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Chapter 11

posted by awelborn

…for San Diego:

Following a failed final attempt at settling clergy-abuse claims, the Roman Catholic Diocese of San Diego filed for Chapter 11 protection just before midnight last night, according to the San Diego Union Tribune.  The filing makes San Diego the largest of five U.S. dioceses to declare bankruptcy.

The diocese’s action halts the first of about 150 lawsuits alleging sexual abuse of children by 60 priests in incidents dating back decades.  The chain of lawsuits was set to begin today.

Coverage from the San Diego paper.



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Mike Petrik

posted February 28, 2007 at 11:44 am


A preemptive strike before we see the predictable posts claiming that this is a nasty effort by the Church to avoid paying appropriate damages to those its priests harmed:
Bankruptcy is not designed to defraud or harm creditors: it is designed to facilitate the orderly payment of creditors. Without bankruptcy, fire sales and crisis management will result in a reduction of payment to creditors. This is not to say that no creditors are ever harmed by bankruptcy, since those that might be especially shrewd or favored might be, but the proceedings are intended to ensure that creditors are not paid based on favoritism, bias or their own relative shrewdness.
The notion that bankruptcy operates to harm creditors is a misconception.



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Sydney Carton

posted February 28, 2007 at 11:59 am


It’s been a while since I took Bankruptcy in law school, Mike, but you’re right. However, I forget what happens to existing lawsuits. Even if they’re treated as creditors with valid claims (as opposed to potential claims since no judgement has been rendered in the case yet), wouldn’t they get paid pennies on the dollar anyway? And that, basically, is a big club against plaintiff’s lawyers looking for $$$$$. Hard to collect a million dollar verdict when there’s no money, right?



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James

posted February 28, 2007 at 1:17 pm


What are we up to now, nationally – in terms of money shelled out with regard to the priestly sodomite abuse scandal? One billion? Two billion?
In the meantime, we have Cardinal Mahoney doing his pro-sodomy thing in California…
Are they men who lead this Church, or neutered men?
You tell me.
James



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lourdes

posted February 28, 2007 at 1:18 pm


“Secured” creditors always get top priority. Then provisions are made to pay those creditors necessary to keep the “business” running. Since Chapter 11 is a reorganization type bankruptcy (and not “liquidation”) the aim is to keep the organization viable. A diocese is an odd subject for a bankruptcy and I’m sure the bankruptcy laws were not drafted with this type of situation clearly in mind.
While it may be true that the bankruptcy laws were not drafted to harm creditors, it is also true that creditors are harmed in bankrutpcy in the sense that they very rarely receive the full value of what is owed to them. The problem with pending litigation is that there has not yet been a determination as to the value or the merit of the claims. Bankruptcy court will provide the forum for those negotiations and will impose limits on the damages awarded. It’s not a perfect system, but it does provide finality and some measure of compensation.



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Mike Petrik

posted February 28, 2007 at 1:45 pm


Sydney and lourdes,
While it is true that Chapter 11 often results in creditors being paid less than 100% of what is owed, they are harmed only to the extent they otherwise would have been paid 100% (or something more than what they were permitted as part of the reorganization). That happens only in the particular sense, meaning that bankruptcy will favor some creditors over others, so it is quite possible that each and every creditor will not benefit. Absent an unusual situation, however, “protected” debtors typically pay out more in the aggregate than they would have without the bankruptcy. Indeed, this is the intention — i.e., to benefit creditors as a group by allowing the business to continue to operate in a way that maximizes its ability to repay. But Chapter 11 does alter the amounts individual creditors are paid insomuch as they are paid in a specified order as envisioned by statute, which is why secured creditors receive priority. The bottom line is that the debtor benefits by having an opportunity to stay in business and the creditors benefit by being paid more, as a group, than they would have been paid had the business been forced to immediately shutter its doors.



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Pew Sitter

posted February 28, 2007 at 2:03 pm


Before we forget: whose money is it that is paying these lawsuits? Not “the bishops’” money, not “the pope’s” money, not “the Church’s” money. Every cent paid in these law suits comes from the donations of us, the parishioners, who contribute every Sunday.
I feel strongly that those harmed need redress, but legitimate redress does not come from legally seizing cash that properly belongs to the service of those (the laity) who have done nothing wrong.
Sorry, but I support every attempt to prevent the wholescale looting of the contributions of the faithful and the destruction of the ministries that serve them and for which they contributed.



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Mike Petrik

posted February 28, 2007 at 2:07 pm


Sydney,
I realize that I did not answer your particular question. That is because I don’t know. If I find out, I’ll post an answer.
Best,



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Paul Pfaffenberger

posted February 28, 2007 at 2:12 pm


Mike,
More important than protecting assets for many diocese is protection of the documents. A public trial makes church documents regarding what they knew and when they knew it public. I believe that all of the bankruptcies have been filed on the eve of a civil trial – before, not after, the financial liability is even known.
I don’t know the specifics of the negotiations in San Diego, but the sticking points in Tucson and in Portland had more to do with public release of church documents than with $.
60 priests with 150 lawsuits indicates a widespread problem, one that most likely was not dealt with cleanly by the church. The desire to keep that dirty laundry in the closet rather than out on the line needs to be seriously considered as the primary motivation behind the filing.



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Mike Petrik

posted February 28, 2007 at 2:21 pm


Paul,
That is a good point. My understanding is that filing for Chapter 11 protection on the eve of a trial is a common practice. From a sheer financial perspective I’m honestly not sure about the tactical advantage, given that such litigation is normally merely stayed and eventually permitted to go forward. But a stay certainly would be desirable if one wants to delay problematic discovery.



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James

posted February 28, 2007 at 2:56 pm


And sadly, PewSitter, that billion and half dollars (just in the US by the way), could have been used for tremendous good.
We don’t give to the general diocese collection anymore. Have no real idea how or where the money is spent. We do give to specific Catholic charities, however.
James



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Little Gidding

posted February 28, 2007 at 2:58 pm


How would it be possible to “liquidate” the Catholic diocese of San Diego? Insofar as the Church is a “business,” then, okay, it can stay in “business” or not. But if capital assets are sold off and turned over to the creditors, then what? There’s still going to be a Catholic diocese of San Diego–with a bishop and priests and lay members–even if people are meeting in each other’s homes for Mass and confessions. So, *that* business *can’t* be liquidated, even if the bishop were put into debtor’s prison and all the priests had their paychecks attached. So what sort of “business” *is* that, anyway? Do these odd angles come up in bankruptcy proceedings?



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Joel

posted February 28, 2007 at 3:04 pm


The list of victims just keeps growing and growing. Now it includes the entire community that this parish serves. How this helps the victims is beyond me.
Imagine how many countless people “gave out of their poverty”, only to line the pockets of lawyers. What can we do but pray that Christ removes all the perverts from his church, and the bishops that coddle them?



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lourdes

posted February 28, 2007 at 3:05 pm


Mike,
I think if you re-read your comment, you’ll see that your analysis of Chapter 11 applies to a “business.” The problem with the Roman Catholic Diocese of San Diego is that it is not a “business” per se. Perhaps some of the problems that arose did so because the Church was being run like a business and not “the Church.”
While in a business creditors may be happy that they got something rather than nothing…in this case creditors are getting less than they should because the diocese is trying to avoid paying legal settlements. This is not “just” in the Catholic meaning of the word. It may be better than nothing, but it is not just.



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James

posted February 28, 2007 at 3:12 pm


“What can we do but pray that Christ removes all the perverts from his church, and the bishops that coddle them?”

You can find out who the perverts are and embarrass the hell out (and I mean that) of those who coddle them, Joel.
There’s a Catholic guy around where we live who started to photograph priests entering ‘gay’ bars (as per info he got from serious Catholic homosexuals – that is, chaste ones). He sent the photos to the bishop and threatened to send them to the newspapers. The priests were removed from our area – but of course, no one knows where.
And where we live, our kids attend a Catholic elemntary school which was the site of one of the most hideous homomolestation cases in the US – where six boys were serially anally raped by a priest over several years. One boy later committed suicide, and the others are horrifically damaged. Two pastors later, a man in the next town googled the name of the new priest pastor and principal of the school, and came up with nude photos that that priest was sending out over the internet to ‘gay’ porn sites.
Basically, you should find out everything you can about your priests. The diocese will NEVER tell you. I say this for the love of your children, if you have them.
James



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Mike Petrik

posted February 28, 2007 at 3:22 pm


Little,
The answer, I think, has to do with the fact that (i) a “liquidation” is not the same as a “dissolution,” and (ii) a complete “liquidation” doesn’t have to be a “final” liquidation. (Note: I assume we are discussing complete liquidations here, not partial liquidations.)Moreover, most liquidations do not occur in the context of a bankruptcy.
While almost all complete liquidations are “final” and followed by corporate “dissolutions,” they technically don’t have to be. Conceivably, an entity can make liquid all its assets and distribute all proceeds to creditors (and then owners), thereby performing a complete liquidation, and then continue to operate going forward as the same entity. This is usually undesirable, and therefore atypical, insomuch as any unsatisfied liabilities would typically survive, but this would not be the case in the context of a liquidation in bankruptcy that involved a bankruptcy order to the contrary.
The bottom line is that I think a diocese can completely liquidate to satisfy creditors and then go on, and if in the context of a bankruptcy it may be able to “go on” unencumbered by any debts not satisfied by the liquidation.
At least I think that is right.



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Mike Petrik

posted February 28, 2007 at 3:35 pm


lourdes,
I appreciate your point, I do; but my analysis has nothing to do with the Church being, or not being, a business. I think you are assuming that the plaintiff-creditors would get more money of the Church does not file for protection under Chapter 11, but that should only be true if it is at the expense of other pre-existing creditors. You seem to assume that these plaintiffs’ claims are somehow automatically more important than the claims of other creditors. I don’t think that is an assumption grounded in justice. Bankruptcy law includes rules that prioritize claims of all types of creditors. A debtor will not pay less, but will almost certainly pay more. Which creditors get paid is a function of the rules rather than the idiosyncratic biases of the debtor wishing to favor some creditors over others.



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Unapologetic Catholic

posted February 28, 2007 at 3:42 pm


Creditors, of course, can be harmed in bankruptcty, and Sydney’s point is valid. A personal injury judgment is usually one of the first to go. Tort plaintiffs are almost always unsecured. Unsecured creditors may get littel or nothing in a bankruptcy.
Also, the bankruptcy filing stays civil suits. The civil actions may still be resolved in a bankruptcy adversary action (without jury). The whole focus of the bankruptcy filing is to preserve the estate assets. The adversaries usually find themselves on very unfriendly ground as a practical matter becasue every award to an adversary reduces the estate.
They may otherwise wait for years for the automatic stay to be lifted.
I don’t think its fair to characterize a bankruptcy filing as an unfair effort to avoid paying damages. It is a legal strategy that will have the effect of reducing and or delaying the resolution of claims. It also avoids the dissipation of assets to those who file their lawsuits first. The effect may be to reduce individual payments to individuals but allow more individuals to recover at least partially.
I can think of at least one situationwhere a bankruptcy may help claimants. If the diocese has insurance coverage problems, a bankruptcy stay may delay resolutionof cases while the diocese pursues the insuracne companies. If successful, there may well be a bigger pool to settle claims.



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esquire

posted February 28, 2007 at 5:24 pm


From the Catholic Encyclopedia:
There is no moral blame attributable to a man who through misfortune and by no fault of his own has become bankrupt and unable to pay his debts. But if bankruptcy has been brought about by the debtor’s own fault, he must be condemned in the court of morals, even if he escape without punishment in the court of law. Bankruptcy may be the result of one’s own fault in a great variety of ways. Living beyond one’s means, negligence or imprudence in the conduct of business, spending in betting and gambling money which is due to creditors are frequent causes of debtors appearing in the bankruptcy court. All such causes are accompanied with more or less of moral quilt, in proportion to the bankrupt’s advertence to their probable consequences, and the voluntariness of his action.
http://www.catholicity.com/encyclopedia/b/bankruptcy,moral_aspect_of.html



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fbc

posted February 28, 2007 at 5:58 pm


I’m a bankruptcy lawyer. Mike Petrik is correct in his assertion that the impetus for bankruptcy laws in this country was the protection of creditors (through equal treatment).
Someone else asked about the diocese being a “business.” I think it important to point out that Ch. 11 is available to individuals as well as businesses (though the latter is much more common.) I do consumer bankruptcy mostly, but sometimes work on the commercial side of the aisle as well.
I always tell my consumer bankruptcy clients that they’re eligible for Ch. 11, but if they could afford my Ch. 11 fees, they wouldn’t need to file anyway.



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fbc

posted February 28, 2007 at 6:06 pm


Esquire:
The myth of the deadbeat debtor is just that: a myth.
I’ve been involved bankruptcy law since 1987, when I went to work for a U.S. Bankruptcy Court in the midwest. I’ve been in private practice as a bankruptcy lawyer since 2000.
In all those years, and all the thousands of cases I’ve handled or seen, I could count on one hand the number of debtors who were trying to “game” the system. (That is not to say that some level of negligence wasn’t involved in many more, however.) The most common problem: loss of income or overwhelming medical bills.
Most of my clients are like the couple I counseled last night: the husband has just lost his job, the wife is a stay at home mom with a very young child, and they would literally do ANYTHING not to have to file bankruptcy.



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Donald R. McClarey

posted February 28, 2007 at 6:39 pm


I do a fair amount of bankruptcy work for both debtors and creditors. Bankruptcy performs a useful function in the economy by preventing creditors from pursuing debts that are worthless, or, at least, not worth their face value. This forces businesses to write off debts rather than keeping them on the books for years, as in the case of Japan, as false assets of an enterprise. I think this is healthy for an economy since it forces businesses to deal with blunt reality.
I do think there are some abuses in the system. One example, in Illinois a debtor can have an unlimited amount in a 401k, and it can’t be touched by a creditor. I have represented debtors who have had up to six figures in a 401k, and creditors have no recourse against these funds.
Like fbc most of my debtor clients would like to avoid bankruptcy, although I have had a few who have filed multiple times. About 40% of my debtor cases have been due to sudden unemployment, catastrophic medical bills, or divorce (divorce and bankruptcy often go together like lightning and thunder). The remainder have been people who lived beyond their means and have gradually amassed huge credit card bills that they can no longer service. By the time they see me, my average debtor in this category usually has credit card bills anywhere from 50% to 100% of his or her annual income, usually with interest around 25%, and they have no realistic alternative but to file bankruptcy. Most of them are deeply ashamed, and I think very few set out to spend irresponsibly with bankruptcy as the escape hatch, but credit cards are disastrous to people who lack the ability, or the will, to intelligently manage their finances.



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Sr Lorraine

posted February 28, 2007 at 7:12 pm


In Boston Cardinal O’Malley said the payouts for the abuse crimes were not going to come from the parish collections. He sold the cardinal’s residence.
But ultimately, even if the diocese uses other assets, they were probably originally either donated by individual Catholics or purchased with funds from the faithful. So it is coming out of the people’s pockets in one way or another, I would think. It’s another part of the scandal that all this money had to go for lawsuits when it could have been used for good works if those priests had been chaste. (It goes without saying that the worst thing was the harm done to the victims themselves.)



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Jim

posted February 28, 2007 at 7:16 pm


The problem is that dioceses were not operated by sound business principles: what business would protect predator pedophiles in their midst at all costs?
Operating a diocese for the protection of clergy is what got San Diego where it is. It’s that simple.



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rcesq

posted February 28, 2007 at 8:45 pm


“what business would protect predator pedophiles in their midst at all costs?”
The U.S. Congress for one.
“Operating a diocese for the protection of clergy is what got San Diego where it is. It’s that simple.”
The abuse scandal is not that simple even though those who side with the victims (real and not) like to portray it as such. True, the hierarchy did make incomprehensibly stupid mistakes in judgment by focusing too much on protecting the clergy rather than on the criminality of the conduct that they learned about. However, a man doesn’t lose all rights to being presumed innocent until found guilty just because he’s wearing a clerical collar. He also doesn’t lose all rights to privacy — and that’s what the document disputes are all about. These cases do not exist in isolation; the law being made here creates precedents for other litigation as well. If the rules of discovery get distorted because of the passions of SNAP, other litigants will suffer the consequences.



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SouthCoast

posted February 28, 2007 at 10:10 pm


As a parishioner in the San Diego diocese, I am outraged, and I find the actions of the Powers that Be shameful. Not that anyone in SD will listen to a parishioner in the first place…



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WRY

posted March 1, 2007 at 10:16 am


When you have a lot of claims and probably can’t satisfy them all, it is important to not have the money go to the person who simply gets to the head of the line first. My understanding is that bankrupcy keeps this from happening.
Let’s say the diocese had $1 million in assets and the first person completing a case claimed $1 million in damages. The other claimants would then get nothing, unless the court could step in and call for an equitable distribution.



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James

posted March 1, 2007 at 11:00 am


“True, the hierarchy did make incomprehensibly stupid mistakes in judgment by focusing too much on protecting the clergy rather than on the criminality of the conduct that they learned about.”

It was not about stupidity – but about pride and evil.
No real loving father in this world (meaning those who actually have children) would allow a suspected molestor to have access to children – anyone’s children. That would simply not occur. Real men understand that. Huge numbers of our priests and bishops do not. Boy Scouts (as an example), which is run by real men, understands that. The people who run the Church here in America (and in many other countries) do not.
In short, the ‘men’ who did this put the welfare of children DEAD LAST in their considerations.
And most of them are still in power – because no one will get rid of them.
Priests deserve their day in court – but one credibly charged with molestation should be immediately removed from children.
Sad that it takes the free press to take the lid off the abuse rot in the Church for the priests to figure out what right and wrong are with regard to children.
We gave up trusting either priest or bishop to be alone with our children (especially our sons) a long, long time ago.
James



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