Portland archdiocese filing bears high price
The Portland bankruptcy buys time to deal with lawsuits while
limiting power and increasing fiscal scrutiny
By HELEN JUNG and ASHBEL S. GREEN - Portland Oregonian
Archbishop John G. Vlazny
Sunday, July 18, 2004
Archbishop John G. Vlazny's decision to put the Portland
Archdiocese in bankruptcy may be the last major independent
business decision he makes for years to come.
The bankruptcy filing gives Vlazny the time and the process
to deal with dozens of priest-abuse lawsuits at once. If successful,
it likely will put years of litigation and liability behind
the church once and for all.
But a fresh start comes at a high price -- and not just financial.
If he wants to build a new church or sell a piece of property,
Vlazny will need permission from a bankruptcy judge.
And perhaps most humbling, Vlazny may no longer be able to
stand behind a pledge he made in a letter to parishioners
in February. At that time, he wrote that their donations would
not be used to fund settlements with victims of priest abuse.
"It would be a violation of canon law to seize parish
property or use trust funds," he wrote. "I do not
intend to violate canon law."
Bud Bunce, a spokesman for the archdiocese, said Vlazny stands
by the statement.
"He has not changed his position on this," Bunce
But experts say the bankruptcy filing changes everything.
Deciding whether those funds, properties and other investments
are fair game for the archdiocese's creditors is up to a new
authority: the U.S. Bankruptcy Court.
"The archdiocese voluntarily sought the protection of
the Bankruptcy Court," said Elizabeth Warren, a Harvard
University law school professor. "It is no longer the
Lawsuits followed 1999 ruling
The Portland Archdiocese's journey to Bankruptcy Court started
with a directive from another: the Oregon Supreme Court.
In a 1999 ruling, the court held that employers can be held
liable for child sexual abuse by their employees even if supervisors
knew nothing about it. The ruling paved the way for an unprecedented
wave of litigation against the church.
Since then, nearly 180 people have filed lawsuits in Western
Oregon claiming they were abused by Roman Catholic clergy
or others associated with the church. Two dozen have sued
the Baker Diocese, which covers Eastern and Central Oregon.
Oregon is far from alone. Dioceses across the country have
been inundated with priest abuse claims, spending millions
to settle with victims. The Portland Archdiocese, using insurance
money and other church accounts, already has agreed to pay
more than $53 million to settle the claims of more than 130
people -- the second-largest known settlement figure behind
the Archdiocese of Boston.
It has not been enough. Sixty lawsuits remain to be tried.
One, seeking $135 million, was scheduled to start trial July
6, prompting Vlazny to seek the courtroom of Bankruptcy Judge
Elizabeth Perris instead.
Archdioceses around the country facing similar straits will
closely watch the Portland bankruptcy for clues to whether
the benefits outweigh the costs of bad publicity and open
books, experts said. It remains to be seen whether the filing
will discourage parishioners from making offerings, a significant
source of income. Portland has seen increasing contributions
in recent years despite the flood of lawsuits.
Faced with a $135 million lawsuit ready for trial, Portland
had few options.
"I cannot imagine anything worse than the words 'sex,'
'bankruptcy' and 'church' being on the front page of every
newspaper around the world," said Peter Chapman, president
of Bankruptcy Creditors' Service Inc., which publishes newsletters
on high-profile bankruptcies. "This is not a strategic
plan. It is an act of desperation."
Invitation to negotiate
Chapter 11 bankruptcy, at its simplest, gives a company with
too many bills and not enough money a little breathing room.
Creditors cannot immediately collect on their debts or pursue
lawsuits. Instead, under Chapter 11, the debtor shows creditors
its assets -- cash, property and other investments. All creditors
wanting to get paid have to file a claim. Then they set to
the task of hammering out a repayment plan that, if successful,
will satisfy enough of the parties, win approval from the
judge and give the debtor freedom from liability for any past
"Chapter 11 is an invitation to a negotiation,"
said Warren of Harvard. "They succeed through consent.
Consent doesn't necessarily mean everyone is happy. Everyone
gets realistic and says this is the best we can do."
The archdiocese is technically nothing more than a nonprofit
corporation with a single shareholder -- the archbishop. Called
a corporation sole, the archdiocese will have to undergo the
same process as other corporations in Chapter 11, said Marcus
Cole, Stanford Law School associate dean and a bankruptcy
That means the archdiocese will have to ask permission from
Perris, the bankruptcy judge, to pay employees, hire a consultant
and make other expenditures that could reduce the amount of
money available for creditors. The archdiocese will have to
open its books for scrutiny.
And it can no longer guarantee that any of its assets are
off the table, experts said. Any income, such as collection
plate donations, that is deemed part of the archdiocese's
assets may have to go toward paying sexually abused victims
if creditors win that concession in negotiations.
But when an entity of one of the most powerful institutions
in the world seeks bankruptcy protection because of a flood
of sex abuse lawsuits, the process is bound to break ground.
"Nobody's dealt with this thing before," said Jan
Ostrovsky, a bankruptcy partner in Seattle law firm Crocker
Kuno Ostrovsky and a former U.S. bankruptcy trustee overseeing
five Western states. "This is pretty unique."
For instance, how do you assign a dollar value to victims'
claims over sexual abuse? Does a victim who was abused repeatedly
merit a bigger claim than a victim who was abused once?
The judge could opt to deal with that question in several
ways, experts said. She could hear the cases herself; allow
some cases to go to trial as planned; appoint an outside expert
to evaluate claims; or estimate claims based on a variety
"What happens next," Cole said, "is a really
Church's worth is key debate
During the past 41/2 years, as priest-abuse lawsuits were
filed almost weekly, the Portland Archdiocese and opposing
plaintiffs' attorneys settled more than 100 cases without
agreeing on how much the church was worth.
That question, however, is likely to take center stage during
the bankruptcy proceeding.
"That is the $64 million question -- or more,"
The importance of the answer is simple. The church's ability
to pay its creditors depends in large part on how much it
The problem is that the church and the plaintiffs' attorneys
are far apart.
Church officials said in court papers last week that archdiocese
assets are worth between $10 million and $50 million, while
plaintiffs' attorneys say the church could be worth $500 million.
The difference between the figures are real estate, bank
and investment accounts that church officials say belong to
the 124 parishes in the archdiocese but plaintiffs' attorneys
say belong to the archdiocese.
Typically, a bankruptcy judge turns to state law to settle
such a dispute. But what complicates this case is that archdiocese
officials are basing their arguments on the centuries-old
canon law under which the Roman Catholic Church operates.
Experts disagree on how the court will sort this out.
"I don't know why you wouldn't look to canon law,"
said Ward Greene, a Portland bankruptcy lawyer.
Others say religious law has no place in a bankruptcy proceeding.
"Ecclesiastical law cannot be litigated in a civil court,"
said Cole, who formerly represented religious entities in
sex abuse cases as an attorney in the Chicago office of Mayer
Brown Rowe & Maw LLP.
The judge could reach one decision on who owns the churches
but reach another on various accounts that the archdiocese
"That," said Ostrovsky, the former bankruptcy trustee,
"will be a big fight."
Dow Corning a possible lesson
Although the archdiocese case will break ground, the parties
can turn to recent cases for one way to possibly resolve it.
Many experts point to the Dow Corning bankruptcy case. The
Midland, Mich.-based silicone products manufacturer filed
for Chapter 11 protection in 1995 as it faced a flood of lawsuits
from women claiming they were injured by the company's silicone
The company established a $2.35 billion trust fund to pay
settlements to women. After years of litigation on multiple
aspects, the company emerged from bankruptcy last month, and
the trust started sending checks.
Something like that might work in Portland, experts said.
The archdiocese could promise future revenue, sell property,
issue notes, take out a loan or make other moves to fund such
a trust. Insurers and other religious orders may opt to throw
in cash to increase the trust, gain more acceptance from creditors
and resolve their own potential liability, Chapman said.
It brings up other thorny issues, Cole said. The bankruptcy
court will be determining matters that may have an effect
on the spiritual mission of the church, he said.
For example, any cemeteries that are determined to be assets
of the archdiocese could potentially be sold to repay creditors,
meaning that what was once a Catholic cemetery could be run
by a secular entity, contrary to the wishes of those who buried
family members there.
And not everyone may be happy with the results. But not everyone
has to be.
"Bankruptcy Court is not a court of law; it's a court
of equity," Cole said. "A court of equity recognizes
that in a real world there are limitations to how far we can
satisfy every victim's claim."
Helen Jung: 503-294-7621; [email protected]
Ashbel "Tony" Green: 503-221-8202; [email protected]
Copyright 2004 Oregon Live.