Archdiocese bankruptcy may involve Marist High.

Byline: Jeff Wright The Register-Guard

More than $41 million worth of Lane County property owned by the Archdiocese of Portland - from schools to parishes to homes - could become fodder in the church's unprecedented and unpredictable bankruptcy case, law experts say.

The archdiocese contends that most of its properties - including Eugene's Marist High School, its single largest asset with a market value of nearly $14.8 million - aren't at risk because their assets belong to the local school or parish under church law. Portland Archbishop John Vlazny has said he has no authority to seize parish property.

But lawyers for those alleging clergy abuse contend that the church must answer to state and federal law because it voluntarily sought bankruptcy protection. That means the archdiocese assets are viewed as fair game to pay off debts expected to rack up as a result of the abuse lawsuits.

New legal trail ahead

Archdiocese officials have said that day-to-day operations at Catholic parishes and schools will proceed as usual and that parishioners needn't fear the sale or closure of such institutions. But even spokesman Bud Bunce says no decision has been made about whether to sell off assets.

Bo Muhlheim, a veteran Eugene lawyer specializing in bankruptcy law, said the case is sure to blaze new legal trails - in part because the law never anticipated such a development. "When Congress wrote the act, it didn't give a second thought that a church might file for bankruptcy," he said.

Archbishop Vlazny announced July 6 that the archdiocese was filing for Chapter 11 bankruptcy because it couldn't risk a huge verdict in two clergy sex abuse cases seeking more than $155 million in damages.

The church and its insurers have already spent more than $53 million to settle more than 130 claims of priest abuse - and at least another 60 cases are pending. Many of the cases involve the late Father Maurice Grammond, accused of molesting more than 50 boys while serving parishes in Oakridge, Seaside and elsewhere.

Canon vs. civil law

Several bankruptcy law specialists said they're dubious of the archdiocese's assertion that church law, known as canon law, should trump civil law in bankruptcy court.

"I can't see an American court applying canon law," said George Treister, a longtime bankruptcy lawyer in Los Angeles who now lives in Ashland. "Most certainly, civil law would apply."

The stakes are high because the archdiocese's worth could grow by tenfold or more if parish assets are included. The archdiocese has said it has a net worth of less than $50 million, while plaintiffs' lawyers say the range is closer to $300 million to $500 million when including parish assets.

According to database information from the Lane County taxation and assessment office, the archdiocese is the owner of record on title deeds for more than 50 properties in this area, including Marist High School, Mount Calvary Cemetery and undeveloped timberlands near Veneta.

That record doesn't bode well for the archdiocese, several experts said. "If there's actual written documentation about who the owner is, that makes it pretty easy for a judge to figure out," said Charles Zech, a Villanova University economics professor with expertise in Catholic church finances.

Money flows two ways

Marist High is one of three Catholic high schools in Oregon - the others are Central Catholic in Portland and Regis in Stayton - run under the auspices of the archdiocese. Seven other Catholic high schools are operated by distinct Catholic orders, such as the Dominicans, and aren't affiliated with the archdiocese.

The Marist Brothers, the Catholic church's second largest order of teaching brothers, operated Marist High for the archdiocese from 1968 until 1993, when the order withdrew due to personnel commitments in Chicago and the East Coast. A Dominican priest served as principal until 1998, when the school began hiring lay professionals for the job.

Schools or parishes structured as independent corporations are probably immune from creditors, but the only such institution within the local archdiocese is Holy Rosary parish in Portland, spokesman Bunce said. The archdiocese covers all of Western Oregon.

The money among Catholic institutions flows two ways: Parishes give a portion of collection-plate offerings to the archdiocese - currently 8 percent, increased from a previous 5 percent in response to growing litigation expenses. The archdiocese also gets money from an annual bishop's appeal and investment income.

In turn, the archdiocese distributes a portion of its budget to Catholic schools, in the form of lump sums or tuition assistance scholarships.

Most Catholic schools - such as Marist, St. Paul and O'Hara in Eugene - also operate foundations set up as separate trust accounts. Most of those foundations, including Marist's, have been established under civil rather than canon law and thus would probably have greater immunity from creditors.

Some church officials have argued that the archdiocese is protected by a "charitable trust doctrine" - the notion that money placed in a collection plate for charitable work can't be used to pay off creditors. But many bankruptcy law experts are skeptical.

"I don't think that will fly," Zech said. "If someone left a bequest, that might fly. But regular contributions, no."

The archdiocese, Zech said, should also be careful about what it wishes: If parishes in fact control their own assets, parishioners might expect greater say on how their money gets spent. "It's a control issue that could be very difficult for such a hierarchal church," he said.

Muhlheim, the Eugene lawyer, said such an interpretation could also make a parish liable if an offending priest served there.

Another challenge facing the archdiocese could be the requirement that it make public a number of documents related to its finances. "Disclosure is the touchstone of Chapter 11," said Andrea Coles-Bjerre, bankruptcy law professor at the University of Oregon. "You come to the court and you have to come clean."

Points for bankruptcy

But despite all the potential downsides, the decision to file for bankruptcy may be a smart one, said Coles-Bjerre, Zech and others.

For one thing, it buys the archdiocese time to evaluate its assets and, should it sell any, get something closer to market value for them. It also puts a hold on all litigation until the archdiocese's financial status is resolved.

Also, by filing for Chapter 11, the archdiocese remains in possession of its assets while proposing a reorganization plan, rather than being subject to the decisions of an outside trustee or having its assets liquidated as in a Chapter 7 bankruptcy.

The reorganization plan must be approved by the court and a majority of creditors, but it's still the archdiocese's plan to propose.

There's also the basic justice issue cited by Archbishop Vlazny: Compensation should be shared with all legitimate claimants in sex abuse cases, not just those who "got in line" first with earlier trial dates.

"The equal treatment of creditors is what the bankruptcy system is all about," Coles-Bjerre said.

The archdiocese may also be hoping that the courts will step lightly, not wanting to appear heavy-handed in light of strong national traditions of religious freedom and separation of church and state.

Coles-Bjerre said she won't be surprised if the issues raised by the Archdiocese of Portland - the first in the nation to seek bankruptcy protection - reach the U.S. Supreme Court.

As for what it all portends for Lane County Catholics, Muhlheim said he doubts it will affect parish or school operations any time soon. Parishioners should know, for example, that any money placed in a collection plate now - after the bankruptcy filing - can't be lost to creditors.

The most likely scenario, he said, will be the establishment of a fund, financed by the archdiocese, insurers and others, to be distributed among sex-abuse claimants and other creditors.

"It's an unknown, but there's no reason to expect a catastrophe - the archdiocese is not going to go away," he said. "The only ones crying right now are the claimants' lawyers."