HOLE-Y STRATEGY

[October 12th, 2005] 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 to declare bankruptcy.

Vlazny says that was the only way to ensure archdiocese operations continued 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 claims and some insurers' refusal to pay, looks shaky to analysts as a Dec. 6 court date looms.

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 to settle 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 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 plaintiffs counter that the $500 million in properties clearly belong to the archdiocese and could be mortgaged or sold off to pay victims, and that church law does not belong in bankruptcy court.

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

"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 bankruptcy expert David Skeel, a University of Pennsylvania law professor. "It's like they want the benefits without the burdens."

The archdiocese responds that the court will violate its First Amendment right to exercise its beliefs if it doesn't let church law determine who owns the assets.

Doug Pahl, an attorney representing parishioners, told WW that Catholic donors expect their donated proceeds to remain with the parishes. And the archdiocese has argued that the First Amendment prevents the court from interfering in its organizational structure.

There's another problem with the case, analysts say. Civil records show the archdiocese to be the owner of the parish properties.

At Judge Perris' 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 in 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 wouldn't 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.

Meanwhile, the deeds of 96 properties the archdiocese has sold over the past 10 years show the archdiocese transferred the deeds, in effect considering itself the owner.

The parishes and archdiocese argue that the archdiocese is merely holding the property in trust for the parishes. 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.

Parishioners who donated to the church clearly believed the money would stay with each parish, adds Pahl, saying that Oregon trust law makes the donor's intention a "fundamental factor."

Sam Gerdano, executive director of the American Bankruptcy Institute, points out another problem for the Portland Archdiocese: Case law doesn't back its stance 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 with the church's previous position that Catholic parishes here and in other parts of the United States weren't separate from the archdiocese.

For the court to now consider the parishes legally separate would run afoul of court practice that discourages benefiting from a position in one court, then taking the opposite position in another, says Al Kennedy, an attorney representing 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 prior cases are either irrelevant for various reasons or have been mischaracterized.

Here's one last big problem: The Catholic Diocese of Spokane, which filed for bankruptcy in December 2004, argued unsuccessfully that its properties belonged to parishes. The diocese is appealing that Spokane bankruptcy-court ruling.

That certainly can't bode well for the Portland Archdiocese.

"They had no business being in bankruptcy court in the first place. It's too risky," Gerdano says. "[The Spokane decision] is a precedent. 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."