Catholic Diocese of Spokane, Washington

From the

Official News Magazine of the Diocese of Spokane

Deacon Eric Meisfjord, Editor
P.O. Box 48, Spokane WA 99210
(509) 358-7340; FAX: (509) 358-7302

Legal arguments still leave Chapter 11 case uncertain

by Deacon Eric Meisfjord, Editor, Inland Register

(From the July 7, 2005 edition of the Inland Register)

Monday, June 27 was the 204th day the Diocese of Spokane has been under the protection of U.S. Bankruptcy Code as it seeks a settlement to scores of claims against it for sexual abuse by members of its clergy. A formal reorganization plan has yet to be presented to plaintiffs for consideration.

Under the rules of the bankruptcy code, the bishop of the Catholic Diocese of Spokane, a Corporation Sole, has significant fiduciary responsibilities towards creditors. All those parishes which have money on deposit in the diocese’s Deposit and Loan Fund are a class of creditor, but the primary creditors in this case are the victims of sexual abuse. Their claims total in the tens of millions of dollars.

The central legal question in the diocese’s Chapter 11 litigation focuses on what assets the bishop of the Diocese has to use to settle those claims. In bankruptcy language, the “extent of the estate” of the Corporation Sole must be determined. Attorneys for the Diocese of Spokane and the Association of Parishes had opportunity to argue their positions before federal bankruptcy judge Patricia Williams on Monday, June 27. After much media hype and the resultant tension, attorneys for the Diocese of Spokane, the Association of Parishes, major local Catholic institutions and plaintiffs clarified and argued their positions. Full legal argumentation already had been made in court filings.

Central to the day-long legal argumentation was the nature of a corporation sole. Diocesan attorney Shaun Cross argued that Washington State law created the corporation sole status in order to allow a hierarchical Church like the Catholic Diocese of Spokane to conduct its affairs according to its own internal polity, or manner of structured operation. In the case of the Catholic Church, that means in accordance with the stipulations of Canon Law. Canon Law recognizes each parish as its own “juridic person” – or what that civil law considers to be unincorporated associations.

The Association of Parishes (AOP) was created at the initiative of pastors and parish administrators in October 2004 to provide for the defense of parish assets in the Chapter 11 case. Through the AOP, volumes of material were placed before the court as evidence to such independence.

Cross argued that Bishop Skylstad is bound by the regulations of Canon Law and does not have the ability to confiscate those assets to use for settle of sexual abuse claims. He argued, in effect, that the estate which the bishop has at his disposal is limited to the estimated $10 million of liquidable assets identified in the schedules filed on Dec. 6, 2004, when the bishop formally placed the case under the jurisdiction of the U.S. bankruptcy court.

The diocese further argued that the court constitutionally could not legitimately force the bishop to do what he is prohibited from doing by the Church’s canon law.

Avoiding the entanglements involved in the interpretation of constitutional law – uncharted territory in this case – AOP attorneys Ford Elsaesser and John Munding focused their argument on the provisions of Washington State trust law. They argued that properties of parishes are held only in trust by the Corporation Sole who only holds bare title to the real estate of individual parishes.

Attorneys for the plaintiffs, James Stang and John Campbell, forcibly argued an opposing perspective on the nature of a corporation sole. Their claim was that a corporation sole is an established manner for doing business in the State of Washington but that individual parishes are merely operational divisions of the diocese – much like is found in a large corporation like General Motors.

Based on that central argument, all the assets of the parishes and their ministries (real and personal property) are at the disposal of the bishop for use in settlement. Their value is an estimated $80 million.

Jim King, attorney for Catholic Cemeteries, Catholic Charities and Morning Star Boys’ Ranch, and Kevin O’Rourke, attorney for Immaculate Heart Retreat Center, addressed the court, asserting the legal independence of the institutions they represented and associating their argument with that of the diocese.

Even after a gruelling hour of questioning of attorneys by Judge Williams, it was not clear where legal victory may have surfaced. The intensity of her inquiries ranged from a playful waving of paperwork at the diocese’s attorney, to piercing questions put to attorneys about the application of trust laws and standing status in court proceedings, to puzzlement over what obligation the court had to respect the stipulations of the canon law of the Catholic Church. Even before her questioning, judge Williams cautioned participants not to read into her questions the direction of the ruling she was contemplating.

Disregarding her caution, and remaining faithful to their cause, both sides left the courtroom claiming victory.

Judge Williams’ written ruling is expected sometime in mid-August. As she advised the participants, the ruling will be presented with the full expectation that the losing side will appeal.

An analysis of the court proceedings on June 27 could well indicate that the much-anticipated fireworks of the day made for excellent legal drama, but substantially did not bring settlement for the victims of sexual abuse any closer. Either side likely will appeal Judge Williams’ ruling – pursuing the legal battle even further – potentially as far as the U.S. Supreme Court.

There is serious question if the diocese has the ability to fund such a drawn-out case. According to U.S. bankruptcy rules, the debtor (the diocese) is obliged to pay legal fees not only for its own defense but also for that of its creditors (the victims of sexual abuse). Given the burn rate of $300,000-400,000 per month and extremely limited diocesan resources, the current legal process may well end in a motion to dismiss the case, sending all the claims back to State court, where the funding of litigation is the respective responsibility of either party.

Focusing on a settlement for victims of abuse, the AOP has made known its opposition to the sale of diocesan assets merely to fund litigation. In addition, noting the dwindling financial resources of the diocese (directly or indirectly provided by the parishes themselves) the Association has filed a motion with the court to either stop or significantly limit payments to lawyers in this case. Lawyers for the plaintiffs as was well as those for the diocese have filed objections to their motion – leading to yet another hearing before Judge Williams.

Meanwhile, the court has approved Gayle Bush from the Seattle firm Bush, Strout & Korn-field as legal representative of victims of sexual abuse who have yet to file claims against the diocese. The approval – a necessary part of an eventual reorganization plan presented by the diocese – adds even more expense to mounting legal bills.

The court also has approved the pro-bono services of Judge Gregg Zive, who presides in a separate and therefore legally disinterested district (Reno, Nev.), to serve all sides as mediator. To date, the parties have not availed themselves of these services to sit down and hammer out a just settlement of claims.

The uncertainties and legal issues for all parties which remain in the case ever since the June 27 hearing may well focus attention away from seemingly endless legal argumentation to the central issues at stake, namely the provision of a just settlement for the victims of sexual abuse and the continuation of the mission of the Catholic Church in the Diocese of Spokane.

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