The July 6, 2004, bankruptcy filing of the Archdiocese of Portland should serve as a clarion call for dioceses and diocesan ministries to revisit their corporate structures to assure they enjoy the fullest liability protection accorded by corporate law. Significant lessons can also be learned by non-diocesan ministries on the value of appropriately structuring ministry operations and ownership. Many dioceses hold and operate significant assets and ministries through corporations "sole," charitable trusts and even less formal arrangements, possibly subjecting these assets and ministries to attachment in the event of litigation. Properly structured, corporate arrangements can mesh with canon law, assuring compliance with both civil and canonical prescriptions.

Impact of the Bankruptcy Filing

Faced with trials from two plaintiffs seeking in excess of $155 million in compensatory and punitive damages for alleged clergy sexual abuse, and with 60 additional abuse suits pending, the Archdiocese filed Chapter 11 reorganization in bankruptcy court. The impact of the filing is to immediately stay all litigation while the Archdiocese develops a reorganization plan that will enable it to pay its debts and resume financial viability. A plaintiffs' committee has been formed and is beginning its analysis of assets available to settle claims.

Serious questions of Church authority and compliance with canon law arise as a result of the filing. First, pursuant to canon law, the bishop is charged with administering (overseeing) all assets within what canon law would term the diocesan "public juridic person" (essentially all assets held within the diocesan corporation or receiving their Catholic identity as a result of their connection to the diocese). The bankruptcy filing, however, now vests authority in the bankruptcy court judge to operate the corporation (Archdiocese), including the assignment of a trustee to assume oversight. Asset sales may also be ordered. It remains to be seen the extent to which actions will be considered by the court that may directly conflict with canon law and how these issues will be resolved.

There is also the question of what assets will be subject to attachment by Archdiocesan creditors (largely plaintiffs). In his press release announcing the filing, Archbishop Vlazny commented that "[u]nder canon law, parish assets belong to the parish. I have no authority to seize parish property." Creditors are developing the argument, however, that parish and ministry assets should be considered available to satisfy claims against the Archdiocese.

While courts will often give deference to internal "church" law for disputes internal to the religion—for example, who owns the church building when there is a splitting of a congregation—it is unclear whether the bankruptcy court will look to canon law to advise on ownership of assets. If the court does not, it is possible that all assets held within the Archdiocese's corporation might be used to satisfy creditor claims.

In addition, significant questions of public policy and constitutional law might arise should the creditors seek parish assets to pay claims. It is unlikely that most parishioners and donors to Catholic schools and other ministries in the Archdiocese understood that their offerings and gifts may be used to satisfy claims for causes unrelated to the particular parish's or ministry's operations.

Because bankruptcy filings initiate a process that can take several years to resolve, the Archdiocese is entering into an extended state of limbo in which its operations will be subject to scrutiny. The ability of the Archdiocese to take strategic actions with respect to its parishes and ministries will be severely compromised as creditors seek to "protect" all potential assets that may be used to pay claims. Furthermore, bankruptcy is an expensive undertaking, depleting the assets available to parties with legitimate claims against the Archdiocese.

Corporate Structure

The Archdiocese of Portland is organized as a "corporation sole," meaning that the Archdiocese is organized as a single corporation(presumably nonprofit) with Archbishop Vlazny as its sole member and director. The bankruptcy filing does not indicate the degree to which the Portland Archdiocese has separately incorporated its ministries, parishes or related activities (although we believe that it has not done so) or employed other avenues to shield assets. Many times with corporations sole all activities, including parishes, schools and health care institutions are conducted through this single corporate vehicle. To the extent that all of Portland's activities are under a single corporate umbrella, these assets might be subject to the jurisdiction of the bankruptcy court and used to satisfy creditors. While being quite sensitive to the needs of bishops to remain vigilant over diocesan activities, in these litigious times it is imperative that civil law structures be effectively used to isolate liability exposure and appropriately shield assets.

Often, religious institutes operate out of a corporate sole mentality, housing schools, daycare operations and sometimes skilled nursing facilities within their religious institute corporation. The clear lesson of Portland is that liability attaching to one activity housed within the corporation can jeopardize the financial viability of all activities housed within that entity.

It is possible to protect assets through effective use of corporate structures as well as through other mechanisms, such as charitable trusts. One common use of trusts is to shelter retirement funds. Appropriate use of insurance coverage also has a role to play. Less formal efforts to shelter assets, such as through the use of board designations, are unlikely to be effective in the event of litigation.

Next Steps

Dioceses, diocesan ministries and others concerned about liability exposure should carefully review their corporate structures to assure that high exposure activities are appropriately addressed. High liability activities include any activities where there is a potentially high frequency of litigation (such as in a health care setting) or where the exposure associated with litigation is severe. Legal counsel and canonical input should be secured to assure that an effective corporate structure is in place so assets are appropriately protected, strong oversight is maintained and state and federal laws impacting the particular activity are fully satisfied.

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