Diocese's asset shift may be scrutinized if it files bankruptcy over sex lawsuits

By Jay Tokasz
Buffalo News
August 5, 2019

https://bit.ly/2ZzL5Ah

The Buffalo Diocese could face dozens, if not hundreds, of clergy sexual abuse lawsuits in August. Bishop Richard J. Malone will have to decide if bankruptcy is the diocese's best option. Photo by Derek Gee

A year after a bill that would suspend the civil statute of limitations in child sex abuse cases was first introduced in the New York State Legislature, the Buffalo Diocese in 2006 began moving $91 million from its main investment account into the accounts of parishes, schools, cemeteries and other Catholic entities.

Diocese officials at the time characterized the transfers as “an opportunity to increase long term investment income” and “to invest in harmony with the teachings and beliefs of the Roman Catholic Church.”

But it also was an effort to shield money in the event the bill became law and exposed the diocese to the same kinds of clergy sex abuse lawsuits that other dioceses faced, said Monsignor William J. Gallagher, a retired priest who served on the diocese’s finance council and was a longtime pastor of St. John Vianney Church in Orchard Park.

“Instead of having the diocese holding money for everybody because then it’s reachable by lawsuit, this way they created independent outfits to take care of it,” said Gallagher. “When the lawsuits started, they had to make sure that everything was separated.”

The Child Victims Act was signed into law in February, after 14 years of failing to advance to a vote in the State Senate. And now the diocese faces the prospect of dozens — and perhaps hundreds — of lawsuits this month with the opening of a one-year window in which sex abuse cases that were time-barred by statutes of limitations can proceed in civil courts.

Some victims have been waiting decades for the Buffalo Diocese to be forced to reveal the full extent of clergy sex abuse and punished for covering up crimes against children.

But as 19 other Catholic dioceses and archdioceses across the country already have done, the Buffalo Diocese could answer a cascade of lawsuits by declaring bankruptcy, a process that would prevent jury trials and limit the amount of damaging information about a cover-up that might otherwise surface in the discovery stage of state court proceedings.

The question of a Buffalo Diocese bankruptcy has been looming for months. A diocese spokeswoman did not respond this week to an inquiry from The Buffalo News about whether the diocese had shifted assets due to the possibility of lawsuits or hired a bankruptcy attorney.

The diocese already has paid $17.5 million to 106 abuse victims through a compensation program that concluded earlier this year. Those who accepted the diocese’s offers won’t be able to sue. But 17 people rejected compensation offers, and the diocese turned down 135 claimants who were deemed ineligible for the program. All of them now will have the chance to seek justice through the court system.

If the diocese gets pummeled with hundreds of cases, bankruptcy might be its best option, said attorney Raymond L. Fink.

“It’s a better way to manage through this thing,” said Fink, an expert in bankruptcy law and a partner in the law firm Lippes Mathias Wexler Friedman.

Fink said he has no direct knowledge of the Buffalo Diocese's financial situation, but based on what’s happened in other parts of the country, he said he would counsel the diocese to consider filing for Chapter 11 in advance of the lawsuits, “instead of waiting for the floodgates to open and having to deal with this constant barrage of lawsuits to be filed over the next 12 months.”

In a bankruptcy, victims' claims would have to be filed in U.S. bankruptcy court, rather than going through the traditional state court process. The bankruptcy court would set a date by which all claims against the diocese must be filed.

Because so many other dioceses already have gone through Chapter 11, the Buffalo Diocese would have a road map.

The bankruptcy court likely would create a special panel of experts such as doctors, psychologists and therapists to determine the validity of victims' claims and to establish the amount each victim should receive, based upon the severity of abuse, the amount of injury associated with the abuse and other factors. The panel potentially could be in place for years, said Fink.

In 2004, the Archdiocese of Portland in Oregon became the first diocese or archdiocese in the country to seek bankruptcy protection in response to a series of sex abuse lawsuits.

Eighteen dioceses and three religious orders have filed since then. Settlements have ranged from a low of $9.8 million in the Diocese of Fairbanks in 2010 to a high of $210 million in the Archdiocese of St. Paul & Minneapolis in 2018. Insurance covered as little as 15 percent of settlements to as much as 85 percent, depending on the diocese.

A bankruptcy filing would trigger an intense analysis of the Buffalo Diocese’s finances. The diocese would be required to reveal all assets, including real estate, artwork and artifacts, and their estimated value. And investigators for the creditors committee would try to ferret out anything that can be construed as a diocese asset, said Fink.

Dioceses and abuse victims in other bankruptcies battled over how much property dioceses owned. Creditors have sought to include the assets of parishes, schools, cemeteries and hospitals in the bankruptcy estate, while dioceses have argued that those assets should not be included.

The Archdiocese of St. Paul & Minneapolis reported net assets of $45 million in its 2015 bankruptcy filing, which followed a crush of Child Victims Act lawsuits in Minnesota. Lawyers for abuse victims tallied the archdiocese's worth at $1.7 billion when taking into account 187 parishes, a foundation and other entities that they said fell under the control of the archbishop.

In Milwaukee, creditors tried unsuccessfully to prove that the archdiocese in 2008 had fraudulently transferred $35 million from its pooled-investment account to dozens of parishes to shield the assets in bankruptcy. The two sides also fought over an additional $55 million that was transferred in 2008 from the archdiocese’s cemetery fund into a new trust.

Creditors pointed to a letter to the Vatican from the Milwaukee archbishop requesting approval for the transfer as a way to safeguard funds from any legal claim and liability. The archdiocese argued that religious freedom laws protected its actions. After nearly five years, the two sides agreed on a plan to pay $21 million to abuse victims, including $8 million from the cemetery trust and a $3 million loan from the trust to the archdiocese, which ended up also paying $20 million in legal and professional fees.

The Buffalo Diocese at one time held tens of millions of dollars in a “diocesan pooled investment program” on behalf of parishes, cemeteries and Christ the King Seminary. On paper, the funds looked as if they were owned by the diocese.

In 2010, a bankruptcy judge ruled that a $120 million pooled investment account in the Diocese of Wilmington was a diocesan asset, even though two-thirds of that money was deposited with the diocese by parishes, schools and other Catholic entities. The Wilmington Diocese ended up paying $77 million to 148 victims, and entities that had invested in the pooled fund lost significant savings.

Like Milwaukee, the Buffalo Diocese in 2006 moved the assets of its pooled investment program — $91 million — to parishes, schools and other entities. In turn, those organizations deposited the money into the St. Joseph Investment Fund. The professionally managed program “will provide parishes and institutions with greater long term investment income to support parish ministries, educational support and provide a means for permanent parish cemetery maintenance,” then Bishop Edward U. Kmiec wrote in the diocese’s 2007 audited financial report.

The 2007 report listed diocese assets of $54 million, down from $145 million in 2006.

The transfers don’t mean those assets will be off-limits to creditors, according to attorney Michael T. Pfau of the Seattle-based law firm Pfau Cochran Vertetis Amala.

“That is exactly the task that the creditors’ committee will have, tracing all the assets and advocating on behalf of abuse survivors/creditors for the maximum amount of assets to be paid out,” said Pfau, who has represented hundreds of clergy sex abuse victims. “That’s all part of the bankruptcy process, looking at the transfers. Was the money transferred for the purpose of not paying liability claims?”

In 2019, the diocese listed total assets of $66.5 million, including cash, investments, and real estate. Its liabilities totaled $37.3 million, which includes the money it paid to abuse victims through the compensation program, bringing total net assets to $29.2 million, the lowest level since 2003, after the stock market crash of 2002 hurt the diocese’s investment portfolio.

The diocese’s audited financial report doesn’t list the value of its 161 parishes and 34 elementary schools. The Catholic Health system and Catholic Charities are separately incorporated non-profit organizations and are not included, either.

Nor does the report include $64 million in net assets overseen by the Foundation of the Roman Catholic Diocese of Buffalo, a non-profit organization incorporated in 1996 to raise and administer funds on behalf of “the educational, religious, and charitable needs of the Catholic Diocese of Buffalo.”

From 2015 to 2018, the foundation secured $107 million in pledges to a capital campaign, called Upon This Rock, aimed at bolstering parishes, Catholic education, campus ministry, clergy health care and other efforts, most of which traditionally have been funded through the diocese’s central offices.

The foundation so far has collected on less than half of the pledges, about $45 million. George J. Eberl, vice-chairman of the foundation, assured donors in a December letter that their gifts and pledges will only be used for what they were intended.

“Donations to The Foundation,” Eberl wrote, “are not discretionary assets of the Diocese and cannot be used by the Diocese for victim abuse settlements, reconciliation fund payments, claims made by creditors of the diocese, legal fees or anything other than its declared mission of philanthropy.”

Fink said the Upon This Rock funds will get a close review, nonetheless.

“The timing of it and its purpose and whether there was an ulterior motive. I’m sure that is something that will get heavily scrutinized,” he said. “If the campaign had an ulterior motive, if that can ever be established, certainly that would be problematic.”

“Even if there isn’t a bankruptcy, it may get put under a microscope," although ultimately "it's very hard to get to restricted assets," he added.

Bankruptcy filings offer tactical advantages for dioceses.

There are fewer depositions of priests and fewer perpetrator histories revealed in a bankruptcy proceeding as compared with a state court proceeding, said Pfau.

“Discovery would be much more invasive for the diocese if they were facing hundreds of jury trials,” he said.

Some dioceses have filed bankruptcies just as a trial was about to begin or the day before a bishop was to be deposed, said attorney J. Michael Reck of Jeff Anderson & Associates. “It’s a very calculated tactic used by the diocese because the one thing that a bankruptcy does is it will, at least initially, freeze that discovery process,” said Reck. Ultimately, even in bankruptcy, dioceses will face some level of discovery — the pre-trial process by which lawyers on both sides of a case obtain evidence from each other through interviews and document requests.

And Reck said a bankruptcy court might even allow a handful of cases to go to trial "to establish what a valuation would be for a certain type of case."

Bankruptcy filings also can be a way to get reluctant insurance carriers to pay up.

“You may find that the diocese’s carriers almost require at some point that they go into an 11 to try and compose a structure,” said Fink. “They’ll say, ‘We’ll pony up, but it’s only going to go in through a Chapter 11 process and a confirmed plan and this will be part of the fund, but you’re going to also add to the fund with other assets and other resources. And we want an order from the bankruptcy court saying that our exposure is capped, we have no more risk on this thing. We pay up, we’re done, we’re out.”

Catholic church finance expert Charles E. Zech said bankruptcy ends up being a fairer way to compensate abuse victims.

State courts handle cases on a first-come, first-served basis, allowing for the possibility of large verdicts or settlements early on, while other deserving cases get short shrift. “There might be some inequities down the line,” said Zech.

Bankruptcy courts, on the other hand, “will treat all of the plaintiffs as a group and make sure that they get paid based on their degree of abuse,” said Zech.

Dioceses that have gone through bankruptcy generally have rebounded. Most of them had to lay off employees and sell assets, including stocks, bonds and real estate, said Zech.

“They’re probably smaller in scope than they had been before, but they’re not near going under. That’s never happened,” he said.

Parishes usually contributed to settlements by fulfilling a diocese fundraising quota.

Dioceses tell parishes, “You can raise the money whatever way you want to, but this is your share of the settlement,” said Zech. “And some parishes use savings or have a special collection or maybe have bingo more often.”