Faced with a similar situation: millions of dollars worth of sexual abuse claims, San Francisco's Catholic Archdiocese didn't go this route. But the one in Portland, OR did. There, where former SF Archbishop William Levada previously served as archbishop, Archbishop John Vlazny decided to make an unprecedented move and declare bankruptcy. Looks like he may have erred in judgment. 



Portland, OR Archdiocese legal strategy on shaky ground


By Savannah Blackwell

SFProgresive.com Editor


Archbishop John Vlazny insists to this day that he made the right choice 15 months ago when he directed Portland’s Catholic Archdiocese to be the country’s first archdiocese to declare bankruptcy.

Vlazny says that was the only way to ensure the archdiocese could keep operating for nearly 400,000 Catholics in Western Oregon while providing fair compensation for plaintiffs with legitimate sex-abuse claims against priests. 

But Vlazny’s decision, which he hopes will limit financial losses from mounting abuse claims and some insurers’ refusal to pay, looks shaky as a Dec. 6 court date looms.

Here are three reasons why, according to independent analysts: In essence, the archdiocese wants internal church rules to apply in civil court. It must contend with real-estate records that don’t back its position, and it’s using legal arguments that run counter to its position in past court cases.

Already, the Catholic Diocese of Spokane, which filed bankruptcy in December 2004, has lost similar arguments. The Spokane diocese is appealing that ruling.

If Vlazny’s gamble proves a loser before U.S. Bankruptcy Judge Elizabeth Perris in Portland, his archdiocese may have to sell off church assets throughout its 124 parishes and schools in Western Oregon to pay people making some $200 million in sex-abuse claims.

The question of whether the archdiocese’s liabilities outweigh its assets rests largely on whether church property, worth at least $500 million in assessed value, can be considered part of its estate. 

The archdiocese says internal church law considers the parishes as separate owners of properties and buildings. If the bankruptcy judge agrees, assets actually belonging to the archdiocese total only $19 million. Settlements would be limited to that kitty. 

The victims counter that the $500 million in properties clearly belong to the archdiocese, could be mortgaged or sold off to pay victims and that internal church law has no place in bankruptcy court.

The diocese has made a dangerous wager, bankruptcy experts say, by seeking bankruptcy protection but then arguing the court must follow internal church law – not civil law – in determining the extent of property holdings.

No religious organization has tried to make this argument before in federal bankruptcy court, says Sam Gerdano, executive director of the American Bankruptcy Institute.

In effect, says bankruptcy expert David Skeel, the archdiocese is arguing that church law trumps civil law on the determination of assets.

“There’s something a little bit worrisome about the church coming into bankruptcy trying to make use of the benefits without putting up assets,” says Skeel, a law professor at the University of Pennsylvania. “It’s like they want the benefits without the burdens.”

David Slader, an attorney for several sex-abuse claimants, quips that an effort to subject U.S. courts to Vatican doctrine makes him wonder, “…I don’t ever remember electing the Pope.”

The archdiocese’s argument boils down to this: the court will violate the church’s First Amendment right to freely exercise its beliefs if it doesn’t let canon law determine who owns the assets. 

Doug Pahl, attorney for the parishioners, said that a donation is a religious act, and Catholic donors expect the proceeds of the donations to remain with the individual parishes. The archdiocese has argued that the First Amendment prevents the bankruptcy court from interfering in its organizational structure.

But the First Amendment argument didn’t fly with Patricia Williams, the Spokane bankruptcy judge. She found that deciding for the archdiocese would mean subjecting sex-abuse victims to “ecclesiastical doctrines.” Meanwhile, she said ruling against the archdiocese would pose no unfair burden on the church’s religious practices.

That’s not the only trouble with the case. Civil records show the archdiocese to be the owner of the parish properties. 

At the judge’s request, the archdiocese selected nine parishes (which include primary schools and cemeteries) and one high school as samples for determining ownership. Real-estate records for that $77.8 million worth of sample property show the archdiocese holding the title in all but one instance.

Malcolm Newkirk, chief underwriter for the commercial division of Chicago Title Insurance Company of Oregon, said in a court statement that his firm would not have given the archdiocese title insurance unless it had sole legal right to transfer ownership. The archdiocese wants Newkirk’s statement thrown out for technical reasons.

Out of some 600 deeds pertaining to all properties located within the archdiocese, it could only identify three deeds that would bolster its position that an individual parish has an interest. 

Meanwhile, the deeds of 96 properties the archdiocese has sold over the last 10 years show the archdiocese transferred the deeds in effect showing it considered itself the owner. 

For their parts, the parishes and archdiocese argue that the archdiocese is merely holding the property in trust for the parishes. That’s the position taken by the Vatican in August, when it decided the Archdiocese of Boston shouldn’t have closed parishes and kept the proceeds not long after it settled lawsuits over its own set of sex-abuse charges.

Pahl says local history supports the parishes’ claim: the Portland Archdiocese closed several parishes in the 1990s and delivered the proceeds to the resulting parish.

In determining whether a trust exists between the archdiocese and the parishes, Perris should consider that Oregon courts have said the "by-laws, constitution and in one case the canons of a religious organization" can be relevant, according to Pahl. 

Parishioners who donated to the church clearly believed the money would stay with each parish, and “under Oregon trust law, the intention of the donor is a fundamental factor,” Pahl says.

But in the Spokane decision, Judge Williams decided it doesn't matter whether parties within a church have decided a trust exists between them. What matters is whether any civil records show that. 

And they do not in Spokane, nor Portland. 

The Spokane archdiocese has no right to basically “graft” church laws onto the laws of the state, Williams wrote.

Even the weekly National Catholic Reporter editorialized on Sept. 9 that the strategy failed “because it is built on an assertion than any Catholic would recognize as false.” 

“The niceties of canon law aside, power in the U.S. church, ownership if you will, clearly resides with individual bishops in their dioceses.”

Gerdano points out another problem for the Portland Archdiocese: case law does not support its position that the parishes are separate.

While no case featuring the exact same circumstances exists, there are at least a half-dozen instances where courts agreed that Catholic parishes here and in other parts of the United States weren’t separate from the archdiocese.

In Archdiocese of Portland v. Raymond Thorne, a case where the archdiocese successfully argued that church schools were exempt from unemployment taxation, the Portland diocese’s own 1979 court papers stated its parochial schools "are clearly not legal entities separate from the church itself." In 1991, the archdiocese argued in a case concerning unemployment compensation that its schools “have no separate legal existence apart from [the archdiocese]." 

More recently, the Portland archdiocese argued successfully before the Oregon Supreme Court that state labor laws didn’t apply to Central Catholic High School, because the school wasn’t separate from the diocese. 

For the court to now consider the parishes legally separate would run contrary to court doctrine that prevents benefiting from a position in one court, then taking the opposite position in another, says Al Kennedy, an attorney representing the committee of claimants.

Pahl points out that the Portland parishes have never claimed to be part of the diocese in any state court. The archdiocese says those cases are either irrelevant for various reasons, such as it did not specifically say it owned the school or parish property, or have been mischaracterized. 

Maybe so, but the argument is problematic, Gerdano said.

“They had no business being in bankruptcy court in the first place. It’s too risky,” he said. “(The Spokane decision) is aprecedent. Any diocese contemplating bankruptcy has to account for the likelihood that the entirety of all the property is in the pool. The price (per claim) nationwide just went up.”

SIDEBAR: Victimized by Church Bankruptcy

When the Archdiocese of Portland paid $300,000 to J.L. to settle a sex-abuse case against one of its priests, the 46-year-old victim thought he had found resolution to a painful ordeal. 

The public-school teacher knew the cash couldn't make up for the sexual abuse he says he suffered as a teen-ager from 1973 to 1976 at a Portland parish school. But going through the legal process helped him overcome the helplessness that lingered decades after he said Father Ronald Warren molested him (The archdiocese never conceded to any wrongdoing on Warren's part).

The empowerment proved short-lived. J.L., who asked to be identified by his initials for fear his fellow community members would think badly of him, had just returned home when his attorney called to tell him the church's check had bounced.

The reason: the check was deposited on July 6, 2004. That’s the day the archdiocese declared bankruptcy, making it the nation’s first and largest Catholic archdiocese -- with nearly 400,000 worshippers -- to take that step. 

(The archdiocese did clear a $1.2 million check to its lawyers at Schwabe, Williamson and Wyatt the same day, according to J.L.'s attorney, Dan Gatti. Archdiocese spokesman Bunce claimed Gatti is wrong.)

"I was shocked," J.L. says. "It's like there is no closure."

The archdiocese defaulted on a settlement payment to at least one other sexual abuse victim.

“It was emotionally devastating to my client,” attorney David Slader said. “He thought he had an approximation of justice and then everything came to a grinding halt.”

A shorter version of this story was published 10/12/05 in Willamette Week.

Email SFProgressive editor Savannah Blackwell at savannah.blackwell@gmail.com

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