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Church structure complicates bankruptcy's impact on local parishes
Church structure complicates bankruptcy's impact on local parishes
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Cumberland County

Church structure complicates bankruptcy's impact on local parishes

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Saint Patrick School

Saint Patrick Catholic Church and School are located at 87 Marsh Drive, Carlisle.

With the ongoing bankruptcy proceeding of the Diocese of Harrisburg, local Roman Catholic parishioners may be wondering if the assets of their parish could be tapped to satisfy the diocese’s outstanding financial liabilities.

The short answer is no, in all likelihood, based on previous church bankruptcies across the nation.

But that doesn’t mean that local parishes like Saint Patrick Church in Carlisle and Saint Joseph Church in Mechanicsburg won’t have to take action in court to ensure that their local congregations aren’t affected, depending on how the first diocesan Chapter 11 filing in Pennsylvania progresses.

The issue arises out of the overlapping structures of canonical and secular law that govern the church — something that can be seen all the way down to local parishes such as St. Patrick’s and St. Joseph’s — and the way that the Diocese of Harrisburg and its creditors may portray that legal structure in bankruptcy court.

The critical assertion in the Diocese of Harrisburg’s bankruptcy filing is that the amount of church property under the bishop of Harrisburg’s direct control, and thus subject to creditors’ claims in bankruptcy, is extremely limited, and that parish trusts are separate organs that creditors cannot indemnify.

“That’s an argument I’ve seen over and over again, and depending on how the bankruptcy goes, there’s a certain appeal to it,” said Marie Reilly, a Penn State law professor who has studied church bankruptcy cases.

Marie Reilly

Reilly

Creditors

But the ultimate outcome of such an argument is equally dependent on the diocese’s creditors, who may likewise make the case to a bankruptcy judge that the scope of relevant assets is much wider than the diocese would prefer to let on.

“The bankruptcy experts we’ve been in touch with have expertise in examining what is contended to be assets that have been conveyed, and piercing those where the assets really are the diocese’s but have been transferred to escape liability and responsibility,” said Richard Serbin, an attorney representing some of the sexual abuse claimants whom the diocese lists as creditors.

In petitioning for bankruptcy last month, the Diocese of Harrisburg argued that Chapter 11 is the most equitable way of disbursing its available funds to survivors of sexual abuse by clergy, given the projected volume of claims and the cost of litigating them individually.

The diocese’s bankruptcy petition states that at least 200 claims for abuse-related compensation are outstanding, with an estimated price tag of between $50 million and $100 million. In August of last year, the diocese had also reported that 106 abuse survivors had accepted offers totaling $12.1 million through its voluntary survivor compensation program.

A court-supervised reorganization under Chapter 11 would allow the diocese “to successfully emerge from bankruptcy and continue its charitable mission with the benefit of a full and final resolution of the claims related to clergy sexual abuse and the related savings in substantial defense costs,” the diocese wrote in its Feb. 21 bankruptcy brief.

Ultimately, attorneys such as Serbin have a critical interest in convincing a bankruptcy judge that the scale of diocesan assets should be broadened; if more assets are roped into the diocese’s orbit, there are more assets that can be used to compensate victims.

“The larger the pot, the more there is to satisfy unsecured creditors,” Serbin said. In this case, the creditors are sexual abuse survivors.

Richard Serbin

Serbin

But in previous church bankruptcies related to clerical sexual abuse, it has never been successfully argued that such a pot includes local parish holdings.

“The fact that the bishop has ecclesiastic authority in some sense over the parishes has been argued by sexual abuse claimants as reason to treat all of the property in one pot, but that argument has not been all that successful,” Reilly said.

Canon law

The legal question involved is not an easy one when dealing with the Catholic Church. The relationships between church entities are governed by canon law, which is not always analogous to modern, secular law.

The Diocese of Harrisburg’s initial bankruptcy brief relies on the concept of “juridic persons,” which under canon law are “entities, comprised of physical persons, with corporate agency.”

While a juridic person may own property under canon law, that property “has the character of church property,” and the ownership is represented by canonical administrators who serve as stewards of the property in trust of the juridic person.

Under canon law, “dioceses and parishes are public juridic persons having separate and distinct canonical legal existence from each other and from the church,” the Diocese of Harrisburg asserts in its legal brief.

Further, each parish in the Diocese of Harrisburg has created a charitable trust to replicate the canonical concept of “juridic person” in the form of secular civil law, according to the diocese’s brief. While the bishop is the trustee, the beneficial ownership is the congregation as a collective whole.

This structure is seen in how the church writes its deeds. The land of St. Patrick’s in Carlisle was deeded in 1897 to “Bishop Thomas McGovern in trust for Saint Patrick’s Church of Carlisle,” and later expansions of the Carlisle church refer to its owner as the Roman Catholic Congregation of St. Patrick’s Church.

Church land in Mechanicsburg is likewise deeded to the current Bishop of Harrisburg “in trust for the Roman Catholic Congregation of St. Joseph’s Church of Mechanicsburg.”

In previous church bankruptcies, creditors have scrutinized the timing of a diocese transferring assets to discrete trusts, arguing that recent moves to codify canon law relationships in secular law were driven by liability concerns following the nation-wide church sexual abuse scandal.

“I think we’re going to see that some of these transfers were what we call fraudulent conveyances,” Serbin said.

Assets

In its bankruptcy petition, the Diocese of Harrisburg estimated its assets between $1 million and $10 million. But an audit of the diocese, published online by the diocese itself, put the value of the “diocesan administrative entities” at $183 million in 2018.

This is likely because the audit included entities that the diocese argues in its bankruptcy filing are not subject to claims by its creditors, including the diocese’s separate corporate entities for publishing and administrative services, its pension fund, and others.

Critically, the bankruptcy filing also argues for the insulation of the diocese’s trust, which receives and disburses funds received from parishes, under an irrevocable trust agreement executed on Feb. 27, 2018. Parish assets within the irrevocable trust were not included in the 2018 audit, according to that document, but deposits in the trust payable on demand to the parishes topped $78 million.

Even if the diocese’s creditors are successful in piercing the formal trust agreements, parishes could still argue in court that they have the predominant beneficial interest in the funds.

This is what happened in the bankruptcy of the Spokane, Washington, diocese, according to a study by Reilly. Parishioners there successfully argued that, although no formal trust entity existed, a “resulting trust” had been formed given that the diocese was in control of parish property despite parishioners being the ones paying for it.

This was proved by “overwhelming affidavit” testimony from parishioners themselves, Reilly said, concerning the amount of time and money they had put into their local institution.

“It’s not a weird artifact of Washington law,” she said, “it’s a compelling argument that the person who pays for the property and has been paying to maintain the property and for all purposes treats it as their own and is responsible for it, but their name is not on the deed, has some kind of interest in the property that rises to the level of an interest that the court will respect against the claim of a creditor.”

Courts have been widely respectful of this relationship, Reilly said. But the vagaries of canon law mean that parishioners should be prepared that the legal issue is “not buttoned up nicely.”

Email Zack at zhoopes@cumberlink.com.

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