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Bankruptcy filing may fend
off big losses in sex-abuse claims
By
Susan Chandler, Tribune staff reporter. Freelance reporter Dan Cook
contributed to this report from Portland
Published August 1, 2004
The Roman Catholic Church in Portland, Ore., has more in common these
days with corporate giants such as Dow Corning Corp. and Texaco Inc.
than it does with its Methodist or Baptist neighbors.
When the Portland archdiocese filed for bankruptcy in early July, it was
trying to protect itself from hundreds of millions of dollars in damages
sought by people who claim they were sexually abused by priests. It's
the same strategy often used by corporations faced with legal judgments
they can't afford to--or don't think they should have to--pay.
"It's not unheard of for a religious institution to seek refuge in
bankruptcy court, but this is still highly unusual," said James
Sprayregen, one of the nation's top bankruptcy lawyers. "This case is
going to be watched very closely."
Anytime an institution gambles on Chapter 11 to solve its problems, the
outcome is far from certain. Occasionally, management loses control of
the firm, and sometimes the firm can't be saved.
No one is suggesting the Catholic Church in Portland might disappear,
but it is likely to spend years in bankruptcy court and end up much
smaller, experts in Catholicism and bankruptcy say.
"I suspect they will have to sell property, cut back on programs and lay
off people," said Chuck Zech, an economics professor specializing in
Catholic Church finances at Villanova University in Pennsylvania.
Adds Douglas Baird, bankruptcy professor at the University of Chicago
Law School: "They're not in control of their own destiny anymore."
In the best-case scenario, the bankruptcy filing will allow the Portland
archdiocese to get a handle on the size of the claims it is facing and
sell church assets in an orderly fashion rather than in a fire sale,
Zech said. It may shock some who are seeking damages for alleged sexual
abuse by priests into moderating their demands.
In the worst case, the bankruptcy may force the church to disclose a
mountain of closely guarded financial information and embarrassing
documents relating to how it dealt with priests accused of sexual
misconduct.
New plaintiffs may suddenly appear, and loyal worshipers may be
discouraged from making donations.
In the short term, Portland Archbishop John Vlazny has to face a bitter
fact. He now answers to U.S. Bankruptcy Judge Elizabeth Perris,
financially if not spiritually, and he will have to seek her permission
for major moves, including paying his bankruptcy attorneys and awarding
college scholarships.
"It's not a happy situation," Zech notes, "for a church to have a court
and creditors dictate what happens."
Vlazny and attorneys for the archdiocese declined to comment.
The Roman Catholic Church has 195 dioceses around the U.S. Almost all of
them have been confronted by people who claim that as children they were
sexually abused by priests.
The financial drain has been heavy.
Last summer, a small archdiocese in Louisville paid out $25.7 million to
243 people to put the scandal behind it.
A deal in Boston
The Boston archdiocese flirted with a bankruptcy filing because of the
number of sex-abuse cases it was facing. But a new archbishop reached a
deal last fall to pay $85 million to more than 500 people, the largest
single sex-abuse-related settlement so far.
Money for the settlement was raised by selling 43 acres of land to
Boston College.
If any archdiocese was likely to seek protection from its creditors, the
bets were on Tucson, Ariz., Catholic experts say. The Tucson Catholic
Church isn't facing as many lawsuits as some others, but the church
doesn't have a lot of resources, a reflection of the largely rural area
it serves.
As it turned out, a single plaintiff in the Pacific Northwest pushed the
Portland archbishop into an unprecedented act: the first bankruptcy
filing in the history of the U.S. Catholic Church.
The Portland archdiocese already had paid $53 million to settle 130
abuse cases--many of them concerning a single priest accused of
molesting more than 50 boys over three decades--when one plaintiff
refused to budge from his demand for $135 million in damages.
Abandoned by insurance companies and with a trial date approaching, the
church said it had no choice but to seek protection from its creditors
and reorganize its operations in Chapter 11, the same fateful decision
made by struggling companies such as United Airlines, WorldCom Inc. and
Enron Corp.
Anger on both sides
That angers some Catholics, who say the accusers and their attorneys are
more interested in cashing in than seeking justice.
"There are still people today who feel the church has been unfairly
attacked and exploited. Some of these people don't get it, and some of
them have a modest point. There have been false accusations," said Scott
Appleby, a history professor at University of Notre Dame who has studied
cases of priest sex abuse.
"But this is a very, very real phenomenon and a very real crisis. The
vast majority of the complaints, sadly, have turned out to be
well-founded."
Like some corporations, the Portland archdiocese is arguing that the
assets available to pay potential claims are much smaller than they
appear on the surface.
When it filed, the archdiocese checked a box indicating it had no more
than $50 million in assets, a figure that seemed low given its 124
parishes, two universities, 52 schools and nine hospitals.
Attorneys for sex-abuse plaintiffs howled, saying the archdiocese
commands assets worth at least $1 billion.
The archdiocese explained the discrepancy this way: Under canon law, the
Portland archdiocese doesn't control the assets of its parishes, so it
can only claim ownership of its headquarters and various bank and
investment accounts.
It's a tactic similar to that used by Texaco Inc., the giant oil
company, when it sought bankruptcy protection to shield it from a $12
billion judgment for improperly interfering in a planned merger between
Pennzoil Co. and Getty Oil Co.
In the 1987 case, Texaco Inc. and two financial subsidiaries filed
Chapter 11, but the action excluded the subsidiaries that generated 96
percent of the company's revenue.
Pennzoil grumbled but didn't make a big fuss about Texaco's move to
fence off its subsidiaries. It could have pushed the issue if settlement
negotiations had broken down and probably would have won the point, says
Jay Westbrook, a professor at the University of Texas School of Law.
But after only eight months in bankruptcy, Texaco agreed to pay Pennzoil
a drastically reduced but still hefty penalty of $3 billion. It exited
Chapter 11 four months later.
Nobody expects the Portland archdiocese case to end as swiftly.
The asset-ownership question will be one of the earliest Judge Perris
has to tackle, bankruptcy experts say.
She is unlikely to rule that the parishes of Portland aren't part of the
archdiocese's assets because of how the church is organized, according
to several church experts.
The Portland archdiocese is set up as a non-profit religious
"corporation sole" under state law, the same structure used by the
Catholic archdiocese in Chicago.
Like a corporate president
That makes Portland's archbishop the president of the corporation and
only titleholder to the church's property.
He can't pass the property on to his heirs or relatives, but upon his
death or replacement, the next archbishop becomes the new owner.
"The law says the property belongs to the archbishop as trustee," said
economist Zech. "I'm not certain how they can argue they don't control
the assets."
Still, the church intends to vigorously argue the point, its attorneys
say. If it loses, it won't let the matter rest there.
"That's a question that will be taken up on appeal, and we'll get an
answer to that three or four or five years from now," said Mark Chopko,
the general counsel for the U.S. Conference of Catholic Bishops, the
church's top attorney in the U.S.
If necessary, the church would appeal the ownership issue all the way up
to the Supreme Court, he said.
Although parishes aren't legal entities in their own right and can't
hold title to property, they are still considered independent entities
under canon law, Chapco said.
In many places, including Portland and Chicago, parishes deposit excess
cash in a central archdiocesan bank where the money is kept separate and
still considered property of the parish.
Funds collected for special purposes such as Catholic education or for
the poor also are kept segregated.
"It doesn't just go into a big cookie jar," said Thomas Reese, editor of
the national Catholic weekly magazine America and author of "Archbishop:
Inside the Power Structure of the American Catholic Church."
"Both church and state laws are very deferential to a donor when they
give money. If the donor says, `This money is for the parish,' you have
to respect their wishes."
The Portland archdiocese already has acknowledged it didn't include
nearly $100 million in investment accounts in its asset estimate because
the money either belonged to its parishes or was set aside for special
purposes.
"When the archdiocese filed its initial papers, it filed what I would
say was a deliberate untruth," said plaintiff's attorney Kelly Clark.
"That bothers me."
Seeking a way out
Taking a look at other companies that have used Chapter 11 to handle a
wave of litigation is one way to anticipate what is in store for the
Portland Catholic Church.
USG Corp., the Chicago-based maker of drywall and joint compound, sought
bankruptcy protection three years ago because of asbestos-related
lawsuits. The case has dragged on with little progress, and USG is
waiting for a new judge to be appointed.
Dow Corning, a joint venture between Dow Chemical Co. and Corning Inc.,
spent nine years in bankruptcy, trying to come to terms with plaintiffs
who said they had been injured by the company's silicone breast
implants.
Some plaintiffs' attorneys spent years trying to gain access to the
assets of Dow Corning's parent companies, but eventually they threw in
the towel.
The bankruptcy court limited Dow Corning's liability to $3 billion in
the case and set up a trust fund with that amount.
The company emerged from bankruptcy June 1 and began processing claims,
something it will be doing for the next 14 or 15 years, a window
determined by the court.
Despite the distraction and the huge legal costs involved, the
bankruptcy filing hasn't devastated USG or Dow Corning.
"Here at Dow Corning, we isolated a small team to look after the Chapter
11 part of our situation and tried to have everyone else focused on our
business," said company spokeswoman Mary Lou Benecke.
"We were able to continue growing and improving our business."
Likewise, at USG, only 20 to 30 employees devote their time to the
bankruptcy case out of a company total of 13,000.
"Our customers would tell you business is fine," said spokesman Bob
Williams.
The Portland archdiocese says being in Chapter 11 will not stop it from
ministering to the poor, comforting the sick or educating students from
low-income families.
In fact, bankruptcy was the only way to make sure there was enough money
to do all those things, said Bud Bunce, a spokesman for the Portland
diocese.
"The archbishop felt he had to do something to preserve that mission,"
he said.
- - -
A familiar strategy
Similarities between Chapter 11 filings by the Portland Roman Catholic
Archdiocese and Texaco Inc.
PORTLAND'S ARCHDIOCESE
Who:
Portland's Roman Catholic Archdiocese, a non-profit religious
corporation that covers almost 30,000 square miles in western Oregon and
includes 124 parishes. Founded in 1840s after settlers sent a petition
for priests.
Why they filed:
The church already had paid $53 million to settle 130 cases involving
allegations of sexual abuse by priests. It is facing 60 additional
suits, and one plaintiff is asking for $135 million in damages.
Strategy:
The Portland archdiocese says it has no more than $50 million in assets
because it doesn't control the assets of its parishes.
Outcome:
Attorneys representing sex-abuse plaintiffs in Portland were outraged
and are pressing for a full accounting of the archdiocese's assets.
TEXACO INC.
Who:
Texaco Inc., a giant oil company that was the eighth-largest industrial
concern in the U.S. when it filed for Chapter 11 protection in April
1987. Founded in 1902 as the Texas Co.
Why they filed:
A jury found that Texaco improperly interfered with a planned merger
between Pennzoil Co. and Getty Oil Co. and awarded Pennzoil almost $12
billion in damages.
Strategy:
Texaco excluded from its bankruptcy filing operating subsidiaries that
generated 96 percent of its revenue.
Outcome:
Pennzoil attorneys called Texaco's filing "phony" but proceeded with
settlement negotiations that eventually resulted in a $3 billion penalty
payment.
Chicago Tribune
- - -
Chicago Roman Catholic Archdiocese, parishes
$495.5 million
Assets of the Archdiocese*
$1.12 billion
Assets of Chicago parishes*
$2.7 million
Settlements in fiscal 2003 for sexual abuse by priests
$14.9 million
Settlements halfway through fiscal 2004
Not disclosed
Number of sex-abuse claims pending
*as of fiscal year ended June 30, 2003
Source: Chicago archdiocese financial statements
Copyright ©
2004,
Chicago Tribune
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