By Janet I. Tu and Stuart Eskenazi
Seattle Times
July 7, 2004

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A unique set of circumstances converged to make the Roman Catholic Archdiocese of Portland the first in the country to file for bankruptcy, setting off speculation about whether other dioceses facing mounting costs in the church's sex-abuse scandal will follow suit, and whether victims will be fairly compensated.

The Portland Archdiocese filed for Chapter 11 bankruptcy yesterday, halting a pair of sex-abuse trials in which two plaintiffs were asking for more than $155 million in damages.

"This is not an effort to avoid responsibility," Portland Archbishop John Vlazny said in a statement. "It is, in fact, the only way I can assure that other claimants can be offered fair compensation."

Vlazny said operations of parishes and schools in the archdiocese would continue as usual.

Church leaders in Seattle said bankruptcy is not a likely option any time soon, as settlement amounts have been reasonable and covered by insurance.

Dioceses in Boston and Tucson have talked about the possibility of bankruptcy, and Vlazny had warned as far back as December 2002 that the Portland Archdiocese might seek bankruptcy protection as a last resort to deal with sex-abuse lawsuits.

Experts on church finances said the Portland bankruptcy will tread tricky legal ground in the separation of church and state by placing civil courts in charge of a church's finances and assets.

"This is uncharted territory," said Charles Zech, a professor of economics at Villanova University, a Catholic institution near Philadelphia and an expert on Catholic church finances.

60 claims pending

The Portland Archdiocese has paid $53 million to settle 133 claims from people who were abused by priests, including $21 million in the past year alone, paid from church money. Another 60 claims are pending.

"Major insurers have abandoned us and are not paying what they should on the claims," Vlazny said.

Lawyers say the number of priest sexual-abuse lawsuits in Portland is high because of Oregon law making it easier for victims to seek compensation.

In 1999, the Oregon Supreme Court made Oregon the only state in the country in which the church can be held liable for an abusive priest's actions even if it had no knowledge of the abuse, said Kelly Clark, the plaintiffs' attorney who argued the case.

"In Washington and in every other state, a plaintiff has to prove the church actually knew the priest was a risk and did nothing about it," Clark said. "Before filing a case, you have to certify to the court that an allegation of negligence is well-founded."

Oregon also allows plaintiffs to sue for punitive damages — those meant to punish a wrongdoer.

Washington is among a few states that do not allow for punitive damages in civil suits, except in limited cases. In Washington, awards have been limited to damages compensating victims for pain and suffering.

"The threat of a larger jury verdict is higher when there's punitive damages," said Michael Pfau, a Seattle attorney who has suits pending against the Seattle Archdiocese.

Financially independent

Each diocese of the Roman Catholic Church is, essentially, an independent corporation and must fend for itself financially.

The Vatican is unlikely to bail out dioceses in financial trouble since "dioceses across the world are in various states of financial disarray," said Zech. "And the Vatican has its own financial problems."

Experts are debating whether Vlazny's move requires Vatican approval. Under canon — or church — law, any sale of sizable church assets requires such permission, but it says nothing about filing for bankruptcy, said the Rev. Paul Pluth, a canon lawyer with the Seattle Archdiocese.

Vlazny said yesterday's bankruptcy filing "offers the best possibility for the archdiocese: to resolve fairly all pending claims, to manage a difficult financial situation and to preserve the ability of the archdiocese to fulfill its mission. It will also allow us to continue our good works without fear of an impending large verdict."

Filing for Chapter 11 bankruptcy protects the archdiocese from its creditors while allowing it to develop a reorganization plan. During that time, a court-appointed manager or trustee could exercise control over the major financial decisions involving the 60 pending lawsuits.

Clark suggested the church could obtain an order from the bankruptcy court that would preclude further claims once the bankruptcy case is resolved. Clark said victims' attorneys likely would challenge such an order, since some victims don't come to terms with the effects of abuse until later in life.

Some viewed the timing of the bankruptcy as a ploy to delay yesterday's scheduled start of trials involving the Rev. Maurice Grammond, a deceased priest accused of molesting more than 50 boys in the 1980s. The plaintiff in one of the cases sought $130 million; the other $25 million.

"The church is still engaging in a cover-up and rather than being exposed in a trial, the church has opted for bankruptcy," said Bill Crane, an abuse victim and Oregon coordinator for Survivors Network of those Abused by Priests (SNAP). "If truth was on their side, they wouldn't need to file for bankruptcy."

Crane said yesterday's filing also is a way for the church to heap more false guilt upon victims — to make them feel bad for seeking restitution because the payouts are financially bankrupting the institution.

David Clohessy, executive director of SNAP said that many dioceses have threatened to file for bankruptcy over the past 15 years. "Virtually without exception, until today, they've all backed off. It's felt like desperate legal defense maneuvering and public relations posturing. Without an independent third party really looking at their books and assets, we simply can't know whether this is more posturing or whether this is really needed."

But some experts say the move gives the diocese time to get a sense of its liability in current and future lawsuits and plan accordingly.

This way, said Zech, "if they have to sell property, they won't have to operate under a gun."

Seattle paid $12.8 million

In contrast to Portland's $53 million, the Seattle Archdiocese has paid about $12.8 million to 99 victims. About 20 suits are pending.

Clark, the Oregon attorney, believes another reason for the lower amount paid out in Seattle is that "lawyers for the church in Seattle take a much more aggressive and contentious litigation posture than is taken in Portland. There are things we are able to agree upon in Portland with a phone call and a handshake that are still being handled in Seattle with 40 pages of paperwork, two motions and a hearing."

Seattle Archdiocese attorney Michael Patterson said church officials prefer to resolve claims without involving the courts. But if victims file lawsuits, the archdiocese has a right and legal obligation to mount a vigorous defense.

The Seattle Archdiocese has been fortunate in that its insurers have covered its settlements, the amounts of which the archdiocese considers reasonable. In some other dioceses, including Portland, insurers have said policies do not cover sexual abuse of minors by priests.

"I think if we were faced with the same situation, where the settlement amounts were that great, we'd be faced with the same difficult decision they made," said Greg Magnoni, spokesman for the Seattle Archdiocese.

The Spokane Diocese, where about 25 victims are seeking more than $50 million, is facing a situation closer to Portland's.

"It's beyond our means to resolve cases in that range," said Spokane Diocese attorney Mike Geraghty. Bankruptcy is a possibility, he said. "But it's way too premature to be talking about that for our diocese."

Experts are already debating whether Portland's filing will make it easier for others to do the same. "There's some stigma attached to being the first one," said Zech, the Villanova University economist.

Zech sees the bankruptcy filing as raising all sorts of questions about civil law versus canon law.

Under canon law, facilities and assets of an individual parish belong to the parish. As a result, the archdiocese contends it has no authority to seize parish property to help pay off claims.

"Civil law would say: 'Hey, once you declare bankruptcy, all assets are out there and that could well include parish property,' " Zech said.

Declaring bankruptcy also means the diocese's financial records will be open to the court. "Once this happens, I think Catholics across the country are going to say: 'Why can't other dioceses be more accountable and transparent in their finances?' " Zech said.

Gayle Bache, co-chair of Voice of the Faithful in Western Oregon, said lay Catholics are concerned about the consequences of the bankruptcy for those devoted to the church.

"What will happen to the spirit of those people?" Bache asked. "But I also believe there is hope. If the archdiocese is willing, the bankruptcy will allow us Catholics to review financial reports and see how our contributions have been spent to further our mission."

Many Catholics will monitor the bankruptcy closely to make sure the victims are still treated fairly.

"The leadership needs to understand that we are going to look closely at how they conduct themselves in this," Bache said.

Material from The Associated Press is included in this report. Janet I. Tu: 206-464-2272 or jtu@seattletimes.com