Spokane Judge Lifts Diocese’s Bankruptcy Shield

Handing a major legal victory to victims of sexual abuse by Catholic priests, a federal bankruptcy judge said Friday that churches, parochial schools and other assets belonged to a diocese -- not individual parishes or trusts -- and thus could be liquidated if necessary to pay victims.

The ruling applied specifically to the bankrupt Diocese of Spokane, Wash., which is facing settlement of lawsuits brought by 58 people who said they were sexually abused by priests.

The diocese said it would file an immediate appeal. But if the ruling is upheld, it could have broad implications for other dioceses staggering under the weight of sexual-abuse lawsuits, because it undercuts the Roman Catholic Church’s claim, reiterated in a Vatican finding this month, that most assets in individual dioceses cannot be put up for sale to settle claims.

The Vatican said investments and real estate such as churches and schools belonged to individual parishes.

But in Friday’s ruling, U.S. Bankruptcy Judge Patricia Williams of Spokane appeared to take issue with that claim.

“It is not a violation of the 1st Amendment to apply federal bankruptcy law to identify and define property of the bankruptcy estate even though the Chapter 11 debtor is a religious organization,” Williams wrote.

David Skeel, a bankruptcy expert at the University of Pennsylvania Law School who has closely followed the abuse lawsuits, said the ruling provided abuse claimants with “a major card here that enormously increases their leverage.”

“As a general matter, what it means is that all of the assets in the diocese have to be made available to compensate clergy-misconduct victims,” Skeel said.

“What the judge is saying here, in sorting out what the pie is, is that this is a very big pie. It’s not a little pie, as the diocese was trying to maintain.”

Spokane Bishop William S. Skylstad, who is head of the U.S. Conference of Catholic Bishops, said that the judge’s decision “has national consequences” and that he felt obligated to appeal.

“Its impact will be felt, not just by Catholic communities, but by many other church communities, of any denomination, of any faith expression,” Skylstad, who was traveling in Europe on Friday, said in a statement.

In the Spokane case, the diocese, which declared bankruptcy in December, argued that it had direct control of only about $10 million worth of real estate, such as its offices.

But lawyers for the victims said the assets totaled more than $80 million, including 82 parish churches, 16 parochial schools, cemeteries and other property in eastern Washington.

Stockton attorney Larry Drivon, who represents hundreds of Californians suing the Catholic Church over childhood sexual abuse, said the Spokane ruling sends a warning to other Catholic dioceses considering bankruptcy to avoid payment of multimillion-dollar jury verdicts in sex-abuse cases.

“They are not going to get anywhere in bankruptcy,” he said. “This is exactly what we’ve been saying since Day One, that all of the Catholic assets within the diocese are available to pay these plaintiffs,” Drivon said.

Drivon said the ruling also meant that money held in restricted funds within dioceses for special projects, such as construction of a cathedral, can be used to pay judgments in sex-abuse cases, contradicting what some church officials have told donors.

“They have told their parishioners, ‘Don’t worry about the funds that you gave us for the cathedral, because these funds are separate and cannot be used for lawsuits.’ Well, they can,” Drivon said.

J. Michael Hennigan, attorney for Los Angeles Cardinal Roger M. Mahony, said the Los Angeles Archdiocese would not file for bankruptcy.

He predicted the Spokane ruling would be overturned on appeal.

In his statement, the Spokane bishop said all diocese ministries would continue as normal while the ruling was appealed.

“We look forward to emerging from Chapter 11 reorganizations,” Skylstad said. “We look forward to a brighter future, a future in which children and vulnerable adults are safe and protected; in which ministry is conducted in a safe environment; a future in which we can continue to do God’s work in service to the people of eastern Washington.”

David Clohessy, national director of the Survivors Network of Those Abused by Priests, called the Spokane ruling a victory for all victims of sexual abuse.

“The notion that a bishop isn’t in charge of his parishes and assets has always seemed ludicrous to us,” Clohessy said in a telephone interview from St. Louis.

“Their goal is to avoid depositions, discovery and testimony at all costs, even if it means filing almost laughable, hardball legal motions like bankruptcy.”

Spokane is one of three dioceses -- the others are Portland, Ore., and Tucson, Ariz. -- that filed bankruptcy under what they all described as the onerous weight of abuse claims.

But Clohessy said Friday’s ruling would discourage other dioceses from making such a move, and he said the church generally had enough money in insurance and assets to cover the claims. He cast the bankruptcy filings as a dishonest attempt to limit such obligations.

“The very same men who said, ‘No, we don’t have abusive priests,’ or, ‘It’s a tiny problem,’ these same men are now saying we can’t do justice to survivors because the money’s not there,” Clohessy said.

“It’s just not true. Dioceses across the country can do justice, and offer closure and healing, without any curtailing of church functions or activities.”

Skeel, the University of Pennsylvania law professor, said the ruling could work its way up to the Supreme Court because it touches on “a very murky area” of the law.

“There is so much at stake here, and it’s a surprisingly unresolved area of the law, actually, and not just for the Catholic Church,” Skeel said.

“It sometimes comes up when an individual church wants to split from the larger denomination,” he said. “The dispute is over who owns the church: Does the denomination own the church, or does the church own the church?”

Larry Stammer in Los Angeles and researcher Lynn Marshall in Seattle contributed to this report. Verhovek reported from Seattle; Guccione from Los Angeles.