Archdiocese, creditors clash over bankruptcy assets

Starkly conflicting views of total assets have placed the St. Paul-Minneapolis archdiocese and its creditors at dramatic odds, with the latter claiming that the archdiocese's just-released reorganization plan represents 1 percent of total assets they say approach $2 billion.

On Thursday, the archdiocese filed its reorganization plan with the U.S. Bankruptcy Court of the District of Minnesota. The plan proposes $65 million to establish an independent trust through which it would settle the 440 claims made by survivors of clergy sexual abuse. The trust is to be funded by a combination of archdiocesan cash, property sales, insurance settlement proceeds, and contributions from parish insurance settlements.

The archdiocese said that the $65 million figure surpasses what has been proposed in a majority of already settled diocesan bankruptcies. In a statement, newly installed Archbishop Bernard Hebda urged for fast approval of the plan.

"The longer the process lasts, more money is spent on attorneys' fees and bankruptcy expenses; and, in turn, less money is available for victims/survivors," he said.

"While we believe that this Plan is fair, we also know that some well-intentioned people may raise objections," said Hebda, who before his May 13 installation served as apostolic administrator of St. Paul-Minneapolis following Archbishop John Nienstedt's resignation last June.

"Reorganizations sometimes involve modifying an initial Plan. We are committed to working earnestly with everyone involved to find a fair, just and timely resolution," he said.

At a press conference following the reorganization plan's filing, victims' attorney Jeff Anderson pushed back against the reorganization plan and the archbishop's claims.

Calling the plan "totally unacceptable and objectionable," he said a bulk of the $65 million comes via three insurance companies, with the archdiocese covering $17 million. That figure represents a fraction, or 1 percent, of the $1.7 billion creditors' lawyers claimed the archdiocese holds in a motion they filed Tuesday.

Anderson accused the archdiocese of attempting a "cram down" strategy of pushing the reorganization plan through without creditors' approval.

He also challenged Hebda's and the archdiocese's claim that their offering surpasses past diocesan settlements. If divided evenly, the plan would pay out roughly $145,000 to each survivor. Looking at other bankruptcies that involved a window into the state statute of limitations -- the Minnesota Child Victims Act, signed May 25, 2013, closed its three-year window Wednesday, May 25 -- Anderson said survivors received payouts closer to $1 million, citing the San Diego and Wilmington, Del., dioceses.

Asked if the goal in St. Paul-Minneapolis is to attain compensation, Anderson said, "The goal is to make sure the survivors are fully and fairly compensated.

"And in the final analysis, today what we know is they've made no authentic effort in this plan to fully or fairly compensate out of their own assets and out of their own assets, they have the ability to do it," he said.

The tenor of Anderson's press conference offered more evidence that the truce arranged between his firm and the archdiocese -- brought about through the John Doe 1 settlement 19 months ago -- has dissolved.

"A year and a half ago," Anderson said Tuesday, "I stood with the archdiocese officials and said there's a new day and a new way, and there's a commitment to transparency and accountability. This isn't transparency and it's far from accountability.

"They have abandoned that pledge," he said.

That same day, lawyers for the creditors filed a motion for substantive consolidation with the bankruptcy court alleging the archdiocese holds roughly $1.4 billion in assets through its parishes and another $300 million in assets from 10 corporations that the archdiocese says are separate from itself but the creditors claim otherwise.

The motion states the 440 claimants are seeking collectively upwards of $1 billion.

How the court views the relationships between the archdiocese and those entities will be critical in whether or not the funds become accessible. If past diocesan bankruptcy history holds, inclusion of the parishes -- all 187 of which are separately incorporated under Minnesota state law -- into the bankruptcy estate will represent a high mountain to scale. While a common negotiating position, it's one that has yet to sway a bankruptcy court to do so.

"No [bankruptcy] judge has ruled that the governance structure of the church over parishes is a basis for consolidating the parishes into the bankruptcy estate of the diocese," said James Stang, a bankruptcy lawyer who has represented creditors' committees in bankruptcy cases involving nine dioceses and two religious orders.

Stang told NCR on May 25 that similar arguments for parish inclusion were made during the recently wrapped Milwaukee archdiocese bankruptcy proceedings, where Wisconsin law also requires parishes to be separately incorporated, but Judge Susan V. Kelley denied that motion in December 2012.

Minnesota state law has required parishes be separately incorporated since 1858, the same year it was granted statehood. Despite that legal arrangement, the creditors' motion argues that the archdiocese, through the archbishop, retains authority over the parish and has say in how its finances are utilized. The motion goes into great detail on the historical church governance structures in the U.S., relying on a series of expert affidavits, including ones submitted by Dominican Fr. Thomas Doyle and former archdiocesan chancellor for canonical affairs Jennifer Haselberger.

Charles Reid, a civil and canon law professor at the University of St. Thomas in Minneapolis, said the creditors' motion presents "a strong case" that relies on the bankruptcy law theory of interrelatedness, which states that a court may consolidate assets of a number of corporate entities that are interrelated with one another.

The motion cites precedence in commercial, rather than diocesan, bankruptcy cases. In construction law, for example, Reid said, if a project goes under, a variety of entities set up under the developer -- plumbing, landscaping, etc. -- could be consolidated to create a larger pool for creditors.

"The court would look at how closely connected are the archdiocesan high schools or the parishes to the archdiocese. And under canon law, under the financial arrangements of the Twin Cities, they look pretty close," he said.

How that argument will hold up remains uncertain, given the lack of precedence and the absence so far of a response filing from the archdiocese.

"Is it a winning argument as opposed to a strong case?" Reid said.

In February 2015, Haselberger, who resigned her position in April 2013 in light of how she witnessed chancery officials under Nienstedt handle and respond to sexual abuse allegations, examined on her blog how the Milwaukee parish ruling differed from a potential ruling in St. Paul-Minneapolis. She noted as potential trouble areas that some Twin Cities parishes don't own their own property, some were formed as nonprofits rather than parish corporations, and not all managed their finances independent of the archdiocese.

"For these reasons, among others, I don't think it would be difficult for the creditors in this bankruptcy to demonstrate that the parish corporations and related institutions and the Archdiocese have a unity of interest and ownership to the extent that the separate legal personalities of the parishes and other corporations do not effectively exist," Haselberger wrote.

In addition to the parishes, the motion asks for the court to consolidate the assets and liabilities of 10 corporations the archdiocese lists with the Internal Revenue Service and the Official Catholic Directory as subject to its control and governance. Among them: Catholic Cemeteries, Catholic Finance Corporation, Catholic Community Foundation of Minnesota (listed through 2013), and several chaplaincies and high schools.

The motion states a response must be filed by June 11; a court hearing is set for June 16.

Addressing the motion in a statement Tuesday, May 24, and repeating much of the same language Thursday, Hebda said the archdiocese is "carefully reviewing" the motion, which he added "sadly tells us that there is still much that needs to be done to restore trust in our affirmations that we are serious about redressing wrongs."

Still, he pushed back at assertions that the archdiocese had miscalculated its full assets.

"Let me be clear: The Archdiocese has disclosed all of its assets and has followed all the rules set forth by the Court and all directives from the judge," he said.

"I know that for at least the last 11 months we have been working extremely hard to marshal and maximize our assets with the hope of providing the most for the most," said Hebda, who then asked for prayers for victims of sexual abuse and a quick end to bankruptcy proceedings.

Shortly after filing for Chapter 11 reorganization in January 2015, the archdiocese entered into court-ordered mediation with its insurance companies and its creditors. At a press conference Tuesday afternoon Anderson was asked if the motion signaled that mediation was not going well.

"I think it's fair to say that mediation has concluded," he replied. "[It] was not successful."

In detailing ways the Twin Cities archdiocese allegedly sought to hide funds, Anderson compared the tactics to corporate criminals, such as those at Enron or Tom Petters, the Minnesota businessman who is serving 50 years in federal prison for business fraud and operating a billion-dollar Ponzi scheme.

"When we look what this archdiocese and this Archbishop Nienstedt, and his predecessors have done here, it makes Tom Petters look like a piker," he said.

The motion alleges that following the May 2013 signing of the Minnesota Child Victims Act, and the archdiocese filing for bankruptcy in January 2015, the archdiocese acted to wipe its name -- at times literally -- from association with at least five different corporations and foundations:

• With Catholic Cemeteries, it cites archdiocesan documents describing it as late as Jan. 15, 2015, as a "corporation of the Archdiocese of Saint Paul and Minneapolis that coordinates the management of the six Archdiocesan-owned cemeteries." Two months later, the website described Catholic Cemeteries as "a separate corporation." In addition, before-and-after photos of signs outside the six cemeteries appear to show that the words "The Archdiocese of Saint Paul and Minneapolis" were painted over on the signs.
• The motion alleges Catholic Community Foundation of Minnesota, with assets of $280 million, was created in 1992 to limit liability from future sex abuse claims after a jury awarded that year $3.5 million, largely in punitive damages, to a survivor. Deposition testimony from former vicar general Fr. Kevin McDonough confirmed that concerns over litigation was one of two issues that led to its formation.
• The Catholic Finance Corporation, created in 2000 and with $30 million in assets as of 2008, is alleged to have broadened its articles of incorporation in July 2015 from performing services for the St. Paul-Minneapolis archdiocese and other organizations under its control and supervision, to include other U.S. dioceses, parishes and schools.

Whether those connections among the foundations and the parishes warrant consolidation will be up to the judge to determine, Reid said.

On the flip side, he said the archdiocese will likely argue in the case of the parishes that separate incorporation wasn't meant to evade creditor liability, but a century-old procedure for management efficiency.

"And there are no precise precedents governing this sort of situation, so it will be the judge's call," Reid said. "But has Anderson made a good case? I think he's made a good case. Will he win? I don't know."

In terms of the foundations, Stang, the bankruptcy lawyer, said while it's relevant that the archdiocese changed names and associations on signage and websites, that doesn't mean it's case-closed. The archdiocese is likely to argue it changed the names to reflect more accurately the true structure of the church and ownership, Stang said. That argument, he said, was used effectively during the Stockton, Calif., diocesan bankruptcy.

In the Portland, Ore., diocese bankruptcy, a judge ruled that the parishes could be included in the bankruptcy estate because the deeds were in the archdiocese's name, and there was nothing on the parishes indicating otherwise. Years later Stang said the Jesuits were able to protect their property before the same judge by placing signs on properties indicating ownership was with another entity, and not them.

"It reflects consciousness of risk but I don't know that in and of itself the timing is all that relevant," said Stang said, who added it would be more significant if ownership of a property or foundation changed, and if it happened post-bankruptcy.

As for the foundations, Charles Zech, the director of the Center for Church Management and Business Ethics at Villanova University, said the courts will look closely at when the changes were made and the intent. Asked if the moves appeared questionable, he described them as good business practices but poor pastoral ones.

"If you really adhere as a faith-based organization and you take your pastoral role seriously relative to your parishioners, shielding assets from them is not being a good pastor. But it is good business," said Zech, adding dioceses do have a right to protect assets and ensure the continuation of its mission to do God's work.

However a judge rules on the creditors' motion, its value could lie most as leverage toward a negotiated settlement, Reid said, where most diocesan settlements ultimately end.

"They don't usually go to trial, they end in settlements. And I suspect that will be the case here," he said.

While a settlement may be the ultimate destination, the apparent breakdown in mediation and filing of the creditors' motion -- another layer of litigation -- signal that the bankruptcy proceedings, already 16 months long, could become a much longer road.

"When you look at how long things took in Milwaukee for one issue to be resolved -- an important issue but still only one issue -- I think it's fair to say that if this matter goes the distance, it's going to be a long haul," Stang said.

[Brian Roewe is an NCR staff writer. His email address is broewe@ncronline.org. Follow him on Twitter: @BrianRoewe.]