Spokane Diocese Files for Bankruptcy

By Janet I. Tu
The Seattle Times [Spokane WA]
December 7, 2004

By becoming only the third diocese nationally to seek shelter in bankruptcy court, the Roman Catholic Diocese of Spokane is hoping the court will help provide a clearer picture of its financial liability in mounting sex-abuse lawsuits and goad its reluctant insurers into paying some of the claims.

The diocese filed for Chapter 11 protection yesterday in U.S. Bankruptcy Court in Spokane, citing total liabilities of about $81 million, with about $76 million of that in sex-abuse claims, according to financial statements filed as part of the bankruptcy proceedings. It has only about $11 million in assets, according to the statements.

Spokane diocese bankruptcy attorney Shaun Cross acknowledges filing for bankruptcy does entail some risk, but said "the diocese chose the option that it believes has the greatest chance of paying the most to claimants" while allowing the church to continue its work.

"Hopefully we'll have some finality" once the court sets a deadline on claims coming forward, and the diocese and its insurers, who have been reluctant to pay can then determine the extent of its potential financial liability, Cross said.

But lessons from the two other bankrupt dioceses Portland and Tucson, Ariz. show the move comes with daunting odds.

In those two dioceses, bankruptcy judges have ruled that victims with repressed memories of their abuse could come forward far from now, thus leaving in question the exact extent of the dioceses' potential liability. And in both dioceses, it's still an open question whether parish properties including churches and schools could be sold to pay off the lawsuits.

"That issue underscores a fundamental fact of this filing it's a big gamble on the part of the diocese," said Michael Pfau, a Seattle attorney who represents more than 50 people who say they were abused by Spokane priests. "They're not going to be able to control any decision made by the Bankruptcy Court."

Daunting legal issues

In the case of the Portland archdiocese, which filed for bankruptcy July 6, U.S. Bankruptcy Court Judge Elizabeth Perris last month ruled that people who'd been abused in the past but hadn't yet connected the abuse with damage in their lives could file claims even after the April 29 deadline for claims filing. So could those with repressed memories of abuse.

That undercuts one of the major reasons a diocese files for bankruptcy: to get a sense of the limits of its liability by getting a cutoff date for claims to be filed.

"Those of us who have tracked this for a long time and I've been practicing for over 20 years were kind of surprised at [Perris'] decision," said Marti Kopacz, a bankruptcy expert with Alvarez & Marsal, a corporate restructuring firm. Kopacz was a consultant for the Boston archdiocese when it was considering bankruptcy stemming from sexual-abuse lawsuits. "That's kind of one of the biggest motivators for why a diocese would put itself through this trauma, so that once and for all it can know who is a victim and over what population it has to spread its remuneration."

Portland archdiocese spokesman Bud Bunce said he would expect the judge to appoint a representative for future claimants and to call for a fund to be established for them. Such a trust fund would typically have a set dollar amount from which future claims would be paid.

Another huge determination is still pending: whether parish assets belong to the diocese something being closely watched by church officials and observers, and a major issue in each of the bankruptcy filings.

In Portland, creditors have filed a mini-lawsuit of sorts within the bankruptcy proceeding, asking the judge to decide the question. Under Catholic Church law, facilities and assets of an individual parish belong to the parish, not the diocese. But victims' attorneys have argued otherwise. And once a diocese declares bankruptcy, such matters are subject to civil law, which may not agree with church law. The Portland archdiocese, in its initial filing, estimated its assets at about $50 million, according to The Oregonian newspaper. But attorney David Slader, who represents about a dozen people in sex-abuse cases against the archdiocese, puts the figure at about $500 million, including parishes and schools.

"They're either one of the richest or one of the poorest corporations in the state," Slader said. "The court just hasn't decided which."

In the meantime, dozens of parishes there have banded together and hired attorneys to make sure they have a voice in the bankruptcy negotiations.

In any of these bankruptcy filings, if an agreement isn't reached on this issue, "that's where you could have the most-contentious arguments that could turn out to be a relatively long struggle," said Fred Naffziger, professor of business law at Indiana University, South Bend. A Bankruptcy Court decision could be appealed to a federal district court, then a circuit court of appeals, then the U.S. Supreme Court.

Hope of settlement

In Tucson, wrangling is going on over whether parishes will end up paying for some of the settlements. However, no one has yet filed suit asking the judge to rule on the issue. The hope instead is to negotiate an agreement.

It would cost much less for parishes to contribute to a fund for settlements, rather than paying attorneys to litigate on their behalf in court, contends Lynne Cadigan, an attorney who represents the bulk of those suing the diocese over sex-abuse claims.

Tucson Bishop Gerald Kicanas has already asked parishes to contribute to a fund that would be used to pay off creditors, and he expects to know the amount they're willing to kick in by the end of January.

At that point, "if parishes don't contribute their fair share, then we're going to go after the parishes," Cadigan said.

An attorney with Tucson's parish-rights association, which all 75 parishes in the diocese have joined, has said they wanted to wait until they have a better sense of how large the total claims are before deciding whether they would contribute.

And as in Portland, U.S. Bankruptcy Judge James Marlar has made provisions for some victims who may come forward after the April 15 deadline for claims-filing. He's appointed representatives for those who are still minors and for those who have repressed memories of abuse. Laws in Arizona, though, are far stricter than those in Oregon and Washington regarding the statutes of limitations on who may file civil suits in cases of childhood sexual abuse. Claims are allowed only for those who file before their 20th birthdays or those who had completely repressed their memories of abuse. In Washington and Oregon, victims can file up to three years after they realize their childhood sexual abuse has caused damage in their lives.

Tucson diocese spokesman Fred Allison said the diocese's reorganization plan calls for setting aside money in a fund for possible future claimants.

Spokane move criticized

Some victims have accused the Spokane diocese of filing for bankruptcy to halt a potentially embarrassing trial that was scheduled to start last month. And plaintiffs' attorney Pfau said filing for bankruptcy will ultimately cost the diocese much more in the end than simply settling.

But Cross, the Spokane diocese attorney, said bankruptcy is "an alternative which the diocese believes has less risk than the path it's on now: serial litigation with no end in sight, with the insurers not contributing in a meaningful way."

Some insurers for the Spokane diocese have balked at paying settlements in sex-abuse cases. Last month, five of its insurance carriers all owned by a common company filed a lawsuit saying they shouldn't have to pay, in part because church officials knew about such abuses but didn't stop them.

"We're hopeful that in the Chapter 11, we'll be able to get the [carriers] to contribute significantly to the resolution of all these claims," Cross said. "It will give us some time to sort through the issues in all these cases, and will give us some finality. There's no end in sight [with the lawsuits] for these insurers right now. ... Hopefully, they will see the Chapter 11 as a positive way to finally resolve this."

Cross readily acknowledges that the diocese is heading into "uncharted waters" by filing for bankruptcy. There is no telling what a bankruptcy judge will decide on issues such as parish assets or future claimants.

And experts say because these cases are so new, unique and complicated, dealing as they do with the intersection of church and secular law, there is no way to predict how such risks will pay off for dioceses.

"I think one of the challenges, if more and more dioceses have to file, is that it's going to be awhile before you get a consistent body of law," said Kopacz, the bankruptcy expert. "Bankruptcy Court knows how to deal with corporate law. This is kind of a new world."


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