Minnesota Abuse Victims Claim Church Shielded $1.7 Billion in Assets

By Tom Corrigan
Wall Street Journal
May 23, 2016

http://www.wsj.com/articles/minnesota-abuse-victims-claim-church-shielded-1-7-billion-in-assets-1464061232

St. Paul Cathedral is pictured in St. Paul, Minn., on May 3.

Archbishop Bernard Hebda

Hundreds of clergy sexual abuse victims raised the stakes in their clash with the Catholic Church on Monday, with victims’ lawyers claiming that the Archdiocese of St. Paul and Minneapolis has worked for decades to keep some $1.7 billion in assets beyond their reach.

The Twin Cities archdiocese, home to more than 180 parishes and 825,000 parishioners, has been in bankruptcy for more than a year, facing liabilities stemming from about 450 people who say they were sexually abused by clergy members, often decades ago. A judge ordered victims, the archdiocese and its insurance carriers to mediation more than a year ago, but talks failed to produce a settlement.

Now victims are looking to force the archdiocese to dip into assets—like parishes and charitable foundations stocked with cash—they say the archdiocese has shielded using a legal playbook more often associated with large, for-profit corporations.

In court papers filed with the U.S. Bankruptcy Court in Minneapolis late Monday, the victims, who are seeking compensation from the archdiocese, said its overall net worth, including property that is legally distinct but alleged to be controlled by the archdiocese, is about $1.7 billion. In bankruptcy court papers filed last year, the archdiocese pegged its total assets at about $45 million.

Attorney Robert Kugler, who represents abuse victims in the bankruptcy, said the two sides are “worlds apart.”

And victims’ lawyers say they expect the archdiocese will soon propose a so-called cram-down chapter 11 repayment plan, a bankruptcy reorganization plan that permanently dismisses their claims over their objections, paying out what the victims consider to be a pittance. At least two other bankrupt Catholic dioceses—the Diocese of Fairbanks, Alaska, and the Archdiocese of Milwaukee—have filed nonconsensual plans. Those two cases, like more than a dozen other Catholic bankruptcies, ultimately resulted in compromises with victims.

Joseph Kueppers, the Twin Cities archdiocese’s chancellor for civil affairs, declined to comment on the bankruptcy until a reorganization plan is filed “due to the sensitive nature of ongoing negotiations and mediation efforts—which the court requires remain confidential.” But he said the archdiocese’s goal is to arrive at a settlement.

“We must come together to care for all those who have been hurt during this tragic time in our church’s history,” former Archbishop John Nienstedt said when the archdiocese filed for bankruptcy. The archdiocese sought chapter 11 protection last year to halt several abuse-related lawsuits from going to trial and has since been hit with criminal charges for its alleged role in endangering children.

Mr. Kueppers said Monday the archdiocese is continuing to cooperate with prosecutors on the criminal charges. The archdiocese also settled civil charges in December related to the abuse scandal but didn’t admit wrongdoing.

Archbishop Nienstedt resigned last year, just days after the criminal charges were filed. He wasn’t charged. The Rev. Bernard Hebda, a lawyer with a degree from Columbia Law School, had been in line to become the Archbishop of Newark but instead took the helm of the troubled Twin Cities archdiocese earlier this month.

Filing for bankruptcy, holding money in trusts and spinning off assets into separate corporations are common business practices in big chapter 11 cases. And to be sure, bankruptcy has come at a significant cost to the Twin Cities archdiocese, which has laid off staff and, according to its annual financial report, made the “difficult, but necessary” decision to put the chancery building, the archbishop’s residence and several other properties near the Cathedral of St. Paul up for sale. The iconic cathedral, a national shrine, isn’t among the properties being sold.

But victims say the archdiocese has sought to wall off its most valuable assets by using trusts or separate corporations that the archdiocese says it doesn’t control, steering hundreds of millions of dollars into those entities.

James Stang, a lawyer not involved in the Twin Cities bankruptcy but who has helped victims negotiate settlements in other diocesan bankruptcies, says he has witnessed similar actions in those cases. “What we’ve seen is that, in some cases, parishes and the dioceses are taking formal actions to protect themselves by setting up separate entities,” he said.

Jeff Anderson, a lawyer who represents most of the alleged victims in Minnesota and who supports the consolidation request, says the archdiocese is hiding its ability to account for past actions, which further harms victims.

“It is to the survivors a double betrayal and a revictimization,” he said.

The archdiocese’s official list of assets filed with the bankruptcy court includes cash, investments and even $265,000 worth of “furs and jewelry.” But it excludes the hundreds of parishes and schools in the archdiocese, including the cathedral, which sit on potentially valuable real estate.

The Twin Cities and other U.S. dioceses have separately incorporated parishes and schools for decades, but victims say the properties are still controlled by the archbishop and should be counted among its assets in bankruptcy. Court papers filed Monday point to what lawyers say is the archbishop’s influence on the parishes’ board seats and his power to merge parishes over their objections.

“Since 1858, parishes in Minnesota have been incorporated separately, and we did not disclose their assets—or those of schools and foundations—because we do not control them,” Mr. Kueppers said Monday.

The archdiocese says the cathedral is leased to a separate corporation for $1 a year and has “no realizable value,” although tax records show an estimated market value of $21 million, according to court papers. Of the archdiocese’s roughly 90 schools, county tax records show three alone sit on property worth at least $13.7 million and victims said in court papers that the three schools’ total value approaches $30 million. But because the schools have occupied the land for decades, the archdiocese says they shouldn’t be counted as part of its estate.

Abuse victims say they aren’t asking for parishes and schools to be closed and sold off. “What would be nice is if that they would recognize that they have some value and figure out how to extract some of that value to compensate victims,” Mr. Kugler said.

Susan Boswell, who has represented a number of dioceses in bankruptcy, says victims’ efforts to consolidate the archdiocese’s properties could result in a “very lengthy and incredibly expensive fight,” one that could ultimately go to the U.S. Supreme Court.

“It’s a drastic remedy,” she said.

Archbishop Hebda, in an interview with Minnesota Public Radio Friday, said the church’s bankruptcy strategy has always been to maximize the recovery for abuse victims.

“We’ve been putting all of our efforts...into how it is that we might be able to provide the most for the most,” he said.

One of the largest assets being pursued by victims is the Catholic Community Foundation, an approximately $280 million fund that makes grants to archdiocese schools and parishes as well as Catholic and secular nonprofits, like the American Red Cross and Catholic Relief Services.

Created in 1992, the foundation is legally distinct from the archdiocese and therefore shielded from victims’ claims—which church officials have testified was intentional.

In a taped deposition in 2014, Rev. Kevin McDonough, a former high-ranking archdiocese official who incorporated the Catholic Community Foundation, explained the foundation was created, in part, to protect the archdiocese’s donations from the growing threat of abuse liability. Donors, he said, were concerned that a civil court could force the church to surrender such gifts to victims.

“We obviously were in a climate that many people were concerned and brought into our attention that they don’t want to give any money to the appeal because their fear that the money would be used to support lawyers and pay victims,” Thomas Mertens, the archdiocese’s chief financial officer, said of a similarly situated foundation, the Catholic Services Appeal Foundation, in sworn testimony last year.

Lawyers for the archdiocese said in bankruptcy court papers that the archdiocese didn’t believe creating either fund involved any transfer of property “outside the ordinary course of business.” The funds, however, sought more distance from the archdiocese after state lawmakers temporarily lifted the statute of limitations on sexual abuse, unleashing the litigation that ultimately forced the Twin Cities archdiocese as well as the Diocese of Duluth, Minn., into chapter 11.

Tax records show that less than six months after the legislation was enacted, the Catholic Community Foundation changed its official name from the Catholic Community Foundation in the Archdiocese of St. Paul and Minneapolis to the Catholic Community Foundation of Minnesota.

“We’re a completely separate and independent Catholic community foundation,” Anne Cullen Miller, the foundation’s president, said in an interview Monday. “We have funds and relationship all over the state of Minnesota, and so the name reflects the work that we do.”

Jennifer Haselberger, a former canon lawyer for the Twin Cities archdiocese who publicly accused its leadership of covering up abuse in 2013, says the archdiocese’s leadership didn’t follow its own internal process for formally separating the foundations from the archdiocese until a growing cohort of abuse-related lawsuits and a looming bankruptcy threatened their safety.

“They absolutely refused to do it until bankruptcy was coming down the pipe,” she said in an interview.

To be sure, over the past decade the Twin Cities Archdiocese, like most Catholic dioceses in the U.S., has also worked to protect children and increase transparency. The church’s Charter for the Protection of Children and Young People calls for extensive—and costly—training programs and background checks for all personnel in contact with children and requires annual audits to ensure compliance.

Since 2004, more than 99% of clergy members, candidates for ordination, educators and other employees who minister to children have had their backgrounds checked at least once. And nearly 99% of priests and candidates for ordination in 188 participating dioceses and eparchies had received training in ways to maintain safe environments for children, according to the most recent audit available.

And dioceses in bankruptcy say chapter 11 is an unavoidable step needed to fairly and equitably compensate victims while also preserving the ministry and mission of the church. Without bankruptcy, lawyers for dioceses say big payouts to the first victims to file lawsuits could prove ruinous and leave nothing for victims who come later.

“The bishop felt strongly, and I did too, that the only way to fairly compensate everyone was to have everybody participate in the same forum, otherwise we were just engaged in a race to the courthouse,” Richard Davidson, a lawyer who represented the Diocese of Davenport during its 2006 bankruptcy, said in an interview.

But some disagree with efforts by the church to protect assets that could be used to pay out abuse-related compensation.

“The philosophy, the ideology, has always been to protect the assets of the church,” Ms. Haselberger, the former canon lawyer, said. ”The question that was never asked is whether our obligation to care for people who have been harmed wasn’t also the work of the church, especially considering that these people were our people.”

Rev. George Leo Thomas, the Bishop of Helena, Mont., shepherded his diocese through bankruptcy in 2014. “It’s instinctual for a bishop to protect the diocesan assets,” he said in an interview with The Wall Street Journal several weeks after his diocese exited chapter 11 protection. “I think the mistake comes when a bishop allows the attorneys to set the tone and the direction and the pace of the proceedings and get in the way of pastoral healing.”

In Helena, the diocese reached a $21 million settlement with about 380 victims, spending less than five hours in court. But in Wisconsin, the Archdiocese of Milwaukee spent nearly five years in chapter 11, until the soaring costs of the litigation threatened to leave victims with nothing. Much of Milwaukee’s bankruptcy battling centered on victims’ access to about $60 million in cemetery funds, a dispute which reached the Supreme Court last year before it was finally settled with proceeds from the cemetery used to fund the bankruptcy plan.

Since then, in the Twin Cities, victims’ lawyers said in court papers that the Archdiocese of St. Paul and Minneapolis has sought to detach itself from its own cemeteries, painting over signs at their entrances that once bore the archdiocese’s moniker.

Mr. Kueppers said Monday that the cemeteries have been separately incorporated for about 40 years and that the archdiocese has no control over their signs.

But within weeks of the archdiocese’s bankruptcy, the cemeteries changed a statement on their website explaining that “the Catholic Cemeteries is a separate corporation,” adding the word “separate” and that it “receives no financial support from the Archdiocese of Saint Paul and Minneapolis.” The site also removed a reference to the former Twin Cities Archbishop Nienstedt as chairman of the board governing the cemeteries.