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	Trial Will Determine Who Owns Parishes By Mark Sauer and Greg Moran Union-Tribune [San Diego CA] May 11, 2007 http://www.signonsandiego.com/news/metro/20070511-9999-1n11diocese.html The explosive issue at the heart of the Diocese of San Diego's bankruptcy case – whether its 98 parishes are separate entities or part of the diocese estate – will be settled in a trial, a federal judge decided yesterday. The ruling by Judge Louise DeCarl Adler to schedule the ownership issue for a fall trial was prompted by the diocese's urgent request that it be allowed to lend money to six parishes to complete halted construction projects. After initially denying the request, Adler reluctantly agreed yesterday to allow the diocese to provide about $14 million in loans. The money will be used to complete new buildings already under construction, remodel a rectory, build a new church and complete other projects. But in granting the diocese's plea to resume construction, Adler required that attorneys for both sides begin the arduous preparations to try the ownership issue, which for years has vexed courts around the country. "We need to know whose property this is," the judge said. When San Diego filed for bankruptcy protection Feb. 27 – the nation's fifth and largest Roman Catholic diocese to do so – diocese funds needed to complete construction at the six parishes, along with all other expenditures, came under scrutiny of the court. Because of the bankruptcy filing, transactions such as loans for construction must be approved by lawyers and representatives of the more than 150 people who have sued the diocese, charging they were sexually abused by priests and other clergy decades ago. The diocese declared bankruptcy on the eve of the first trial. This "creditors' committee" had opposed the diocese's request to make the loans, at an interest rate of 4.5 percent, arguing that such deals devalued the diocese estate and represented poor business judgment under bankruptcy law. Adler agreed yesterday that no commercial bank would ever issue loans at such a low interest rate, but she said the diocese's nonprofit mission to build schools and churches had to be taken into consideration. She scheduled a hearing later this month at which the two sides will settle on a higher interest rate and other terms for the loans. The judge said the skirmish over the loans led to the inevitable court battle over diocese/parish ownership. The outcome will greatly affect the ultimate settlement of the bankruptcy because it will determine how much money is available for potential settlements of the abuse claims. Church officials have offered to settle the abuse claims for $95 million. But the diocese, which according to its lawyers is "not insolvent," says its financial resources would be stretched to the limit in paying the amount offered to the alleged victims under its initial reorganization plan. In records filed with the court, church officials say the diocese owns 34 properties worth just under $100 million. Settlement funds would come from the sale of the former University of San Diego High School site in Linda Vista and other property, plus insurance coverage. But attorneys representing the alleged victims say the $95 million offer is "ridiculously low." A recent survey by plaintiffs' attorney Irwin Zalkin of about 240 clergy-abuse cases in California found the average settlement per case was more than $1.4 million. Those figures were filed with the bankruptcy court this week. Plaintiffs' attorneys have said that if the hundreds of parish properties are included, the diocese estate would have a market value in the "hundreds of millions." They say the diocese can settle with no impact on churches, schools or the church's "core mission" of education and charitable works. Lawyers for the diocese and for a newly formed organization representing the diocese's 98 parishes agreed with Adler that the core issue of property ownership has to be resolved. "We believe, too, that this is an issue that needs to be addressed," said Gerald Kennedy, a diocese bankruptcy lawyer. Attorney Victor Vilaplana, who represents the parish group, said: "Up or down, we need to get that resolved." Adler's move to clarify the issue was also welcomed by plaintiffs' lawyers. "She clearly wants to move things along," said Zalkin, who represents more than 40 alleged victims. "She wants to get these issues teed up and moving quickly." The ownership trial will take place within the bankruptcy proceeding. It will be no ordinary trial, however, as it will deal with highly complex issues of church law, civil law, real-estate law and trust laws, in addition to the federal bankruptcy code. Determining ownership of real estate and other assets has been the signature battle in two other church bankruptcy cases, in Portland, Ore., and in Spokane, Wash. Lawyers for the San Diego diocese contend that under church law, parishes own the properties and the bishop holds them in trust only. In a tentative ruling issued before yesterday's hearing, Adler noted that while the ownership issue is unresolved in the bankruptcy, California law presumes the owner of real property is the titleholder. The titleholder for all diocese properties as well as the churches, schools and other buildings within the 98 parishes is the same: The Roman Catholic Bishop of San Diego. Adler chided the diocese and the parish organization, writing that it had created a legal "conundrum" by refusing to acknowledge the legal presumption that the diocese is the owner of property on which it holds title. The ownership issue is legally unsettled, though it has been tested. After the Spokane diocese declared bankruptcy, the judge ruled in August 2005 that it effectively owned the properties. She also ruled that applying federal bankruptcy law to the church to determine property ownership did not violate the constitutional separation of church and state – another potentially volatile issue that could arise in San Diego. On appeal, however, a federal judge reversed the Spokane ruling, sending the matter back to the bankruptcy court to decide ownership on a parish-by-parish basis. Shortly after, both sides settled for $48 million. In Portland, a bankruptcy judge ruled in December 2005 that the parishes, schools and other properties were owned by the diocese. That was a victory for sexual-abuse plaintiffs. The Portland diocese appealed, but both sides agreed to a $50 million settlement before the case was decided. Mark Sauer: (619) 293-2227; mark.sauer@uniontrib.com Greg Moran: (619) 542-4586; greg.moran@uniontrib.com
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