Roman Catholic Diocese of San Diego accused of fraudulently transferring assets to foil sex abuse liability

A sweeping lawsuit filed in San Diego Superior Court accuses the Roman Catholic Diocese of San Diego of a scheme to fraudulently transfer hundreds of properties to avoid potentially large payouts stemming from a new wave of lawsuits alleging abuse by clergy members.

The suit was filed on Tuesday, less than two weeks after the diocese held a news conference warning it might have to file bankruptcy for the second time since 2007, because of the threat from potentially large payouts to approximately 400 people who have sued alleging they were abused years ago.

The latest lawsuit said that the diocese transferred 291 properties into real estate holding companies in late 2019, just after Gov. Gavin Newsom signed a bill that opened a three-year window for people who claimed they were victims of past sexual abuse to file new claims, long after the legal timeline had passed.

The total tax assessed value of those properties is $453 million, Irwin Zalkin, a San Diego lawyer who represents about 120 sex-abuse claimants, said at a news conference Wednesday.

Transferring the assets to the holding companies — one for each individual parish — lowered the potential amount of money the clergy abuse plaintiffs could receive from the diocese in any settlement, Zalkin said.

The suit seeks to cancel each of the transactions. That would put them back under the domain of Cardinal Robert McElroy, the leader of the diocese, and make them available to claimants seeking compensation from the church.

At the news conference Wednesday, Zalkin said that the move to divest assets was a sham that had been years in the making. He said it was put into motion three years ago after Gov. Gavin Newsom signed AB 218, a law that opened a three-year period for filing new sex-abuse claims.

According to Zalkin and details culled from the lawsuit, in 2010 the diocese formed separate corporations for each of its 93 parishes. While these appear to be separate entities, he said the articles of incorporation made it clear that the assets were still ultimately under control of the bishop.

Zalkin said nothing was transferred into those entities for years. Then, in 2018 a different bill was pending that also would have opened the window to file claims. At that time, he said the diocese formed real estate holding companies — known as Real Property Support Corporations — for each parish.

While that 2018 bill passed the Legislature, then-Gov. Jerry Brown vetoed it. But when newly-elected Newsom signed AB 218 a year later in October 2019, the diocese transferred via grant deeds the properties into the real estate holding companies, with no money changing hands, according to the lawsuit. Zalkin also provided a copy of a deed showing no money was exchanged in a Sept. 13, 2019, transaction involving Sacred Heart Church in Ocean Beach.

Attorney Irwin Zalkin points to documents from the Roman Catholic Diocese of San Diego pertaining to a lawsuit.

(Adriana Heldiz / San Diego Union-Tribune)

Zalkin said that he will argue the diocese “waited to see what would happen with this legislation” in 2019, then moved the assets — all as part of a plan to avoid in the future large payouts.

The lawsuit says the transfers occurred between September 2019 — before Newsom signed the bill, though as lieutenant governor he had indicated support for the previous bill that failed — and February 2020.

In a statement, Kevin C. Eckery, director of media and community relations for the diocese, said the passage of AB 218 had nothing to do with the diocese’s actions. He said that since the diocese was founded in 1936, and under church canon law, the assets of each parish have been considered separate and independent from the diocese itself.

“Over 10 years ago, long before Assembly Bill 218 was introduced, the Diocese began the process of formalizing in civil law the separate legal status of each parish and its assets,” he wrote. “This included recording proper legal title for each parish to its own real estate.”

But Zalkin said that the diocese had used a similar argument when it declared bankruptcy in 2007, contending the parish properties were only held in trust by the diocese. That argument was never fully tested — the bankruptcy was dismissed after the diocese and plaintiffs reached a $198-million settlement — but he said it never gained much traction in the proceedings.

At this time the diocese has said only that it is considering filing bankruptcy, perhaps as soon as late spring or early summer. The diocese has cited the potentially crushing cost of payouts as a reason to seek bankruptcy, where a mass settlement of all claims at once could be worked out.

The Roman Catholic Diocese of San Diego on Feb. 10, the day it announced it might file for bankruptcy.

(Meg McLaughlin / San Diego Union-Tribune)

The lawsuits from alleged victims have all been consolidated under San Diego Superior Court Judge Eddie Sturgeon. The first case is set to go to trial in July. A bankruptcy filing typically halts any lawsuits pending against the filer. In this case, Zalkin said the lawsuit would be folded into the larger bankruptcy proceeding and resolved there.

The resolution of the question of ownership of the properties would be critical. It would be much harder, and in many cases impossible, for plaintiffs to sue individual churches, Zalkin said. If the transfers are canceled by a court, it would mean at least $450 million of assets available for a settlement — possibly more, since the market value of the properties is likely higher than the assessed values.

The properties run the gamut from church buildings and land to strip shopping centers, vacant lots and individual homes that the diocese owns. Most of the properties are in San Diego County, but some are not.

After AB 218 passed, Roman Catholic bishops in the state went to court to get it overturned. They argued the law was unconstitutional to the church and other organizations such as the Boy Scouts that also could be sued, partly because the claims were so old that the organizations could not gather evidence to defend themselves. The effort failed.

The Roman Catholic Diocese of Santa Rosa also said in December it planned to file for Chapter 11 reorganization bankruptcy some time this year. The diocese cited the wave of AB 218 suits as the reason.