Religious Aspects Complicate Bankruptcy
Legal scholars say the Portland archdiocese's Chapter 11 filing will inevitably send the courts into unprecedented areas

By Ashbel S. Green
The Oregonian
July 08, 2004

In filing for bankruptcy, the Archdiocese of Portland is gambling that U.S. courts will be loath to interfere with the intimate workings of church operations.

Judges hearing bankruptcy cases routinely take intrusive steps to protect creditors. Sometimes, they appoint trustees to take over management of failed companies. They can block all transfers of money out of a bankrupt entity.

But the archdiocese is no ordinary company, and experts say Archbishop John G. Vlazny has reason to hope that secular judges hearing the first-ever bankruptcy of a Roman Catholic diocese will be reluctant to impose such sanctions.

"Courts do not like to get in the middle of these cases," said David Arthur Skeel, a professor of corporate law at the University of Pennsylvania Law School.

The case is certain to blaze legal pathways. Judges hearing the case will have to weigh church canon law and the First Amendment protection of free exercise of religion against bankruptcy statutes, which were written to protect creditors.

Fred J. Naffziger, a professor of business law at Indiana University South Bend, said it may seem far-fetched, but the case could provoke an international incident if the creditors sought -- and a judge agreed -- to block any money from going to the Vatican.

"If that came up before the election, I can't see Bush saying to hell with the Vatican and I can't see Kerry saying it either," said Naffziger, who has written about the implications of a Catholic diocese declaring bankruptcy.

Two early conflicts that could occur involve a trustee and the ownership of assets.

"Creditors can ask for a trustee. They can ask for the existing managers to be kicked out," Skeel said. "This procedure makes perfect sense when you're talking about a company. But the concept of a court ousting the archbishop is a little bit hard to fathom."

Even if the court leaves Vlazny in charge of the day-to-day operation of the archdiocese, the archbishop likely will face financial constraints.

Naffziger said the judge could put an upper limit on how much money Vlazny could spend without seeking approval.

Conflicts with creditors could appear if Vlazny sought to buy property for a new school or parish church, but Naffziger doubts that creditors would dispute money spent on good works.

"The creditors have to be leery," he said. "If they're challenging money that's been spent for 30 years for some orphanage or some soup kitchen, the bishop is going to blast them as being greedy."

Parish property

An issue that seems likely to cause a conflict is the ownership of parish property and assets. Vlazny has said canon law, which governs the church, gives him no authority to seize either.

But plaintiffs' attorneys have described the archdiocese and its parishes as one big corporation.

The question of who owns the property is seen as critical in determining how much the archdiocese is worth and how much money will be on the table for the creditors, which include more than 60 plaintiffs and KeyBank of Oregon.

The bank said Wednesday that the Portland archdiocese had agreed to guarantee a $22.3 million loan from the bank to third parties that developed three faith-based housing communities in the Portland area.

Either side could appeal a decision on church assets to a U.S. District Court judge, who would have to weigh the corporate property law against the diocese's constitutional claim to follow canon law.

"One thing that undermines the church's claim is the fact that Chapter 11 is entirely voluntarily," Skeel said. "What the Supreme Court has said in different contexts is that when you invoke the bankruptcy system, you give up rights. So it might mean that constitutional principles play out slightly differently."

In the context of labor negotiations, the Supreme Court in the 1970s said the National Labor Relations Board violated the First Amendment when it required a church to negotiate collectively with teachers, Naffziger said.

But in more recent cases, he said, "the court has been less respectful of religious freedom."

In a landmark decision, the court in 1990 upheld an Oregon decision to prohibit unemployment benefits for a Native American who was fired after using peyote in a religious ritual.

"The right of free exercise does not relieve an individual of the obligation to comply with a valid and neutral law of general applicability," Justice Antonin Scalia wrote for the majority.

International implications

While significant constitutional questions could arise, Naffziger said he is less sure that an international dispute will.

Dioceses send money to the Vatican, and Portland can probably continue to do so as long as the money is raised specifically for that purpose, he said.

But "suppose the judge learns that the bishop transferred $10 million to the Vatican and the judge ordered it returned?" Naffziger mused.

Naffziger said the Vatican could assert it is beyond the judge's reach by saying: "We're a sovereign nation."

If the judge seeks to prohibit any money from going to Rome, Vatican officials could seek help from the State Department, Naffziger said.

"There could be political pressure for the federal government to actively intervene on behalf of the Vatican."

Reporter Steve Woodward contributed to this report. Ashbel "Tony" Green: 503-221-8202;


Any original material on these pages is copyright © 2004. Reproduce freely with attribution.