Funds Are Last Part of $50 Million from Charity Foundation, by Mark Sauer and Sandi Dolbee, The Union-Tribune [San Diego], April 13, 2007

Funds Are Last Part of $50 Million from Charity Foundation

By Mark Sauer and Sandi Dolbee
The Union-Tribune [San Diego]
April 13, 2007

http://www.signonsandiego.com/news/metro/20070413-9999-1m13diocese.html

A federal judge yesterday approved an interest-free, $14 million loan for the Roman Catholic Diocese of San Diego to complete a Chula Vista high school. The ruling came in a contentious hearing that foreshadowed another battle in the diocese's bankruptcy.

The money at issue was the last part of $50 million provided by the nonprofit charity ALSAM Foundation of Utah, which represents the bulk of funding for the $61 million Mater Dei Catholic High School, scheduled to open in the fall.

Judge Louise DeCarl Adler left undecided the question of whether the $36 million in ALSAM funds already paid to contractors was originally a gift or a loan.

That was the key argument among attorneys representing more than 150 people suing the diocese over alleged sexual abuse by priests, and those representing the church and the ALSAM Foundation.

Micheal Webb, the diocese's in-house attorney, summed up the ruling in two words: "Diocese wins."

Developments

Ruling: U.S. Bankruptcy Court Judge Louise DeCarl Adler gave the San Diego diocese permission yesterday to borrow $14 million from the ALSAM Foundation to complete Mater Dei Catholic High School in Chula Vista.

Next: Both sides return to bankruptcy court next week.

"The court understands the importance of completing this high school, and the diocese is delighted with the court's decision," Webb said.

Attorneys representing those who filed lawsuits argued that the $50 million from ALSAM was originally a gift.

The reason for the debate: If the ALSAM money is determined to have been a gift, it becomes an asset to the diocese's estate; if it was a loan, it becomes a liability, shrinking the size of the estate.

Plaintiffs' attorney Irwin Zalkin said the fight was not over whether Mater Dei High would be completed.

"The only reason they had to put on all this evidence was because the judge raised questions," Zalkin said. "We have never said they could not get the money needed to finish that school."

Adler's ruling characterized the approximately $14 million needed to finish Mater Dei construction as a loan.

The judge said she could not find that ALSAM and the diocese acted in bad faith in the agreement to use the money strictly to finish the high school, which is said to be 87 percent completed.

But the $36 million in ALSAM funds already spent on the project may yet be defined as a gift.

Creditors' attorneys produced documents yesterday calling the money a gift, including a July 2004 letter from Bishop Robert Brom to diocese priests and supporters, which said, "I am extremely happy to announce a gift of $50 million from the ALSAM Foundation . . . for the building of Mater Dei Catholic High School."

The $50 million was deemed a loan only after the diocese contemplated declaring bankruptcy in the face of the sexual-abuse lawsuits, said attorney Jim Stang, a Los Angeles bankruptcy specialist representing those who sued the diocese.

"The court asked how the diocese plans to pay back this $50 million loan. I have not heard an answer to that, except, 'I don't know,' " Stang told the judge. "We all know it's going to turn back into a gift" once the diocese emerges from bankruptcy.

An official from ALSAM testified yesterday that the $50 million was a loan. But he conceded that such foundation loans are typically not paid back if the recipient fulfills the project's purpose.

In this case, the diocese was required to build and maintain Mater Dei High for at least 20 years.

Susan Boswell, a Tucson bankruptcy attorney who is leading the diocese case, said no evidence was presented that the diocese would not eventually pay the $50 million back to ALSAM.

"The diocese has significant empathy for these victims (of sexual abuse by priests), and this diocese will pay dearly for the wrongs committed 30 or 40 years ago," Boswell told the court. "We already have a plan offering $95 million in compensation, and that is not insignificant."

The ALSAM Foundation, established by Roman Catholics Aline and Leonard Samuel Scaggs Jr., has made large contributions to a variety of institutions. It gave $42 million in 1999 to the Catholic Archdiocese of Salt Lake, for example.

Locally, ALSAM has given $100 million to Scripps Research Institute for Chemical Biology, $30 million to UCSD Health Sciences and $1.5 million for renovations to Scripps Clinic.

In late February, the San Diego diocese became the fifth and largest Catholic diocese in the nation to file for Chapter 11 bankruptcy reorganization, citing the potential cost of civil lawsuits over the sexual-abuse scandal.

This week, it became the first to face the scrutiny of a court-appointed accounting expert.

Adler announced Wednesday that she would name an accountant – perhaps as early as next week – to help her unravel what she called a "Byzantine" financial system.

She also told the diocese to file a new statement that would include hundreds of parish accounts that had been omitted from a previous filing. She ordered that Brom sign the new statement "under penalty of perjury."

"This is the first time the church has been subjected to this kind of scrutiny," said Stockton attorney Larry Drivon, who represents some of the plaintiffs in civil cases.

But Webb, the diocese's attorney, reiterated yesterday that the church welcomes this appointment. "That stops them from hiring an expert, us from hiring an expert and everyone from beating each other up," he said.

The next hearing in the bankruptcy case is scheduled for Wednesday.

Mark Sauer: (619) 293-2227; mark.sauer@uniontrib.com