Diocese Awaits Bankruptcy Fate Mater Dei Catholic High School Opens Tomorrow in Chula Vista after Months of Uncertainty, by Sandi Dolbee, Union-Tribune, September 3, 2007

Diocese Awaits Bankruptcy Fate
Mater Dei Catholic High School Opens Tomorrow in Chula Vista after Months of Uncertainty

By Sandi Dolbee
Union-Tribune
September 3, 2007

http://www.signonsandiego.com/news/metro/20070903-9999-1n3diocese.html

After being threatened with contempt of court and suffering the slings and arrows of a less-than-flattering financial review, the Roman Catholic Diocese of San Diego is on the verge of getting kicked out of bankruptcy court.

It would be a dramatic move even for this case, which has seen more twists and turns in the past six months than a Shakespearean tragedy.

HIGHLIGHTS

Background: The diocese, which has 1 million Catholics in San Diego and Imperial counties, filed for Chapter 11 bankruptcy Feb. 27 to help deal with legal claims from people who say they were sexually abused by priests as minors.

Lawsuits: Most of the more than 150 lawsuits against the Diocese of San Diego were filed in 2003 when California opened a one-year window to allow lawsuits to be filed in old cases such as these.

Status: On Thursday, a federal bankruptcy judge could dismiss the bankruptcy case. She also could allow it to proceed, postpone judgment or appoint an outside expert to oversee the diocese's finances.

Stay tuned: Mediation sessions with a federal magistrate are said to be making good progress. Some insiders suggest a settlement is close.

"Compared to the other cases we've seen across the country, so far it's really unprecedented," said Charles Zech, an economics professor at Villanova University, a Catholic school near Philadelphia.

San Diego is one of five dioceses that turned to bankruptcy to help deal with claims from people who say they were sexually abused by priests as minors.

On Thursday, attorneys for the diocese will be in court to try to persuade the federal bankruptcy judge not to dismiss the Chapter 11 reorganization petition. Judge Louise DeCarl Adler's order is made even more intriguing because it wasn't initiated by one side or the other.

"It's really unusual for a judge to make this motion on her own," said Frederick Naffziger, a business law professor at Indiana University South Bend and a specialist in bankruptcy cases.

"The church has to take this extraordinarily seriously, because if she doesn't throw it out, the message to the church is: 'You people are on a short leash.' "

The diocese filed for bankruptcy Feb. 27 amid roughly 150 allegations from people seeking financial compensation and disclosures from church hierarchy about what they knew about the abuse and when they knew it. After four years of failed settlement talks, Bishop Robert Brom said seeking bankruptcy protection was "the best way available for us to compensate all the victims as fairly and equitably as our resources will allow."

It has been a bumpy ride, capped by this stinging summons issued by Adler last month after she read the findings of a court-ordered audit of church finances. Among the judge's allegations: the diocese was not following a court-ordered cash-management system, was not properly accounting for all its property, was not listing the fair market value of holdings and was not completely forthcoming about other financial matters.

Susan Boswell, the diocese's lead bankruptcy attorney, disagrees with the judge's interpretation of the financial report conducted by outside expert R. Todd Neilson. Although Boswell acknowledges that "there are some areas for improvement," she said Neilson's report, "read as a whole," found that the majority of parishes were fine.

"We believe there is transparency; required disclosures have been made to the court and to the creditors," Boswell said. "We do not believe the case, based upon the law, should be dismissed."

Diocese attorneys, in a written response filed last week, also raised the question of whether the judge is straying beyond her role.

"The court has gone well outside of the scope of the court's responsibilities," the response said. The judge "has attempted to play 'watchdog' and supervise the debtor's performance, which, it is respectfully suggested, is not the role of the court."

Boswell, who represented the Diocese of Tucson in its successful bankruptcy reorganization, would not elaborate.

"I think the words speak for themselves," she said.

The dioceses in Portland, Ore., and Spokane, Wash., also have emerged from bankruptcy; the diocese in Davenport, Iowa, remains in court.

Naffziger, the bankruptcy professor, said the judge is doing what she ought to be doing.

"The court's in charge and it's the responsibility of the judge to see that the bankruptcy law is properly applied," he said.

If there is a credibility problem, Naffziger suggests it is on the part of the diocese.

Chapter 11 bankruptcy is a tool to help an organization deal with an onslaught of debts. It brings a halt to all other legal actions by centralizing them in the bankruptcy court. It allows the debtor – in this case, the diocese – to reorganize its finances by working out a settlement with its creditors – in this case, sex-abuse victims.

To get bankruptcy protection and assistance, the diocese also has to abide by the court's directions, Naffziger said.The judge has "taken this verbal two-by-four and smacked the bishop with it and said: 'Hey, come to your senses. We've got certain rules and they have to be followed,' " he said.

Attorneys for the victims commend Adler, a veteran judge who was appointed to the bankruptcy bench in 1984.

"I have rarely seen a judge who has been as thorough and decisive as she has on this case," said Venus Soltan, a Costa Mesa lawyer who represents more than a dozen cases.

Soltan points out that the diocese sought bankruptcy one day before the first of the civil lawsuits was due to go to trial. Brom told parishioners that "early trial judgments in favor of some victims could so deplete diocesan and insurance resources that there would be nothing left for other victims." Soltan sees it as another delay tactic.

"When the going gets rough, they go and seek protection under bankruptcy and then they thumb their nose at the very court they are asking protection from," she said.

Attorneys for parishes and parishioners support the diocese's stand that there aren't sufficient legal grounds to dismiss the case.

Thomas Califano, a New York attorney representing the recently formed Parishioners for the Churches and Schools, cites recent testimony from Neilson, the financial expert, saying that no money has actually disappeared.

"People might have ascribed bad motives to it, but at the end of the day it didn't make a whit of difference because the money didn't go anywhere," Califano said.

"What we need to do is get people paid here and get the diocese out of bankruptcy. Dismissal is not going to get anybody paid."

His frustration over what has been a complicated and contentious proceeding is evident.

"What I think is happening here is that there is a lot going on that doesn't advance the ball for either side," Califano said. "There is a lot of money and effort being spent fighting over issues that aren't getting anybody to the real focus."

Attorneys for victims are expected to file court papers tomorrow supporting the dismissal. San Diego lawyer Andrea Leavitt, who has several clients with lawsuits pending, said the diocese's case "smacks of bad faith."

This is the second salvo that Adler has fired over the diocese's bow. In early April, with the case less than two months old, she threatened to hold some attorneys and priests in contempt of court after learning that parishes were trying to set up new bank accounts.

Adler relented, but not before ordering an outside expert to review what she called "the most Byzantine accounting system I've ever seen." That expert's report became fodder for this new order.

There are other complexities.

Although the bankruptcy petition put more than 120 lawsuits on hold, Adler recently agreed to release 42 of them back to state court for jury trials. On Thursday, the same day as the possible dismissal, she is expected to decide whether to take the second step that would allow trial dates to be set.

If Adler does this, and the bankruptcy case is not dismissed, the jury trial verdicts could help put a dollar amount on the victims' claims. The Diocese of San Diego this year offered $95 million, roughly half of what the average payment has been to victims elsewhere in the state.

If Adler dismisses the bankruptcy petition, the lawsuits likely would go back to state court for trial. Although jury verdicts would not be encumbered by an eventual bankruptcy agreement, whatever awards are made could be tied up for years on appeals. Still, said plaintiffs' attorney Leavitt, "at least we're getting the light of day on all the cases."

There also are ongoing closed settlement negotiations. If a deal is hammered out by Thursday's court date, the bankruptcy conflicts and the trial decisions would pretty much become moot.

Zech, the Villanova professor, is surprised that a plan hasn't been reached – especially after the Archdiocese of Los Angeles agreed in July to pay $660 million to 508 victims.

"It's amazing to me that they've let it get this far," Zech said. "It makes the church look bad."

Sandi Dolbee: (619) 293-2082; sandi.dolbee@uniontrib.com.