Bankruptcy for diocese

A week after failed settlement talks with victims of clergy sex abuse, the Roman Catholic Diocese of Spokane announced Wednesday that it will file for bankruptcy by the end of the month.

The move won’t close schools or parishes, but it will stop a civil lawsuit from going to trial on Nov. 29. Filing for Chapter 11 also forces the diocese to surrender its financial records for public scrutiny.

“We are not a wealthy diocese,” Bishop William Skylstad said during a press conference Wednesday. He said filing for bankruptcy accomplishes two goals: “All claims will be treated equally, fairly, with justice” while allowing the diocese to continue its ministry and mission in Eastern Washington.

Victims and their attorneys, however, insist that bankruptcy could have been avoided by settling with plaintiffs during mediation.

“The plaintiffs are deeply disappointed in the bankruptcy filing because we don’t feel it was necessary,” said Michael Pfau, one of the attorneys representing 28 victims of Patrick O’Donnell, a priest who has admitted to molesting boys from the time he was in seminary. Pfau described the bishop’s decision as “a legal maneuver,” “a roadblock to justice” and “an escape which is only temporary, and which will ultimately cost this diocese and its parishioners millions of dollars.”

Spokane will be the third diocese in the country to file for Chapter 11 bankruptcy. The Archdiocese of Portland made its decision in July, the same week a lawsuit was scheduled for trial. In September, the Tucson, Ariz., diocese followed suit, saying it needed court protection because of the cost of the sex abuse scandal.

Skylstad said the diocese has identified 125 people who claim to have been abused by priests who have served in Eastern Washington. About half of them have hired attorneys and are seeking “tens of millions of dollars,” the bishop said.

“Chapter 11 protects those who have been harmed from losing a race to the courthouse,” said Skylstad, who consulted with the pastoral and financial councils and others in the diocese before making his decision.

The diocese also is protecting its assets because of its responsibility to continue helping thousands of people in the area who have benefited from Catholic-related ministries that provide health care, education and social services, Skylstad said. “Because we have a sacred responsibility to preserve the church as an institution, we have a fiduciary responsibility to determine which claims are valid, and which are not,” he said.

Until the diocese files for bankruptcy at the end of the month, it is still open to settlements, he said.

Before filing for bankruptcy, the Archdiocese of Portland spent $53 million to settle 133 claims. The Tucson Diocese, which serves about 300,000 Catholics, has paid an estimated $17 million in settlements and costs related to the abuse scandal. Spokane, which has more than 90,000 parishioners in Eastern Washington, has spent about $300,000 to settle five or six claims, Skylstad said.

David Clohessy, who leads the national Survivors Network of those Abused by Priests, was outraged by Skylstad’s decision to declare bankruptcy.

“Only the most naïve would take the bishop at his word about the financial situation of the diocese,” said Clohessy. “I think he would have a shred more credibility had he settled with dozens and dozens of victims, but it’s particularly shameful to cry poverty after having offered victims virtually nothing.”

The Diocese of Spokane has spent nearly $1 million on attorney fees, according to diocesan figures. It also has paid out $440,600 for public relations. Most of the money spent on legal counsel was paid by the diocese’s insurance carriers.

By filing for bankruptcy, the diocese will put a total of 19 lawsuits involving 58 plaintiffs on hold. “Like his brother bishops in Tucson and Portland, Skylstad’s main concern is to prevent horrific cover-ups of abuse to be exposed in upcoming civil trials,” Clohessy said. “His real agenda is to make sure the secrets stay secret.”

Filing for Chapter 11 doesn’t imply mismanagement, according to bankruptcy experts. It usually means a company has a lot of bills but not enough cash or liquid assets to immediately pay off all the debt, said Bruce Borrus, a bankruptcy attorney from the Seattle firm Riddell Williams.

Borrus – who is not involved in any of the Catholic Church’s bankruptcy filings – said filing for Chapter 11 buys a company, or in this case the diocese, time, a “breathing spell to come up with a plan to restructure its debts.” Instead of paying, the debtor has to open its financial records to the creditors, who have to file a claim if they want to get their money. Then the company has to come up with a payment plan that all the creditors have to agree on and receive approval from the bankruptcy judge.

Filing for Chapter 11 allows a company to maintain its operations and keep the current management, Borrus said. And, it could allow for “a less expensive, streamlined process for payments (to claims) … without a large percentage going to lawyers.”

The downside is that “you lose control over your business,” he said, since major decisions must be approved by a bankruptcy judge after a hearing involving the creditors. “Many companies don’t want their finances to be an open book.” Bankruptcy can also be an expensive undertaking, he noted. Some cases don’t take long, maybe three to six months, Borrus said, but others drag on for as long as four or five years.

“Bankruptcy isn’t a frivolous thing,” Borrus emphasized. “It’s something a company does as a last resort.”

The Diocese of Spokane’s planned Chapter 11 bankruptcy will not have an impact on the recent campaign to build a seminary or on Catholic Charities, which is a separate nonprofit organization, according to the diocese.

In its filings, the diocese will be considered a nonprofit “corporate sole,” which implies that it’s a separate entity. By doing so, it will seek to protect its 81 parishes and nearly 20 schools by identifying them as separate, independent entities. In fact, some of the parishes will work together and hire their own attorney, according to the bishop.

Attorneys for the plaintiffs, however, will try to contest that strategy.

Except for the money raised during the Annual Catholic Appeal and other special collections throughout the year, money placed in the offering plate on Sundays will stay in that particular church, Skylstad said. But depending on the outcome of the bankruptcy filings, he’s not sure if some of that money will eventually be used to pay the rising cost of the sex abuse scandal. “We’re a diocesan family,” he said. “Everyone will be a part of the effort.”