Portland bankruptcy seen as high-risk strategy: process requires church disclosures and transparency

National Catholic Reporter, July 30, 2004 by Joe Feuerherd

The July 14 ruling of federal bankruptcy judge Elizabeth Perris allowing the Portland archdiocese to pay its 112 employees surprised no one. Yet the decision made real what had been theoretical to that point: In asking the court to intervene to protect it from claims of alleged clergy sex abuse victims, Archbishop John Vlazny gave up significant control over his church.

While the archdiocese will likely have considerable influence in developing a reorganization plan designed to pay off creditors and restore it to sound footing, final authority over its financial accounts and its substantial real estate holdings will lie with the government for the foreseeable future.

And while it is unlikely, it is possible that the archbishop and his top staff could be removed from day-to-day oversight of the archdiocese, bankruptcy experts say.

"One of the compelling reasons not to [file for bankruptcy] is to avoid having your finances and the structure of your affairs under the sole jurisdiction of a federal bankruptcy court," said Samuel Gerdano, executive director of the American Bankruptcy Institute.

In addition, the Chapter 11 process is largely public. Over the next year and beyond, the world will get a relatively unfiltered look at not only the archdiocese's financial resources and holdings, but at the personnel policies that led to the unprecedented step.

Gerdano said Perris probably will seek church records related to pending abuse claims because the bankruptcy court will have to make some determination about the extent of the church's financial exposure. "This is not like a state tort court where records can be sealed and largely shielded--bankruptcy court is just the opposite," he said.

"This is going to be very difficult for the church because it is closed with its financial records and it is not used to being interfered with by government agencies," said Thomas Salerno, author of the Executive Guide to Corporate Bankruptcy and chair of the reorganization and restructuring practice at Phoenix-based Squire, Sanders & Dempsey. "But by seeking the protection of the bankruptcy court, the church is now opening itself to public scrutiny--everything becomes fair game."

The archdiocese--facing $155 million in claims in two suits that were scheduled to go before a state court the day of the bankruptcy filing said it had little choice but to seek Chapter 11 protection. "This action offers the best possibility for the archdiocese to resolve fairly all pending claims, to manage a difficult financial situation and to preserve the ability of the archdiocese to fulfill its mission," said Vlazny. "It will also allow us to continue our good works without fear of an impending large verdict."

In a July 6 letter to Portland Catholics, the archbishop said, "I am committed to just compensation. These demands go beyond compensation. With 60 other claims pending, I cannot in justice and prudence pay the demands of these two plaintiffs."

Over the past four years, the archdiocese and its insurers paid $53 million to settle more than 100 sex abuse claims. "We have kind of emptied the pot," Vlazny told reporters.

Just how empty the archdiocese's coffers are will be a matter of contention. At the July 14 hearing, archdiocese attorneys revealed that church investment accounts contain nearly $100 million--$50 million more than was initially disclosed. Much of the newly revealed money is held on behalf of the archdiocese's 124 parishes and affiliated entities.

Clergy abuse victim advocates are skeptical of the archdiocese's approach. Given its financial and real estate assets, "there was no need whatsoever for the archdiocese to file for bankruptcy," says Bill Crane, director of the Oregon chapter of the Survivors Network of Those Abused by Priests. Crane said Portland should have learned a lesson from the Boston archdiocese, which considered filing for bankruptcy but ultimately rejected that approach in favor of a universal settlement with abuse victims. The additional $100 million in assets revealed at the July 14 hearing fueled doubts among victims that the church aims to fully disclose its assets, Crane said.

Yet, said Crane, the bankruptcy filing is a "two-edged sword" for victims, some of whom attended the July 14 hearing. "Actually having a judge asking direct questions of church officials" was a positive step.

In his July 6 letter Vlazny said that "under canon law, parish assets belong to the parish. I have no authority to seize parish property."

Vlazny might not have such authority, but the bankruptcy court does. Under Chapter 11, Gerdano said, nothing--not schools, rectories, nursing homes, hospitals, earmarked charitable donations--"can be walled off." Said Gerdano, "These are things that are going to be litigated, but to submit the archdiocese to the vagaries of the law is an incredible risk."

With so much at risk, what are the benefits?

First, Salerno said, "it gives the church the ability to deal with the universe of claims which are now contingent and disputed." Through the bankruptcy filing, he said, the church avoids "the death of a thousand cuts," meaning that all those with claims predating the July 6 bankruptcy filing must come forward now with their allegations. "They will be able to define and quantify the class of claimants," said Salerno.