Did the Portland Catholic Archdiocese Declare Bankruptcy To Avoid or Delay Clergy Abuse Suits?:
The Risk of Bad-Faith and Noncooperative Church Bankruptcies

By MARCI HAMILTON
hamilton02@aol.com
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Tuesday, Jul. 13, 2004

The Portland, Oregon Archdiocese of the Catholic Church has now filed for federal Chapter 11 bankruptcy and reorganization. Meanwhile, the Tucson Archdiocese has announced it is considering the same option.

No one can know for certain what the Archdiocese's motivations are. But it is clear that a large part of the impetus probably derives from the many clergy abuse lawsuits that have been filed.

Indeed, in Portland, Archbishop John Vlazny explained the filing on the ground that "[t]he pot of gold is pretty much empty now." In choosing the metaphor, he may well have been implying that the victims were gold diggers who had plundered the Church's finances.

The Boston Archdiocese, facing hundreds of clergy abuse lawsuits, also considered bankruptcy. But Boston eventually chose to sell off assets over bankruptcy.

As Archdioceses consider - and in some cases, avail themselves of -- the bankruptcy option, courts will be confronted with an important question: Are they filing in good faith? Or are they trying to use federal bankruptcy law in an attempt to avoid further liability deriving from their having permitted pedophile priests continuing access to children? Or are they attempting to insert endless delay for the victims?

If the answer is avoidance or delay, this strategy isn't just wrong. It's also illegal.

Federal Bankruptcy Cannot Be Used Simply to Defeat Liability

Filing for bankruptcy to avoid litigation is a misuse of the federal bankruptcy system - and courts have so held. For example, in the 1999 case of In re SGL Carbon, the U.S. Court of Appeals for the Third Circuit held that a manufacturer could not use the federal bankruptcy laws simply to avoid a litigation crisis. The purpose of Chapter 11 is not to permit defendants to avoid lawsuits, but rather to permit reorganization of an entity in actual or potential financial trouble. If the sole purpose is the former, the bankruptcy filing is not in good faith.

Recently, in a Boston College Law Review Article, Professor David Skeel pointed out that the same reasoning could be applied to a diocese that is filing for bankruptcy to avoid clergy abuse liability. The situation, after all, is directly parallel: A large organization, facing numerous suits based on a course of past conduct, tries to avoid responsibility - and a number of huge tort judgments - by taking refuge in bankruptcy.

Skeel is right that the bankruptcies of dioceses that face clergy abuse liability may well be filed in bad faith. Accordingly, the bankruptcy court that is assigned the Portland case ought to examine with care whether the Archdiocese has only filed for bankruptcy to avoid full liability, or to delay litigation. If either is the case, the Chapter 11 proceeding should not go forward.

If Reorganization Is Permitted, the Church Is Likely to Be Uncooperative

Suppose, however, that the bankruptcy court is unwilling to make a finding of bad faith, and permits the reorganization to go forward. Still more legal questions will be raised. Some have thought such a filing was good news for victims, because the bankruptcy process would force the Archdiocese to disclose documents related to clergy abuse on the public record.

For one thing, it is unlikely that the Archdiocese would fully cooperate with federal bankruptcy law's requirements that it make full disclosure of documents relevant to its financial situation. These are the very documents the Church has resisted producing in clergy abuse litigation - based on meritless First Amendment church/state arguments, as I described in a prior column.

Even though these documents are directly relevant to the predicted liability that is prompting Archdioceses to consider - or, in the Portland case, file for - bankruptcy in the first place, the Church will have every incentive to keep secret as many as it can.

The Church May Try to Invoke RFRA to Refuse Full Bankruptcy Disclosure

How can the Archdiocese resist normal bankruptcy disclosure while still taking advantage of bankruptcy's protections? The answer will probably be: by invoking the Religious Freedom Restoration Act (RFRA).

Enacted in 1993, RFRA permits religious entities to avoid generally applicable, neutral laws under certain circumstances. Under RFRA, where a general law places a substantial burden on a religious entity's beliefs, the general law will only apply to the religious entity if the government can prove that its law not only serves a compelling interest, but also is the least restrictive means of achieving that end. It is this tailoring requirement that has the potential to turn bankruptcy law into a haven for churches avoiding tort liability.

RFRA, then, has tremendous reach - affecting the application of literally every law. Yet when it was enacted Congress had not even begun to ask how it would affect the laws of the states or its own laws. Instead, Congress acted blindly to give an enormous handout for religious entities. Only a handful of examples of how RFRA might actually apply in practice were even present in the legislative record.

In 1997, in Boerne v. Flores, RFRA was struck down as unconstitutional on multiple grounds. (Full disclosure: I represented the victorious challenger to RFRA, the tiny city of Boerne, Texas.) But since then, a handful of courts have decided that RFRA was struck only with respect to state laws, leaving RFRA in place to undermine federal laws, like federal bankruptcy laws.

My strong view is that RFRA is unconstitutional no matter to what law it is applied, but that is not yet settled law. Nor have courts answered the novel question of how RFRA - a rarely-invoked law - applies in the rare circumstance of a church bankruptcy.

At A Minimum, the RFRA Argument Will Interpose Delay in the Bankruptcy

Thus, the Church has a tool in RFRA that would permit it to take advantage of the Chapter 11 procedures it likes while it resists the portions it does not like. And even if the Church ultimately loses such arguments - as it should - it will doubtless succeed, at least, in interposing tremendous delay.

At worst, it could go one-by-one through virtually every aspect of the bankruptcy system, arguing as a matter of first impression that each aspect must be molded so as to be the least restrictive means of regulating the Archdiocese's bankruptcy. And, based on these arguments, it could urge the court to invalidate each aspect - or, at least, a number of aspects - of the bankruptcy system as it is applied to this religious debtor. The goal for the Archdiocese would be a tailor-made bankruptcy. The result for creditors and victims would be delay, and more delay as these issues of first impression were litigated.

In particular, there may be dispute over disclosure of Archdiocese documents, as noted above, and over the reorganization plan that will have to govern the Church, as it would any other debtor. There may also be dispute as to when - or in what order - the Church must pay its creditors. The Church might argue, for instance, that a slower (or a lesser) repayment schedule than usual--but one that will keep the Church's doors open longer--is the kind of less restrictive alternative that RFRA requires.

The Victims Must Have a Voice In Archdiocese Bankruptcy

The victims of clergy abuse should have a strong voice in urging the bankruptcy court to hold that their interests are compelling and ought to trump any attempt by the Archdiocese to avoid or water down liability or the disclosure of documents through the bankruptcy laws--as modified by RFRA. It would be unjust indeed if opportunistic bankruptcies, made attractive to religious organizations by RFRA, were to force victims to settle their claims for far less than they are worth or prematurely because they could not outlast the bankruptcy proceeding.

Clergy abuse victims - who have the moral high ground, and the People's deep sympathy - are in a prime position to challenge the constitutionality of RFRA or to lobby for its repeal. If Congress begins to see its federal bankruptcy law being used to hide the Church from accountability for clergy abuse, and RFRA being used as a tool to further that end, it may finally make a long-awaited move in favor of victims' interests.


Marci A. Hamilton is the Paul R. Verkuil Chair in Public Law at Benjamin N. Cardozo School of Law, Yeshiva University. An archive of her columns, including those on the Catholic Church clergy abuse scandal can be found on this site. Her email is hamilton02@aol.com.

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