Multiple Issues Still Await Resolution in Complex Church Bankruptcy
By Annysa Johnson
Following the recent release of documents on the Catholic Archdiocese of Milwaukee's handling of sex abuse cases, the local church's immensely complex 3-year-old bankruptcy case is now poised to resume playing out at three levels of the federal court system. At the heart of the case are three key questions: Did the archdiocese defraud victims by exposing them to sexually abusive priests, teachers and others without warning them? Just who, among the 575 creditors who allege they were assaulted over the years, is entitled to compensation? And what church assets, including insurance coverage, can and should be made available to pay them? The legal debates over these and other issues have filled thousands of pages in federal court filings and already cost the archdiocese millions. And any decision can alter the balance of power between the archdiocese and creditors, pushing them toward a possible settlement or back to their trenches — or setting up a new round of appeals that can drag on for months. There are all these moving parts," said Ralph Anzivino, who teaches bankruptcy law at Marquette University. "And unfortunately, it's a slow process to finally get them to stop moving." By that time, the case may be one of the largest, longest-running and most costly Catholic Church bankruptcies in the nation. Until then, numerous other issues remain to be resolved. ■Insurance: In a separate lawsuit related to the Chapter 11 bankruptcy, U.S. District Judge Rudolph Randa is poised to rule soon on whether the archdiocese can tap its insurance coverage to pay sex abuse claims. An earlier state court ruling found it could not in cases of fraud, but that applied to a specific carrier. In a rare show of solidarity, attorneys for the archdiocese and two victims filed a lawsuit against two other carriers — Lloyd's of London and Stonewall Insurance Co. — whose policies were unearthed during the bankruptcy. The availability of insurance would improve the chances of a settlement, though the archdiocese would almost certainly still have to liquidate other assets, said Anzivino. "Obviously, if Judge Randa rules the policies cover some of the wrongdoing here, it increases the pot for all the creditors. But whether it's sufficient to forgo the other moneys is doubtful," he said. A ruling favoring insurers would likely heat up the ongoing battle over other assets, including $53 million in the Catholic cemetery Perpetual Care Trust. And an adverse ruling could persuade the insurers to settle their portion as way to minimize their exposure, attorneys said. Sex abuse settlements — the total amount paid to creditors — have ranged from $10 million to more than $200 million in the seven previous diocesan bankruptcies to date, and insurance has contributed a major portion of each of those. If it is unsuccessful, the Milwaukee archdiocese would be the first diocese unable to tap that important resource. Its predicament is the result of its own success fighting sex abuse victims in the courts. Across the country, lawsuits over the Catholic Church's handling of sex abuse are generally based on negligence. But the Milwaukee archdiocese won a key ruling in 1995 when the Wisconsin Supreme Court found that negligence lawsuits against religious institutions for their handling of sex abuse cases violated their First Amendment right to freedom of religion. That effectively barred sex abuse victims from the courts until 2007, when the high court allowed them to sue under the state's fraud statute. The problem for the archdiocese is that certain insurance did cover negligence, but not fraud. Now, one of the issues is whether the insurers are liable for a kind of fraud known as "negligent misrepresentation." ■Cemetery trust funds: At issue is whether $57 million moved out of a cemetery fund on the archdiocese's books in 2008 and into a newly created trust should become part of the estate that will be used to pay creditors and finance the archdiocese's reorganization plan. The bankruptcy's creditors include not just sex abuse victims, but also hundreds of other individuals, organizations and businesses, including the archdiocese's own pension, health care and investment funds, Vatican offices and other archdioceses around the country. U.S. Bankruptcy Judge Susan V. Kelley ruled in January that tapping the cemetery fund would not hinder the church's free exercise of religion under the First Amendment and a 1993 federal law aimed at protecting religious freedom. That question is now on appeal before Randa. His ruling may address only one issue related to the cemetery trust, after which the decision would be appealed to the 7th Circuit Court of Appeals or return to Kelley. Victims accuse the archdiocese of fraudulently transferring the cemetery funds off its books to protect it from being used for sex abuse settlements. The archdiocese maintains that the cemetery funds have always been held "in trust" at the archdiocese for the exclusive use of cemeteries, and that forcing the church to tap those funds for any other purpose would violate canon law, said attorney Timothy Nixon, who represents the trust and its sole trustee, Archbishop Jerome Listecki. Nixon said the creation of the official trust in 2007 merely formalized that arrangement. Attorneys for the creditors committee have not said how much of the $53 million now in the cemetery trust they believe should be made available to the estate. But they don't think the full amount is needed to maintain the church's cemeteries. "Based on what we know about the cemeteries and the economics behind them, our belief is they don't need $50 to $60 million," said James Stang, who represents the creditors committee. Nixon declined to respond to Stang's assertion. The archdiocese's lead bankruptcy attorney did not comment for this story. Kelley had stayed action on the cemetery trust case until Randa rules on the First Amendment and insurance issue. ■Other assets: Kelley has rejected efforts by the creditors to pursue the assets of the archdiocese's 200-plus parishes, including more than $35 million in a Parish Deposit Fund the archdiocese transferred off its books in 2005. Kelley ruled that the parishes are separate legal entities, and that while there was something "fishy" about the transfer, the deposit funds belonged to the parishes and the high cost of pursuing them would undermine the archdiocese's ability to develop a reorganization plan. Creditors have not appealed those decisions. Lawyers for the creditors and the church have postponed any disputes over the archdiocese headquarters complex known as the Cousins Center, which at one time was valued at $10 million; and the Faith in Our Future fund, an account created in 2008 to hold the proceeds of a $105 million capital campaign launched by then-Archbishop Timothy Dolan, who is now cardinal of New York. Attorneys for the creditors and Kelley have questioned why the archdiocese has not moved to sell available properties, including the Cousins Center and an undeveloped Franklin cemetery parcel valued at $4.4 million. The archdiocese has said it did not want to unload the properties at "fire sale" prices. ■Objections to claims: The archdiocese has filed motions seeking to dismiss more than 400 of the sex abuse claims, arguing it should not have to compensate those whose cases are beyond the statute of limitations for fraud, those who received prior settlements or those who were molested by religious order priests, nuns, teachers or others it does not consider its direct employee. Among the eight Catholic diocese to declare bankruptcy since 2004, Milwaukee is the first to pursue that strategy. Kelley has disallowed six claims to date, and at least two have appealed. Three that were dismissed because they were beyond the statute of limitations could be refiled, Kelley said, if Wisconsin amends the statute of limitations on sex abuse cases, as lawmakers proposed last week in introducing the Child Victims Act. Under current state law, the childhood victims of sexual abusers must bring civil cases before they turn 35 years old. The proposed legislation would remove that limit for a two-year window and allow adult victims currently blocked from suing to do so during that time. For now, Kelley has allowed two test cases from each category of the 400-plus claims objections — two with prior settlements, for example, or two abused by a religious order priest or a Catholic school teacher — to move forward for briefings and eventual trials. ■Releasing more documents: The public disclosure of church documents, obtained in the legal process known as discovery, is one of the reasons many abuse survivors say they take their cases to court. Mike Finnegan and attorney Jeffrey Anderson, who represent most of the survivors in the bankruptcy, have made it clear they will not agree to any settlement without the substantial release of documents. And the July 1 release of 6,000 pages detailing the church's handling of 42 diocesan priests listed as offenders on the archdiocese's website, they insist, is just the first round. Finnegan said the attorneys would continue to seek the release of 100 other alleged offenders named in bankruptcy claims but not listed on the website.The archdiocese is expected to oppose that, arguing the allegations were not substantiated or were against individuals, such as religious order priests, nuns and teachers, over whom it did not have direct responsibility. Victims' attorneys cannot seek additional documents on the priests on the archdiocese website unless new documents are produced. ■Reorganization: The end game of every bankruptcy is the reorganization plan, which allows the debtor to settle with its creditors and continue to operate. Archdiocese spokesman Jerry Topczewski said Friday that the archdiocese is working on a plan that would address creditors' claims, including all those of abuse survivors, and allow the archdioceses to continue its "essential ministries and services to parishioners, parishes, schools, charities and others who rely upon the Church for assistance." He declined to elaborate on the proposal. In all but the rarest of cases, the reorganization plan is the result of a consensual negotiation in which all the parties hammer out who gets what. But that's not possible, said Anzivino, until it's known what funds are available. In rare cases, a debtor can propose a so-called "cram down" process in which it asks the court to impose a plan without the consent of the creditors. But Anzivino said that is unlikely in the archdiocese case. Any plan would include legal fees in addition to $9 million already paid by the archdiocese by February. In bankruptcy, the debtor must pay both its own and the creditors' legal fees, though not those of individual plaintiffs' attorneys, who are paid a portion of the settlement. In January, the archdiocese asked Kelley for permission to suspend the payment of most legal fees, saying it had exhausted its reserves and would be soon operating at a deficit. Kelley granted that request in February, allowing the archdiocese to fold those into the reorganization plan. Short of a surprise settlement, whatever the plan of reorganization, its approval and the archdiocese's exit from bankruptcy may be long in coming.
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