. That date could and likely will change, since victims’ attorneys say it often takes victims a long time to gather the courage to come forward.

In early September, 26 of the archdiocese’s 124 parishes began exploring ways to shield their assets from seizure, should the court decide parishes are part of the archdiocesan property portfolio. The group expects more parishes to join by the time they file papers with the bankruptcy court.

Then on September 17, the parties were in court again for a "status conference." The principle point under discussion that day was archdiocesan lawyers’ desire to move pending litigation from state to federal court. Under federal bankruptcy law, a party being sued in state court can move that case to a federal jurisdiction. Conversely, any plaintiffs who don’t want to have their cases heard in federal court can file a motion to remand their cases back to state jurisdiction. According to one source, all of the plaintiffs plan to ask for such a remand. The bankruptcy-court judge will decide where the cases are ultimately heard.

Meanwhile, Judge Perris will have veto power over everything the archbishop does while the case remains in her court. She could even place a trustee in charge of management functions—although bankruptcy expert Skeel says “this is unlikely.”

FUTURE PROSPECTS

Between now and December, the parties will continue negotiating toward an agreement on who will be paid, and how much. When the archdiocese finally develops its plan of reorganization, it must prepare a disclosure statement that divulges the terms of that plan.

Then there will be a hearing to determine whether that plan contains adequate information about the plans for restructuring the archdiocesan assets. Assuming that the court determines that the plan is adequate, the creditors of the archdiocese will vote on whether or not to accept the settlement. If the creditors vote to accept the plan—in a complicated process that puts different creditors in different classes, and requires two-thirds of the creditors in each class to sign off on the settlement—the court will confirm the reorganization plan.

But before any of that happens, the court has to determine the central issue in the bankruptcy case, the ownership of the parish properties. Technically, the archdiocese operates under canon law, which is clear on the matter. According to Michael Dunnigan, general counsel for the St. Joseph Foundation in San Antonio, Texas, canon law “recognizes a parish as an independent entity, sort of like a corporation, a juridic person, and so the assets of a parish belong to the parish and the pastor.”

However, plaintiff attorney Slader counters, that view does not apply in this case. To carry the provisions of Church law over into a civil court, he says, “is ludicrous." Slader observes that the legal records in Oregon show the archdiocese as the only corporation holding title to the parish properties. To suggest otherwise, he says, is "not an argument someone can make with a straight face. Parishes are simply geographic divisions of an archdiocese. It would be like Wal-Mart saying their San Francisco store is a separate entity from their Portland store.”

Which argument will win? Bankruptcy expert Skeel believes that Judge Perris will most likely “conclude that most of the property in question is archdiocesan property." He reasons that a secular court is not likely to accept the canonical view that parishes are held in trust by the archdiocese, since that contention runs directly counter to the normal provisions of state law. The court, he argues, will resist the notion "that what looks like ordinary secular ownership actually is not."

Spokesman Bunce acknowledges that the archdiocese is in a difficult legal position. But he says that Archbishop Vlazny "is very firm that there are certain things he cannot do, and among those is seize parishes and their assets for his own purposes of paying off lawsuits.”

Steve Moffitt, the lay Catholic radio producer, has his own perspective on how the outcome of this legal case will ultimately affect the spiritual life of the faithful in Oregon:

The Church is not the building, it’s not the bank accounts, it’s not the infrastructure, it is the Holy Spirit, the presence of God in the Eucharist, the people. Strip away the buildings, the bank accounts, and you still have the Archdiocese of Portland. It will probably be better, but regardless, it will still survive.

Brian K. O'Neel writes from Sacramento, California.