Say What ?

By Jennifer Haselberger
Canonical Consultation
February 9, 2015

http://canonicalconsultation.com/blog.html

Since I posted the letter from the mediator last Friday, I have gotten a number of telephone calls and emails from people asking what the letter means. For those of you who are pastors or parish staff, it means you need to discuss the situation with your parish leadership and an informed attorney. For anyone else, let me give you some suggestions as to what it might mean. But first, a caveat: these are just some possible reasons why the letter was sent. There may be other reasons of which I am unaware, or information not currently available that would change my assessment.

The first reason is, I believe, undisputed. All parties involved in the mediation want access to the parishes' insurance policies, including those in which the parish is an 'additional insured' with the Archdiocese and vice versa. The goal of the mediation is to reach a settlement that is agreeable to both victims of abuse and the Archdiocesan leadership, and tapping into additional insurance policies is a relatively painless way to increase the dollar amount available as compensation.

Not all parishes will have available insurance coverage, however, so it is likely that there are other factors at stake. In other Catholic bankruptcies, parishes have joined the process in order to secure a release from existing and future claims. However, according to the notices to creditors sent out last week, no deadline for proof of claims has been set. Establishing such a deadline is difficult in this bankruptcy because more than a year still remains in the 'civil window' which temporarily permitted the filing of lawsuits in cases of sexual abuse that otherwise would be time barred.

There is also the question of the benefit trust and general insurance money (and deposits in the interparish loan fund). As I pointed out in a previous entry, nearly every parish (and even some that no longer exist) have been listed as a creditor because of previous contributions to these funds. If those monies are being proposed as potential sources of settlement funds, parishes and other Catholic entities would certainly have an interest in the proceedings.

Which brings us to another reason why parishes may be encouraged to join the mediation: to circumvent potential litigation arguing that the Archdiocese controls the parishes' assets. Under the reorganization plan filed by the Diocese of Tucson, for example, the parishes agreed to contribute $2 million towards the settlement in order to avoid prolonged and expensive court battles over property ownership under canon and civil law.

What, you say? My parish is separately incorporated, and the Archdiocese has assured us our assets are not at risk! Your parish is separately incorporated, that is true, and the Archdiocese has said that parishes and schools are not part of the reorganization filing. Beyond that, they have been extremely careful to use wording such as 'should' rather than 'is'.

The threat of attorneys for creditors positing an alter ego claim of liability (arguing that the parish corporations are controlled by the Archdiocese to such an extent that the former is a mere instrument of the latter) is a very real one. In Minnesota, we have seen similar claims against religious organizations proceed, most recently against the ECLA. And, this tactic is frequently used in Catholic bankruptcies, including that of the Archdiocese of Milwaukee.

Under Minnesota law, in order for the parish corporations to be liable for the Archdiocese's debts ('piercing the corporate veil') two conditions must be met. First, upholding the independent corporations must result in an inequitable result or sanction a fraud. In other words, there must be a finding that recognizing the independent corporate form of the parishes would result in an injustice to a third party, which in this case would be the victims of sexual abuse by clergy who deserve compensation for their injuries. Second, those attempting to posit the doctrine must demonstrate a unity of interest and ownership between the Archdiocese and the parish corporations so that the separate personalities of each do not exist. Practically, what is at issue is whether the parish corporations are treated as separate entities generally and at all times. Some of the criteria that may be looked at to establish this are whether funds are co-mingled, whether corporate formalities are followed, and whether the corporations are adequately capitalized or whether the Archdiocese frequently floats costs for day-to-day operations.

The doctrine of alter ego liability represents an exception rather than the rule, so the burden of proof is high. To a certain extent, the purpose of establishing corporations is exactly to lawfully isolate and limit liability. But this must result is an actual separation, not merely the creation of 'shadow' corporations. Milwaukee was primarily able to refute the alter ego arguments, but that Archdiocese was in a very different place than we. First, because our historical and current practices are unlikely to demonstrate that transactions are kept at arm's length and, second, because the theft by Scott Domeier, when reported in 2012, made hundreds of financial records and other documents available for scrutiny by the media and, through them, attorneys for the creditors.

I think it likely that an alter ego theory could be successful in regard to the Archdiocese of Saint Paul and Minneapolis, its parishes, institutions, and related entities such as the Catholic Services Appeal. Over the next few days I will outline here the 20 or so criteria that are generally examined when such an argument is made and why I think the Archdiocese's claim of separation is likely to fail in many, if not most, areas. Hopefully it will not come to this, but parishes should definitely be weighing the cost of defending against such claims when considering whether to voluntarily contribute to settlement funds, and should also be seeking the legal advice of someone with the knowledge and experience to properly assess the risks.