Filing for Bankruptcy Halts Priest Abuse Trial

By Ashbel S. Green and Steve Woodward
The Oregonian [Portland OR]
July 7, 2004

The Archdiocese of Portland's decision to file for Chapter 11 bankruptcy protection halted a potentially embarrassing lawsuit from going to trial on Tuesday, but it also opened the church to unprecedented financial scrutiny, and all but assured a constitutional showdown between church and secular law.

Although the decision raises serious questions about the future of archdiocesan schools, parish property and donations, plaintiffs and their attorneys accused Roman Catholic officials of seeking yet again to cover up 50 years of priest abuse.

"They have been morally bankrupt my entire life," said James Devereaux, one of two plaintiffs who was set to go to trial Tuesday.

But in an earlier news conference, Portland Archbishop John G. Vlazny said bankruptcy was the church's only move in the face of empty coffers, a pair of lawsuits seeking more than $155 million and dozens of other unsettled claims. In its filing, the archdiocese said its largest 20 lawsuits added up to more than $340 million in claims.

"This is not an effort to avoid responsibility," Vlazny read from a prepared statement. "It is, in fact, the only way I can assure that other claimants can be offered fair compensation."

Although other Catholic dioceses have threatened bankruptcy to protect themselves from the crush of priest abuse litigation, Portland is the first to file the papers.

60 plaintiffs remain

The Portland archdiocese and its insurers already have spent more than $53 million to settle more than 130 claims of priest abuse -- the second-highest settlement figure in the nation. Lawsuits by 60 more plaintiffs remain unsettled.

Part of that $53 million was provided by "substantial" borrowings, the archdiocese has said, but it declined to identify the lenders. In its Tuesday filing, the archdiocese listed Key Bank of Oregon as its largest unsecured creditor with a $22.3 million loan.

Vlazny said the two plaintiffs set for trial Tuesday refused reasonable settlement offers. He also said the church's insurers are shirking their duty to cover the church. Insurers in 2002 sued the archdiocese, saying their policies did not cover sex abuse by priests when church officials knew what was going on. That lawsuit has been on hold.

With little money left, Vlazny said, he could not risk a huge verdict.

"The pot of gold is pretty much empty," Vlazny said.

Plaintiffs' attorneys scoffed.

"The bishop hasn't begun to touch his pot," said David Slader, who has represented dozens of priest abuse plaintiffs. "He's lying."

Slader said filing for bankruptcy was the only way for Vlazny to shut down a trial that was certain to embarrass church officials by exposing decades of covering up the crimes of the Rev. Maurice Grammond, a deceased priest accused of molesting more than 50 boys from the early 1950s to the mid-1980s.

"We can see what the church's priorities are very clearly -- protecting secrets," he said.

Gayle Bache, co-chairperson of Voice of the Faithful -- Western Oregon, a Roman Catholic reform movement, said the bankruptcy decision might "give us the chance to review the financial documents of the archdiocese, to understand how it works, and how the money we donate is used to advance the mission of the Catholic faith."

Filing for bankruptcy takes several forms.

People are generally familiar with Chapter 7 liquidation, in which the assets of a person in financial trouble are converted into cash by the court and parceled out to creditors. Under Chapter 13, a person works out a plan to repay creditors.

But in a Chapter 11 business bankruptcy, the debtor -- in this case, the Portland archdiocese -- continues to operate the business and has 120 days to file its plan of reorganization. The plan must address how the archdiocese intends to pay its creditors, after disclosing all of its assets to them. The plan must then be approved in a confirmation hearing held by a U.S. Bankruptcy Court judge.

As soon as the debtor makes the Chapter 11 filing, all lawsuits and debt-collecting activities against the debtor are suspended.

Most Chapter 11 cases, which involve businesses rather than individuals, leave the debtor "in possession," meaning that the debtor continues to own and control its assets. In a few cases, the court appoints a trustee to run the business day to day.

"It's the smart thing to do," said Chuck Zech, a Villanova University economics professor who specializes in Catholic church finances. "They bought themselves some time to get their financial house in order.

"More importantly," he added, "now that the insurance has run out, the primary way to settle (lawsuits) is to sell assets. They have time to get an idea what the assets are worth and sell them at market value."

One of the first questions that is likely to arise is exactly how much the archdiocese owns.

Canon, civil laws at odds

Vlazny has insisted that under canon law, the centuries-old law that governs the Catholic Church, he does not have the authority to tap trusts that have been bequeathed to the church. And parish property -- which includes churches and parish donations -- does not belong to the archdiocese, he said.

"Parish assets belong to parishes," he said. "I have no authority to seize parish property."

Plaintiffs' attorneys argue that under civil law, the archdiocese itself -- not the parishes -- is the owner of record of at least $300 million in property in Western Oregon. That includes churches, schools and cemeteries, as well as an apartment tower and commercial buildings in Portland.

The archdiocese also holds an undisclosed amount of cash and investments in trust for the parishes.

In its filing, the archdiocese estimates its assets and liabilities as each being between $10 million and $50 million.

"The bankruptcy process requires the debtor to make full and complete disclosure of assets," said Taylor Ashworth, an Arizona bankruptcy attorney hired by plaintiffs' lawyers who have sued the Diocese of Tucson. "If they choose not to mention or list property because they think they hold it for someone else, that's going to be a fight that a bankruptcy court is going to have to resolve."

And it will be a hotly contested and widely watched decision, both because of its impact on priest-abuse litigation around the country and because it goes to a potential fundamental conflict between church and secular law.

Federal appeal likely

Ashworth said that the loser of that decision is likely to appeal to federal court, where judges will have to weigh fundamental questions such as the First Amendment rights of churches to govern themselves against secular rules of property ownership.

It was unclear whether Portland would stand out as an exception by filing for bankruptcy or whether the archdiocese's decision marks the beginning of a trend among dioceses seeking to gain some control over a 20-year priest-litigation crisis, which has cost the church more than $650 million in settlements, according to a recent study.

Lynn Cadigan, an Arizona plaintiffs' attorney, said Tucson diocesan officials said they would file for bankruptcy if the plaintiffs would not agree to postpone a trial that is scheduled to begin in September.

"When the corruption of the entire diocese could be exposed -- that's when they want concealment and bankruptcy," Cadigan said.

Ashbel "Tony" Green: 503-221-8202; Oregonian researcher Lynne Palombo contributed to this report.