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Issue Date:  September 9, 2005

Diocesan bankruptcies raise church ownership issues

Control of parish assets up for debate in courts and parish closings


The decision of three U.S. dioceses to seek protection from creditors through the federal bankruptcy courts was always a gamble. One has already lost the gamble in a first round in court, one has sidestepped the issue, and the third awaits its fate. At the heart of these proceedings is the question appearing with increasing frequency as dioceses face financial crises: Who owns the church?

Facing hundreds of millions of dollars in potential awards to victims of clergy sexual abuse, the bishops of Tucson, Ariz., Spokane, Wash., and Portland, Ore., were convinced over the past year that Chapter 11 provided the best means to put their dioceses on sound financial footing. Critics say the dioceses hoped to avoid the scrutiny of civil trials. The bishops contend that the relatively orderly bankruptcy process affords the best measure of justice to both abuse victims and innocent parishioners.

Everyone agrees, however, that key to the success of the high stakes strategy was the hope that no court would make all diocesan holdings -- churches and parish halls, schools and cemeteries, social service centers and retreat houses -- part of the pot of available assets that could be sold to pay off creditors. Church lawyers argue that diocesan assets do not extend beyond the central administrative office of the diocese, the chancery. The idea, said Marcie Hamilton, an attorney advising abuse victim claimants, is “to reduce the size of the bankrupt estate so that much less money” is available to creditors.

The Tucson diocese, which filed for bankruptcy a year ago, won its bet. It avoided the question of ownership in a $22.2 million agreement reached earlier this summer with sex abuse victims.

Next month, a bankruptcy court will hear arguments in which the Portland archdiocese seeks to limit the reach of creditors. In announcing the bankruptcy filing in July 2004, Portland Archbishop John Vlazny said, “Under canon law, parish assets belong to the parish. I have no authority to seize parish property.” Whether civil law will require him to do just that will be decided by a federal bankruptcy court.

According to Nicholas Cafardi, a canon and civil lawyer who advises both the dioceses of Portland and Spokane, Oregon state law is less favorable to dioceses citing canon law as a basis to restrict claims than the statutes in Washington state. If Cafardi’s analysis is correct, things do not look good for Portland.

On Aug. 26, bankruptcy judge Patricia Williams dismissed the Spokane diocese’s claims that the bishop there, William Skylstad, had no control over parish assets.

Spokane’s lawyers, like those in Portland, argued that the bishop holds “bare legal title” to the property and assets that lawfully belong to the diocese’s 81 parishes and affiliated entities, such as schools and cemeteries.

Further, like Vlazny in Portland, Spokane’s lawyers contended that canon law places parish holdings beyond the reach of the bishop. In addition, contended the diocese’s attorneys, to subject canon law to civil judicial scrutiny violated constitutional protections related to “free exercise” of religion.

Spokane’s creditors claimed exactly the opposite -- that under civil law and by longstanding practice the bishop was the de facto “owner” of most everything within diocesan borders that bore the label “Catholic.” As a “corporation sole” under Washington law (see accompanying story), the creditors argued, Skylstad has absolute discretion over every asset held by the church. And by voluntarily entering into bankruptcy proceedings, they continued, he put those assets in play.

In a summary judgment, Judge Williams agreed with the creditors.

“It is not a burden on a religious organization which voluntarily seeks the protection of the bankruptcy laws to require it to treat its creditors in the same manner as any other debtor,” wrote Williams. The diocese’s argument, wrote Williams, “is in essence a request to impose internal ecclesiastical rules upon third parties who deal with the debtor in secular transactions.” Treating the diocese like any other debtor, concluded Williams, “does not interfere with the free exercise of religion.”

In her ruling, Williams cited two previous disputes, one involving a group of parishioners who sought to prevent the demolition of a Catholic school, the other a lawsuit filed by a person injured on parish property. In both cases the Spokane diocese explicitly named Skylstad as “owner” of parish properties. The diocese, implied Williams, was trying to have it both ways -- claiming control and ownership when that position suited its interests, disinterested beneficence when the situation called for another approach.

“A litigant cannot posit a legal or factual position and convince a court of the correctness of that position and then in a later case posit the contrary legal position even though the latter case involves a different opponent,” declared Williams.

A party, wrote Williams, “cannot argue out of both sides of its mouth.” If that was what was happening in Spokane regarding church property, it merely reflected the competing arguments over who owns the church that are taking place throughout the country.

As Williams was considering the Spokane case, Boston Archbishop Sean O’Malley received a communication from the Vatican’s Congregation for the Clergy. Fifteen Boston parishes slated for “suppression” as part of a massive “reconfiguration” process had appealed their closures to the Vatican (NCR, Aug. 26).

Follow the money

Under the parish merger plan, O’Malley asserted the archdiocese’s right to take the assets of the suppressed parishes and deposit them in archdiocesan accounts. The idea, according to archdiocesan officials, was to avoid saddling a poor parish merging with another poor parish with the liabilities of the closed parish, while not providing a financial boon in the case of the consolidation of two wealthy parishes. By mid-August, according to a diocesan report, nearly $1 million from the accounts of closed parishes had been transferred to the diocese.

In seven of the parish closings, the Vatican congregation told O’Malley, the archdiocese had wrongly seized parish assets, which, under canon law, should follow the parishioners to their new parish.

The archdiocese is working with pastors to resolve the problem. “I think there’s an understanding on the part of the pastors and the people of what the diocese is trying to achieve. I think the expectation of everyone in the diocese is, if the closing of a parish is going to be upheld, that the assets will be used for the overall good of the church,” O’Malley told The Boston Globe.

Ironies abound. In Spokane the court ruled “that the corporation sole could sell any parish out from under parishioners and give the money to the diocese,” noted Jesuit Fr. Thomas Reese, author of Archbishop: Inside the Power Structure of the American Catholic Church. The conclusion? “American civil law gives more power to a bishop than the Vatican does when it comes to finances.”

Boston is not the only diocese confused about who owns what.

In Austin, Texas, as part of an $80 million publicly supported bond issue to finance church construction projects, the diocese stated that Bishop Gregory Aymond “is the legal owner of all real property of the church, including real property in the parishes, within the geographical boundaries of the diocese. … This includes parish churches and other parish facilities.” However, notes the document supporting the bond issue, “there can … be no assurance that the exercise of episcopal power over assets held in the name of one or more parishes will not be challenged under civil law or canon law by a parish, pastor or a parishioner, creditor, court or others.”

Meanwhile, in the Nashville, Tenn., diocese, church officials were ordered earlier this summer to disclose parish and Catholic school assets as part of a $68 million suit brought by two clergy sex abuse victims. The diocese maintains that it does not control the parishes and schools. In the five-and-a-half years since the suits were first filed, the diocese has transferred ownership over nine properties previously in the bishop’s name to parishes and schools. Abuse victim advocates say the move is designed to shield church assets. The sex abuse trial is scheduled for March 2006.

The Spokane precedent

The question of ownership of church assets “will be a longer lasting issue in the U.S. than the abuse scandal,” said Charles Zech, a Villanova University professor who studies church finance issues. “It can’t go well either way for the church.”

If courts hold that, in effect, parishioners own their parishes, then that “throws things out of whack” in terms of traditional church governance, said Zech. If they find, as the Spokane court did, that the bishop “owns” diocesan assets “then you’ll see the dollar amounts [related to creditor or litigant claims] explode.”

The Spokane decision “is a disaster for the church,” said Sam Gerdano, executive director of the American Bankruptcy Institute. “The settlement dollars just went up dramatically,” Gerdano said soon after the decision was announced, “and the claimants hold all the cards.”

“The big issue,” said canon lawyer Cafardi, formerly chair of the National Review Board established by the U.S. bishops to investigate the clergy sex abuse crisis, “is to what extent can we persuade civil courts to respect the internal ecclesiastical discipline of the Catholic church?” Said Cafardi, “Without the ability to handle your property you can’t really operate a church very effectively.”

Spokane’s Skylstad, meanwhile, has ordered the diocese’s lawyers to appeal the decision. “The court’s decision has national consequences,” Skylstad said in a statement released the day of the ruling. “Its impact will be felt, not just by Catholic communities, but by many other church communities, of any denomination, of any faith expression. The decision influences the relationship between various church communities within a denomination, and church communities as they relate to civil authority.”

The appeal will be heard first by a federal district court, then, if circumstances warrant, by the Ninth Circuit Court of Appeals. (Of which Gerdano said, “If it’s possible to find a more hostile forum for the Catholic church I can’t imagine what it is.”) The case could ultimately go to the U.S. Supreme Court.

The church, said Gerdano, “hasn’t been consistent and they haven’t been diligent about observing corporate formalities.” Further, given the risks, the decision to seek bankruptcy protection was “fundamentally misguided.”

“Catholic churches have no business putting themselves voluntarily under the jurisdiction of the U.S. Bankruptcy Court,” said Gerdano. “They did this to themselves.”

Joe Feuerherd is NCR Washington correspondent. His e-mail address is

National Catholic Reporter, September 9, 2005

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