Archdiocese weighs bankruptcy, but what would it mean?

Chancery offices in St. Paul.
The Archdiocese of Saint Paul and Minneapolis Chancery Offices in St. Paul, Minn.
Amanda Snyder / MPR News

File bankruptcy? It's the big money question facing the Archdiocese of St. Paul and Minneapolis.

With more than a dozen alleged victims of clergy sex abuse suing the archdiocese, three suits set for trial in a few weeks and worries about the cost of future, unknown claims, Chapter 11 could be a logical, if painful, next step — an orderly process to decide payments for current and future claims. It would also halt the coming trials.

Church leaders have said they're weighing bankruptcy as they face huge potential costs tied to clergy abuse. They won't say if any decision is imminent, though in November archdiocese chief financial officer Thomas Mertens called bankruptcy protection "a way to respond to all victims/survivors by allowing the available funds to be equitably distributed to all who have made claims..."

The best case, arguably, for the archdiocese would be a pre-negotiated bankruptcy, where key players agree on critical issues in advance. Church leaders, abuse victims, insurers and an army of attorneys would have to settle on how much money is on the table and who's going to get it.

History, though, suggests that's unlikely. A bankruptcy here is likely to resemble most church bankruptcies: bitter, contentious, costly and dragging on for at least two to three years.

Here's how it could unfold.

'Usually about money'

A bankruptcy filing would stop the trial court machinery, according to law professors and others who've studied archdiocese bankruptcies around the country.

Sex abuse claims would be settled instead as part of the bankruptcy. A judge would likely set up a process to evaluate alleged victims' claims.

Explore the full investigation Clergy abuse, cover-up and crisis in the Twin Cities Catholic church

A deadline would be set for victims and other creditors who had not yet filed claims against the archdiocese, although it's unclear how that timeline might fit with the state's claims window. Minnesota lawmakers opened a three-year window, through May 2016, for older victims to bring claims forward. No other diocese has filed for bankruptcy while such a window was still open.

"The idea is to resolve past, present and future claimants in one go," said University of Minnesota law professor Christopher Soper. "To set aside a pool of money for past, current and future claimants, so that the church can still go on with a fresh start, while still providing equitable money for various victims."

An initial bankruptcy filing could be detailed, offering guidance about the archdiocese's plans, or it could be just a one-page document giving a general range for archdiocese assets and liabilities.

In bankruptcy, the archdiocese would operate as usual in the short term. But its operations and finances would be scrutinized by a judge, court officers and attorneys.

The church would typically have four months to file a reorganization plan. Creditors and a court-appointed trustee overseeing the bankruptcy could propose alternatives.

"You'll see the crafting over a long period time, with judicial supervision, of a reorganization plan" that may or may not meet with creditors' satisfaction, said Charles Reid, Jr., a University of St. Thomas law professor.

A creditors committee would most likely be made up exclusively of abuse victims and their representatives. That's because abuse victims would be the people who'd be owed the most money.

The creditors' group would hunt for any assets that could compensate abuse victims and other people and businesses.

Insurers will be squeezed for money, too. But those companies argue they should not be on the hook for sex abuse the church knew about but let continue.

In the end, a judge decides if a proposed reorganization plan is fair and feasible.

The parties usually can't resolve their differences upfront, said James Stang, an attorney who's served on creditors committees in most of the 11 previous Catholic diocese bankruptcies.

"There are lots of reasons why you don't come to an agreement. It's usually about money," he said. Survivors may feel church officials are hiding money, and insurers may balk at paying out what creditors seek, he added.

Only the bankruptcy of the Helena, Montana, diocese could be counted as a pre-negotiated bankruptcy, Stang said.

Milwaukee abuse victims
Peter Isley, front left, Charles Linneman, front middle, and Monica Barrett, front right, stand before a group of other clergy sexual abuse victims outside federal bankruptcy court on April 17, 2014, in Milwaukee.
M.L. Johnson / AP 2014

A tentative settlement proposed in that case provided $15 million in compensation for victims who have already come forward and an additional $2.5 million for those who might come forward in the future.

That kind of tidy conclusion, however, is exceptional. It's more typical to see bitter disputes over what assets are actually controlled by an archdiocese and should be available to settle debts, said Stang.

The Milwaukee archdiocese bankruptcy, for instance, is entering its fifth year, with legal and professional fees of more than $13 million.

Relationships between the parties and the lawyers are crucial to how the process plays out, said Temple University law professor Jonathan Lipson, who has studied church bankruptcies. "If you have a great deal of acrimony prior to and during the bankruptcy, it's much less likely you'll have a negotiated resolution."

Who pays? How much?

Compensation for abuse victims has varied greatly in bankruptcies across the country.

In Fairbanks, Alaska, it was "relatively small," but in San Diego, Calif., it was significant, said Stang. "A lot of it has to do with insurance coverage."

In Fairbanks, about 325 victims shared $10 million in compensation, nearly $31,000 on average. Many claims involved abuse during years when the diocese had no insurance coverage.

In San Diego, an out-of-court settlement let 144 victims split $200 million, nearly $1.4 million on average. The archdiocese had filed for bankruptcy, but a judge dismissed that case.

Overall, from 2004 to 2013, the nation's Catholic dioceses and other entities reported nearly $2.4 billion in allegation costs, including settlements, victim therapy, offender support and attorneys' fees, according to annual sex abuse reports compiled by the U.S. Conference of Catholic Bishops. On average, insurance covered just one third of costs.

In individual cases, of course, insurance covered more. Or less. Or none.

"In most cases, there have been findings that a church, school, archdiocese, whatever body is being sued did in fact have enough information about the individual bad actor to expect or intend the loss," said Wendy Voss, a Delaware attorney who's represented religious organizations and other policy holders in insurance coverage lawsuits.

Insurers will reject claims involving expected or intentional acts. Generally there's no coverage when supervisors know of misconduct and let it continue. And attorneys representing abuse victims have long argued that's exactly what happened for decades in the St. Paul-Minneapolis archdiocese.

Archdiocese leaders did not respond to an MPR News request for information about total settlements and insurance coverage for past abuse claims.

"Plaintiffs' attorneys who represent the sexual abuse victims might have a good claim against the archdiocese but then they basically argue themselves out of coverage from the insurance company," said Peter Nash Swisher, who teaches insurance law at the Richmond School of Law.

Parishes protected?

Sunday offering
St. Paul resident Margaret Belanger collects offerings from the St. Frances Cabrini parish congregation on Oct. 20, 2013, in Minneapolis.
Amanda Snyder / MPR News 2013

Will an archdiocese bankruptcy reach into the neighborhood churches? That may be the biggest concern of Twin Cities Catholics.

The archdiocese has maintained that the 188 Twin Cities parishes, the community foundation and charities and other Catholic organizations would be protected in a bankruptcy.

The creditors' committee might not agree.

"We're always looking to see if there are available assets to pay the claims," said Stang. "We look at the civil structure of the parishes. Are they incorporated? When were they incorporated? Did they seem to be incorporated in response to ... child abuse?"

The archdiocese ended fiscal 2014 in the red, with an operating deficit for the year of about $9.1 million. The institution held about $33 million in net assets.

Twin Cities parishes, however, hold roughly $1.7 billion in assets, according to an MPR News analysis of internal parish financial records last year. But buildings and real estate account for most of that, and the parishes could be seriously overestimating what properties are worth.

Another big pot of cash rests with the Catholic Community Foundation, which as of last June reported assets of $280 million. The organization says it is the largest Catholic community foundation in the United States, and it gives millions in donor-directed grant money every year to Catholic schools, parishes and the archdiocese.

Former Archbishop John Roach created the foundation in 1992 as a way to shield donations from lawsuits related to clergy sex abuse.

The archdiocese appears to have done a good job to protect parish assets, said Charles Zech, director of the Center for Church Management and Business Ethics at Villanova University.

To get at parish assets, abuse victims would have to sue individual parishes, Zech said, and he doesn't expect that to happen.

"Each parish is its own separate corporation," Zech said. "Each parish is legally distinct from the archdiocese. By making it a separate corporation, parish assets are protected from lawsuits aimed at the diocese."

He suggested it would be difficult to establish parish responsibility for priest misconduct, given that the archdiocese assigns priests to parishes. Parishes generally don't have enough money to make suing them worthwhile.

Zech, though, said the archdiocese's assets could be greater than they seem.

"Dioceses across the country have pleaded poverty," he said, "and when you look at the actual market value of their assets, they're not so poor."

Your support matters.

You make MPR News possible. Individual donations are behind the clarity in coverage from our reporters across the state, stories that connect us, and conversations that provide perspectives. Help ensure MPR remains a resource that brings Minnesotans together.