BishopAccountability.org
	S.D. Diocese Follows Lead of Others in Bankruptcy Companies Have Used Chapter 11 for Years By Bruce V. Bigelow Union-Tribune [San Diego CA] March 18, 2007 http://www.signonsandiego.com/news/business/20070318-9999-1b18bankrup1.html When the Roman Catholic Diocese of San Diego filed for bankruptcy last month, Bishop Robert H. Brom invoked the patrons San Diego and Our Lady of Refuge for guidance. But the bishop and his lawyers won't exactly be walking through darkness and uncertainty during their journey through Chapter 11 reorganization. The path has become well-worn over the past 25 years by scores of U.S. companies that determined Chapter 11 was the best way to consolidate and manage the potentially runaway costs posed by a host of related personal injury lawsuits. Brom acknowledged as much in a statement he issued with the Feb. 28 bankruptcy filing, which came just hours before trial was scheduled to begin in the first of about 150 lawsuits alleging clerical sexual abuse. The concept of using bankruptcy as part of a corporate strategy was pioneered by the Johns-Manville Corp., a suburban Denver mining and materials company that filed for Chapter 11 in 1982. At the time, Johns-Manville was a successful company that ranked 181st on the Fortune 500 list of the largest American companies. But it also faced about 16,500 product liability lawsuits based on studies that linked asbestos fibers to respiratory diseases, including certain forms of lung cancer. Johns-Manville feared its potential liability to be about $2 billion, which was then equivalent to the company's assets. "Johns-Manville was a pioneering, precedent-setting case," said Robert Lawless, a professor at the University of Illinois College of Law. In what was then a novel argument, Johns-Manville filed for Chapter 11 not because of an inability to meet its current debts, but rather because of future liabilities the company anticipated from its asbestos-related claims. "It was solvent in the traditional financial sense," Lawless said. "But it was clear, given the probability of liability and the amount involved, that they were not going to be able to meet all their claims going forward. That approach has become legally permissible since then." Johns-Manville also pushed the envelope by engineering a corporate reorganization in 1981 – a year before it filed for bankruptcy. Lawyers for asbestos victims argued the restructuring was designed to facilitate the company's bankruptcy filing and to insulate its operations from its asbestos liabilities. There are signs the San Diego Diocese also developed its reorganization strategy before it filed for bankruptcy. Lawyers representing sexual abuse claimants are questioning how the diocese restructured the ownership of its secondary schools in the years before its bankruptcy. With nearly 1 million Catholics under its auspices, the San Diego Diocese is the largest of five dioceses in the Western United States that have sought refuge in bankruptcy. In all five, a key difference from a corporate Chapter 11 filing is the designation of each diocese as "a corporation sole." The term means that all the corporate power of the diocese is vested in a single person – which in San Diego is Bishop Brom. Diocese lawyers argue the distinction is important because the diocese owns no parish property under the Roman Catholic code known as canon law. Even if the bishop is the only one listed on the deeds to various parish churches, missions and schools, lawyers for the church contend the dioceses only hold such property in trust for their parishes. The dioceses steadfastly reject any other interpretation. Such arguments may be unique among the bankruptcies precipitated by mass lawsuits alleging personal injuries. But experts say the battles in bankruptcy court are generally similar. The debtor fights to minimize the value of its assets while the creditors fight to maximize the valuation to increase the value of their claims. "Bankruptcy in general is about providing collective solutions," said Ali M.M. Mojdehi, a San Diego bankruptcy lawyer. The bankruptcy system, however, was not designed specifically to deal with thousands of personal injury claims in a single case, and experts say the results have been mixed. Since the Johns-Manville bankruptcy in 1982, more than 70 companies have sought bankruptcy protection, primarily to resolve their mass personal injury liabilities, said S. Elizabeth Gibson, a law professor at the University of North Carolina. Within a decade, more than half of the 25 largest U.S. asbestos manufacturers had followed Johns-Manville into bankruptcy. A.H. Robins filed in 1986, as thousands of lawsuits mounted over its Dalkon Shield birth control device. Dow Corning Corp. filed for bankruptcy in 1995, after the company had attempted to resolve thousands of lawsuits over silicon breast implants by creating a $2.02 billion settlement fund. By 1995, about 440,000 women had filed claims – prompting more than 15,000 individuals to opt out of the settlement in a move to obtain a better deal by preserving their right to individual trials. "What Manville has taught, and subsequent cases refined, is this idea of creating a trust" that oversees a settlement pool, Mojdehi said. "The idea was to put a box around the liabilities and allow the company to go forward without being encumbered by legacy litigation." The Manville Corp. emerged from bankruptcy in 1988, after establishing a settlement trust funded with about $2.5 billion worth of company stock and other proceeds. The company was acquired by Berkshire Hathaway in 2001. But a host of problems with the trust were outlined in 2004 in an article by Loyola of Los Angeles Law School Professor Georgene Vairo. When the bankruptcy court approved the Manville reorganization plan in 1986, it was estimated that as many as 100,000 claims would be filed against the trust during the course of its existence, Vairo said. By late 1994, however, the trust itself became insolvent, triggering more litigation to restructure the trust. By the end of 2003, the trust had settled almost 597,000 claims and paid out more than $3.2 billion. But the trust still faced tens of thousands of claims and continuing financial problems forced trust administers to reduce the pro rata payments and modify disease classifications. "The trust was managed, in effect, by the plaintiffs attorneys," said Frederick Dunbar, an economist with National Economic Research Associates. A Rand study found that 60 percent to 70 percent of the claims paid out went to plaintiffs' lawyers, with about 30 percent going to people with asbestos-related health problems. Through a better-designed process for settlement trusts, Dunbar said a number of bankruptcy cases that followed Manville were able to resolve their mass lawsuits more successfully. The claims administrator for the Dow Corning settlement trust has been processing claims for the $2.35 billion fund since mid-2004. Vairo found that the Dalkon Trust established during the A.H. Robins bankruptcy "resolved over 99 percent of its claims without litigation or formal arbitration" and was terminated in 2000. Bruce Bigelow: (619) 293-1314; bruce.bigelow@uniontrib.com
Any original material on these pages is copyright © BishopAccountability.org 2004. Reproduce freely with attribution.