Bankruptcy Filing Can Give Diocese a Measure of Control

By Karen Mracek
Arizona Daily Star [Tucson]
June 16, 2004

Should the Catholic Diocese of Tucson go through with a Chapter 11 bankruptcy filing, it would give church officials more control over how they repay their debt.

Unlike Chapter 7 bankruptcy, the diocese would be able to continue with business as usual while under the court's protection.

"The diocese is certainly eligible to file for bankruptcy," said Roger Whelan, resident scholar at the American Bankruptcy Institute in Alexandria, Va., and a former U.S. bankruptcy judge. "Each diocese is a separate financial entity within the church."

Following are some details about how such an action might work:

What is Chapter 11?

Chapter 11 is a form of reorganization available to individuals, corporations and partnerships.

It is most often used by large corporations seeking to restructure their debt, because it has no limits on the amount of debt - unlike Chapter 13, in which debts can't exceed $871,550.

The diocese has a long-term debt of $4.7 million and a deficit of $7 million, according to its financial report for fiscal 2002-03.

Chapter 11 bankruptcy also lets the debtor control the repayment structure and run the business as usual, with major business decisions needing the approval of the bankruptcy court, Whelan said.

How does Chapter 11 work?

The U.S. Trustee, the bankruptcy arm of the Justice Department, would appoint one or more committees to represent the interests of creditors. They would work with the diocese to develop a plan to repay debt.

The diocese would have 120 days to put together this reorganization plan.

A committee of creditors - most often the 20 largest creditors - negotiate the plan with the organization to relieve it from repaying part of its debt so it can try to get back on its feet, Whelan said.

"The plan can include cutting back expenses or liquidating assets," Whelan said. "But it is ultimately up to the company."

The diocese then would have 60 days to get the plan accepted by all its creditors and confirmed by the bankruptcy court.

Some companies and organizations prepare a reorganization plan and get it approved before filing to simplify the process and save money.

What will happen to pending sex abuse lawsuits against the diocese?

Chapter 11 bankruptcy protects companies against pending noncriminal judgments.

"The actions are not dismissed," Whelan said. "But they are stayed until the diocese formulates a plan of repayment."

The diocese may include future litigation payments in its restructuring plan.

Can the diocese use donations from parishes to pay off debt?

Parishioners may see a portion of Sunday collections used for debt repayment.

Donations would not be exempt from repayment use if they are donated to the diocese's general use fund, Whelan said.

Money from parishes provides slightly more than one-quarter of the diocese's $5.5 million annual income.

Churches around the diocese could designate donations for particular activities, such as hunger relief or building funds, "to allay any fears that people's donations are being used for legal purposes," Whelan said.

What's different about Chapter 11 for nonprofit groups and for-profit companies?

With a nonprofit, there are no stockholders looking to make money from the reorganization, Whelan said.

"Shareholders always want to get something back," he said.

The church, however, is a spiritual entity and not a financial one, so a reorganization would have to deal with parishioners as much as creditors.

"It's not a typical Chapter 11 case," Whelan said. "The services provided are not viewed as a legal contract."


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