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Forgive Us Our Debts

The Boston Archdiocese may file for Chapter 11 bankruptcy

Andrew Harris
The National Law Journal
12-17-2002


If the archdiocese of Boston follows through on its rumored plan to file for Chapter 11 bankruptcy protection, some of the toughest decisions and most decisive battles will likely be fought over some of the most fundamental questions: Who or what entity is declaring bankruptcy and what property does it own?

Cardinal Bernard Law resigned as Boston's archbishop on Friday after meeting with Pope John Paul II and senior church officials. He was at the Vatican to discuss not only his fate, but reportedly also the fate of his diocese. Boston's archdiocese, which, like many across the country, has been embroiled in a series of child-sex abuse scandals, faces lawsuits seeking tens of millions of dollars in damages.

So far, the archdiocese has settled 86 cases for nearly $10 million. Attorneys involved in the litigation say the archdiocese has hundreds of millions in assets, including insurance, but that some of those assets may be held in trust, where they would be beyond the reach of its creditors.

In an e-mail to The National Law Journal, Boston bankruptcy lawyer Daniel M. Glosband confirmed that he has "been consulted by the general counsel to the Roman Catholic Archbishop of Boston, a corporation sole, about possible ways to arrive at a global resolution of asserted and unasserted claims arising from allegations of sexual abuse."

Glosband, a partner in Boston's Goodwin Procter and chair of that firm's insolvency and business reorganization practice, added, "I cannot, at this time, discuss the matter further."

Law's general counsel, attorney Wilson D. Rogers Jr. of Boston's Rogers Law Firm, declined to be interviewed.

Practicing attorneys and academics who are willing to talk about what would be an unprecedented step for an American archdiocese offer divergent views on the usefulness to the church of seeking bankruptcy protection and the trajectory that such a case might take. They all agree, however, that there will be conflict over the contents of its bankruptcy petition and its accompanying schedules.

A CORPORATION SOLE

As Glosband says, the archdiocese is a "corporation sole." A specifically ecclesiastical designation, a corporation sole is a not-for-profit entity where, like a closely held corporation, all of the corporate power and authority vests in the person who leads the diocese. [The Vatican on Friday named Auxiliary Bishop Richard G. Lennon to head the archdiocese until the Pope names a new archbishop.]

Plaintiffs' attorney Mitchell Garabedian represents more than 100 claimants and settled the 86 cases for $10 million. Adamantly opposed to the idea of a bankruptcy filing, he calls the notion "an attempt by the Archdiocese of Boston to once again silence the victims."

Garabedian says, "Law's resignation doesn't change the posture of litigation at all."

One of the instant benefits of filing for bankruptcy is the invocation of the automatic stay provision contained in U.S. Bankruptcy Code ? 362. Except under limited circumstances, ? 362 freezes any actions pending against the debtor anywhere.

But a bankruptcy filing by a corporation would not automatically result in a stay of all actions and proceedings against the principal of that corporation as an individual or against other individuals affiliated with the debtor.

In short, Law may obtain no protection from a filing by the archdiocese and he's not the only one that could still be within the claimants' reach.

Garabedian points out that the cases he settled concerned abuse allegations against just one clergyman, now-defrocked Boston priest John Geoghan. Geoghan has since been sentenced to more than nine years in jail. But many cases have not yet been resolved and many other potential defendants have not been identified or sued. There are an estimated 450 claimants, Garabedian says.

Like Garabedian, plaintiffs' attorney Jeffrey A. Newman also opposes the filing. He adds that in his conversations with church representatives he has tried to dissuade them from doing so. Newman's concern is that given the substantial number of claims, the process will be dehumanized. "People could be translated into numbers without a substantial amount of input," he says.

He adds that the archdiocese still has $90 million worth of insurance coverage and maintained that if sufficient insurance is available to cover a claim, than a claimant may be able to gain relief from the stay to proceed with a civil court suit.

WHO OWNS WHAT?

Another source of conflict in a bankruptcy scenario would be proper marshalling of archdiocese property.

Distinctions made as to what real estate is defined as belonging to the archdiocese, and what may rightly be said to belong to one of its 362 parishes, could have a dramatic effect on the total value of the bankruptcy estate and how much money is available to settle claims.

Walter W. Miller Jr., a bankruptcy law professor at Boston University, calls identification of the archdiocese's property "the heart of the whole thing."

He speculates that much of the archdiocese property may be held in trust for the parishes, meaning that it would be beyond the reach of its creditors.

Thomas Bean, a partner in Boston's Nutter, McClennen & Fish, agrees. "The archdiocese would take the position that much of the property it holds, it holds for the benefit of its parishes." If the archdiocese was successful in establishing the existence of a beneficial trust, then the creditors could not gain access to that property, he says.

One way of identifying the level of control, Miller says, is by determining whether the archdiocese or the parish can transfer the property in question.

"If the archdiocese can control the property and does not necessarily hold it in trust for a particular group, then the court is going to find that they own it."

Newman, a partner in Greenberg Traurig, represents more than 200 claimants. Although he would not divulge the extent of his research into the archdiocese's assets, he says that it owns a large amount of property and that much of it is unencumbered.

Newman also says the potential exists for great disagreement over what properties belong to the diocese. "It's a real mess," he adds, "because you're talking about the difference between federal law and canon law."

ESTABLISHMENT CLAUSE

Bean, who co-chairs the Bankruptcy Section of the Boston Bar Association, also raises the spectre of the archdiocese losing control of the bankruptcy estate to a court-appointed trustee.

Ordinarily, a business in Chapter 11 is allowed to operate the bankrupt entity as a debtor-in-possession (DIP), unless the creditors lose faith in its ability to discharge its duties as their fiduciary.

Bean says that if Law's travails have undermined the trust of the creditors, than the court might find itself embroiled in an establishment-clause controversy if it tries to appoint a trustee to manage the church's business affairs.

Herbert Lemelman, a bankruptcy law professor at Boston's Suffolk University Law School, disagrees, calling the appointment of a trustee to supplant a DIP "very rare."

He adds that the First Amendment typically comes into play when there is a question of whether the government should be involved with the church. "Remember," Lemelman says, "here it's the religious institution choosing it, not the government imposing it."

One major advantage to filing for bankruptcy protection, all of the experts agree, is that the bankruptcy court would quickly set a so-called bar date by which all outstanding claims against the diocese must be filed. After that date, an individual still seeking compensation would have to get special permission from the court to file late.

Forcing potential claimants to file by the bar date would bring a more expeditious resolution to the issues, Bean says.

He theorizes that this may also be of some comfort to the claimants. "Suits will [otherwise] take several years to proceed and each day that this goes on is a difficult day for the abuse victims."

Bankruptcy lawyer Paul Brenman, a partner in Philadelphia's Wolf, Block, Schorr and Solis-Cohen, also says that imposition of a bar date would force people to bring claims sooner than they might otherwise do so.

But Brenman, a former chair of the Philadelphia Bar Association's Bankruptcy Committee, cautions that a bar date would also potentially forever bar claimants who are too young to emotionally grapple with, or even articulate, their injuries. He suggests that perhaps one way to provide for those claimants would be to set up a trust fund that would be administered separately from the archdiocese.

Asked about the establishment of a trust, Garabedian is skeptical. "It depends on what the trust is made up of, what the purpose of the trust is and what it would provide for victims."

Proving claims that are timely filed could conceivably result in the spectacle of a federal bankruptcy judge trying child sex-abuse cases. Newman says, "It's possible that that they will try some of these cases in federal court, but with 450 cases, it's doubtful."

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