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

Portland Archbishop 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 said.

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 archbishop's decision."

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 claims.

"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 law expert.

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 of models.

"What happens next," Cole said, "is a really gray area."

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," Warren said.

The importance of the answer is simple. The church's ability to pay its creditors depends in large part on how much it is worth.

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 holds.

"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 breast implants.

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.