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Bankruptcy filing called option for archdiocese

Advisers cite worst-case plan

By Stephen Kurkjian and Michael Rezendes, Globe Staff, 8/2/2002

he Archdiocese of Boston is considering the option of filing for bankruptcy if it loses large judgments in clergy sexual abuse cases, including the dispute currently being heard in Suffolk Superior Court over whether it must abide by an agreement to pay alleged victims of convicted child molester and former priest John J. Geoghan between $15 million and $30 million, church advisers said.

The advisers, who asked that they not be identified, said the bankruptcy option was being considered as a ''worst-case scenario'' that would enable the archdiocese to continue operating if it were to be hit with large judgments in the more than 400 claims of clergy sexual abuse it currently faces.

The bankruptcy option is also being considered at a time when the archdiocese is grappling with a fiscal crisis brought on by dwindling donations in the wake of the sexual abuse crisis and a downturn in the economy that have forced church officials to cut this year's operating budget by as much as 40 percent, affecting urban parishes, parochial schools, and other church programs.

In recent days, attorneys for the archdiocese have discussed the pros and cons of filing for bankruptcy with Daniel M. Glosband of the law firm Goodwin Procter, one of the city's top bankruptcy lawyers. Glosband declined to comment.

The church advisers said a bankruptcy filing would have an immediate positive effect on the archdiocese's legal and financial status because it would stall the process of litigating sexual abuse claims for weeks and possibly months while a US bankruptcy court judge took overall control of the cases.

In the long run, the bankruptcy process would also help the archdiocese manage the clergy sexual abuse crisis by setting a definite time frame, perhaps a year, during which alleged victims of clergy abuse could file legal claims. Most of the more than 400 alleged victims who have contacted lawyers have done so since January, when the scandal erupted.

In addition, the bankruptcy procedures afford greater protection to nonprofit groups, such as religious organizations, than to commercial enterprises. For example, the creditors of a nonprofit organization cannot ask a bankruptcy judge to liquidate the nonprofit's assets to pay off its debts.

In the case of the archdiocese, that would mean that creditors, including abuse victims, cannot force the archdiocese to sell its millions of dollars worth of real estate to compensate their claims.

A bankruptcy filing by the archdiocese could also limit the amount of money alleged victims could receive in damages. And even the prospect of a bankruptcy filing could affect settlement negotiations. No other diocese has filed for bankruptcy. But one church adviser said that the Dallas diocese obtained permission from the Vatican to file for bankruptcy after getting hit with a $199.6 million jury award to victims in a 1997 clergy sexual abuse lawsuit. With the prospect of bankruptcy imminent, families of the victims agreed to accept $31 million.

While no other established church group could be found to have filed for bankruptcy in recent years in the United States, large Catholic, Anglican, United, and Presbyterian church organizations are facing bankruptcy because of claims of sexual and physical abuse.

Even if the archdiocese prevails in the current $15 million to $30 million dispute with alleged Geoghan victims, the church may seek to limit its liability by asking the court to force the plaintiffs to accept class-action status, which could limit the amount of time alleged victims have to file claims and limit the overall settlement amount.

''It's got to be a global settlement to work,'' said one church adviser. ''It's just not fair to settle some claims and not others.''

Outside analysts said there would be advantages and disadvantages to a bankruptcy filing by the archdiocese.

Attorney Thomas O. Bean, co-chairman of the Boston Bar Association's bankruptcy law section, described a bankruptcy filing as a ''strategic option.''

But in devising a plan to determine how much the archdiocese would have to pay its creditors, a bankruptcy court would take into consideration the archdiocese's total assets. And because creditors are entitled to receive at least as much in a bankruptcy settlement as they would in a so-called liquidation, the archdiocese may decide to sell property to raise money to help create a fund to repay creditors, Bean said. It could also ask for donations to create such a fund.

In Boston alone, the archdiocese and its parishes own 249 pieces of real estate, which are assessed for $220 million, according to city records.

In addition, a bankruptcy filing could reduce the incentive to battle in court because creditors typically receive less than the full amount of their claims, Bean said. But it could also spark a scramble among creditors to win the largest claims they can.

But while bankrupcty provides protection from creditors, it also damages an organization's reputation and, in the archdiocese's case, could ''have an effect on the willingness of members of the church to give, because they're not sure where the money's going,'' Bean said.

Bankruptcy would also force the archdiocese to open its financial records to the public, a prospect church leaders are unlikely to find appealing.

There is no requirement that a debtor be insolvent before it files for bankruptcy, meaning its liabilities don't have to exceed its assets. Instead, it must only have a so-called good faith basis for filing.

If the church decides to file for bankruptcy it would probably file under Chapter 11, which is considered a reorganization and allows the bankrupt party to continue operating while it attempts to sort out its financial affairs. By contrast, a Chapter 7 bankruptcy filing is considered a liquidation, and means a trustee would be appointed to sell off assets and, ultimately, the bankrupt party would cease to exist.

Whether the Vatican could be ordered by a court to cover the archdiocese's liabilities would likely be determined by the church's corporate structure, Bean said. If the church is found to be organized into different corporations - the Boston Archdiocese, for example, is considered a ''corporation sole'' - the Vatican could be shielded from liability, just as for-profit parent organizations aren't liable for the debts of their subsidiaries, he said.

Advisers to the archdiocese say church officials are uncertain what percentage of the clergy sexual abuse claims will be covered by insurance. Previous estimates had placed at about $40 million the amount of money that the archdiocese would have to pay out of its own coffers, in addition to the available insurance coverage.

However, that toll could rise as the Aetna and Kemper insurance companies, whose policies cover the archdiocese for the period in which most of the claims were made, are said to be balking at honoring many of the claims, according to advisers yesterday.

Meanwhile, lawyers for some clergy sexual abuse victims criticized the archdiocese for considering the option of filing for bankruptcy to minimize claims and protect its real estate holdings.

Roderick MacLeish Jr. and Jeffrey A. Newman, whose law firm Greenberg Traurig represents more than 200 alleged victims, said they believe that the church has more than $100 million in the insurance company available to it to cover the claims.

The pair have been in discussion with lawyers for the archdiocese for more than a month to gain a financial settlement of their claims. ''There is just no reason for seeking the protection of the bankruptcy court at this juncture,'' MacLeish said.

Sacha Pfeiffer of the Globe Staff contributed to this story.

This story ran on page A1 of the Boston Globe on 8/2/2002.
© Copyright 2002 Globe Newspaper Company.