What happens when a church goes bankrupt

When the Roman Catholic archdiocese in Portland, Ore., declared bankruptcy this week, it began a new phase in the church's effort to put the sexual abuse scandal behind it. Other dioceses - finding themselves with not enough financial assets to settle the legal claims of the victims - may well follow suit.

But beyond the millions of dollars and hundreds of claims involved, this latest chapter in a story of sexual abuse and coverup could also open the church to greater scrutiny of its finances, facilities, and programs around the country, experts say. More significantly, it could eventually involve federal courts in the weighing of important church-state issues, as well as the authority of centuries-old canon law.

"No bishop has wanted to declare bankruptcy," says the Rev. Thomas Reese, editor of America magazine, a Catholic weekly published in New York. "But sooner or later, with jury awards mounting up, we would get a situation where the judgment was bigger than the assets of the diocese."

In fact, that's already happened in Dallas, where a jury awarded $120 million to victims of an abusive priest. In that case, the plaintiffs (former altar boys) reportedly settled for about $30 million rather than force the church into what probably would have been a lengthy bankruptcy.

Here in Oregon, Archbishop John Vlazny expressed "profound apologies to those who have been harmed by abuse." But in a letter this week, Archbishop Vlazny also said that faced with "great financial risk," seeking bankruptcy would be the only "prudent" step to allow parishes and schools to continue operating.

"This is not an effort to avoid responsibility," he emphasized. "It is, in fact, the only way I can assure that other claimants can be offered fair compensation." As is the case elsewhere, insurance companies here have refused to pay the claims on grounds that the church knew of the offenses and neglected to stop them.

The Oregon situation could well be repeated in other dioceses around the country. A case in Tucson, Ariz., is scheduled for trial in September. There, church officials have said the assets of the diocese are less than the claims filed against them by those who say they were abused by priests.

In a letter to parishioners last month, Tucson Bishop Gerald Kicanas said that bankruptcy "now appears to be the only option."

Bankruptcy in such cases involves complicated and murky legal ground.

Depending on state law, individual parishes are constituted as their own corporations. This could mean that parish assets - investments, churches, and other facilities - are protected from lawsuits directed at the diocese to which the parish is a part.

Victims and their lawyers dispute this interpretation, which they view as a way of avoiding compensation for abuse. The Arizona Star reported last week that the Roman Catholic Diocese of Tucson had sold or transferred assets worth $5 million to other Catholic corporations over the past year. Church officials said this was part of normal church business, as well as a way to pay off abuse settlements from two years ago.

Once it gets beyond the bankruptcy court (which it very likely will do), the Oregon case will move to federal court where fundamental questions involving church and state will have to be weighed. Already, some are predicting that this case - as well as others - could end up in the US Supreme Court.

Also at issue is canon law, which dates back to Roman law and governs the faith and practices of the Catholic Church.

Some church officials argue that canon law prevents them from drawing on church bequests or parish property to raise money. But the US court system is based on English common law. And when it comes to finances, says Father Reese, "Civil law trumps canon law."

Beyond the legalities of such cases, dioceses filing for bankruptcy raise unusual ethical questions. Filing for bankruptcy protection is an admission that an individual, business, or organization cannot meet its obligations. In terms of appearance, at least, religious institutions are meant to hold to a higher standard than secular organizations.

On the other hand, church organizations operate in the secular world. And as has been shown in the cases involving clerical abuse, such organizations are not always infallible.

In any case, moving into the realm of bankruptcy is likely to expose the church to far greater scrutiny of its finances than it has experienced in the past.

In the wake of this week's diocesan bankruptcy in Oregon, one of the leading organizations of lay Catholics is calling for "financial accountability and transparency in the Catholic Church."

"Hopefully, this will give us the chance to review the financial documents of the archdiocese, to understand how it works, and how the money we donate is used to advance the mission of the Catholic faith," says Gayle Bache, Oregon representative of Voice of the Faithful, a Boston-based national lay organization. "It means that there is a tremendous occasion for renewal of the spirit, but the archdiocese must be as willing to achieve renewal through transparency as we are."