Bankruptcy: Legal and Moral

This is a belated post on the excellent conference hosted by Angela Carmella of Seton Hall on November 5 on the diocesan bankruptcies. The Portland and Tucson bankruptcies, triggered by massive actual and potential liabilities to victims of sexual abuse, have generated a complex raft of issues in bankruptcy, corporate, constitutional and canon law. The Seton Hall conference included luminaries from all those fields, including David Skeel of Penn (bankruptcy), Nick Cafardi of Duquesne (canon law) Marci Hamilton and Doug Laycock (constitutional law) as well as some practitioners actually involved in the cases.

A threshold issue was whether the use of the bankruptcy was simply an attempt to avoid legal liability to the victims, hence yielding moral bankruptcy as well as legal. I think everyone agreed that the goal should only be to use Chapter 11 to provide for orderly payment of claims and fair treatment of all claimants. This moral question related to the legal question of whether the dioceses would be kicked out of bankruptcy court as "bad faith" claimants using the bankruptcy mechanism simply to gain ligation leverage despite being financially healthy. I believe the consensus was that the dioceses could be compared to companies such as Johns Mansville and AH Robbins who were permitted to use Chapter 11 as the best way to handle overwhelming tort liabilties to large numbers of meritorious claimants. There was also an interesting discussion of the extent to which the civil court should (or could) defer to canon law for purposes of determining ownership.

The conclusion that the bankruptcies could go forward, however, triggered new issues. What are the assets of the diocese (usually a corporation sole, with the bishop the sole member)? Do they include parish property, which may be titled in the name of the bishop or the diocese, but in which the parishes who raised the money to buy the land or build the church/school have an equitable interest? Were recent property transfers to parishes voidable preferential or even fraudulent transfers? Even if the property is the parishes' can substantive consolidation (like piercing the corporate veil) nevertheless treat the property as if it were the diocese's?  How can a court or trustee in bankruptcy supervise a religious institution in Chapter 11 when decisions have to be made in light of vthe institution's religious mission? People had different views about these questions, but all agreed that these were questions of first impression in this context.

Differences were even sharper over the First Amendment and RFRA issues. Doug Laycock argued that THE First Amendment question here is whether hundreds of thousands of believers can be stripped of their places of worship and religious education because of the misdeeds of a very small number of clerics. Marci Hamilton, a staunch victims' advocate, asserted that those faithful had forfeited consideration under the First Amendment because they had acquiesced in a system of heirarchical governance that made the cover-ups and further abuse possible. This struck me as a bit harsh, considering that acquiescence in the episcopal system of governance because of religious belief in apostolic succession merits First Amendment consideration. Only specific, knowing acquiesence in wrongdoing by the bishops, I argued, would justify excluding the First Amendment from the equation. This is not to say, however, that Marci was wrong in her underlying assumption that a lack of accountability and transparency greatly faciltated gross errors in judgment and pastoral care. I addressed this issue in my paper, "After Chapter 11" (in sidebar), arguing that Chapter 11 creates the opportunity for greater lay involvement in diocesan governance.

All in all, a terrific and very timely conference. The papers will be published in one of Seton Hall's secondary journals.

- Mark