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Update on Catholic Dioceses's Chapter 11 Filings, Fall 2018 Edition

posted by Pamela Foohey

A few weeks ago, Marie Reilly (Penn State Law, University Park) posted to SSRN a new paper, Catholic Dioceses in Bankruptcy, which details the outcomes of the eighteen chapter 11 cases filed by Catholic dioceses and religious institutes since 2004. The paper discusses some of the issues that I have blogged about individually over the past few years -- of note, RFRA and fraudulent conveyances, as well as the long-running Minneapolis and Saint Paul diocese case that ended in a settlement agreement which increased payout to sexual abuse claimants by $50 million from the debtor's original proposed plan. The paper also includes a succinct overview of how canon law, business organizational law, and property law interact in these cases. In short, if you are looking for a primer on broader issues that might emerge in future chapter 11 cases filed by dioceses, or simply interested in how a few area of law converge in these cases, this paper is worth a read.

The last chapter 11 filing that Reilly's paper discusses is that of Crosier Fathers and Brothers in Minnesota in June 2017. Since then, one more archdiocese filed chapter 11 -- San Juan at the end of August 2018. The Archdiocese of Agana (in Guam) also announced that it expects to file by January 2019. Like other dioceses, Agana's stated need to file stems from its struggles with more than 180 sexual abuse claims. But the Archdiocese of San Juan's case presents a couple unique issues.

First, the Archdiocese of San Juan stated that it filed because of a legal battle over unpaid teacher pensions. Prior to the filing, the archdiocese was ordered to pay $4.7 million to teachers. The Puerto Rico Supreme Court then authorized the seizure of all of the church's assets, including bank accounts, equipment, and real estate. This left the archdiocese with essentially no money to operate. Its filing marks the first filing of a Catholic diocese or religious institutes not stemming from sexual abuse claims.

Second, immediately upon filing, the archdiocese faced a motion filed by the pensioners that it was ineligible to file bankruptcy. The basis of their motion was that the Supreme Court of Puerto Rico has held that churches in Puerto Rico are not separate legal persons. The pensioners thus argued that the Archdiocese of San Juan is not an independent entity, but rather, a part of the Catholic Church. As such, it is the Catholic Church that held title to all of the assets the archdiocese listed in its petition, and the correct debtor is the Catholic Church of Puerto Rico.

Relying on the same Puerto Rico Supreme Court case about the legal personhood of churches in Puerto Rico, the bankruptcy judge -- Judge Edward Godoy -- held that the Archdiocese of San Juan is the same "jurisdistic personality" as the Catholic Church of Puerto Rico. But, importantly, that fact did not render the archdiocese's filing erroneous. Rather, Judge Godoy held that the chapter 11 filing "benefits and protects" all of the assets held by the Catholic Church of Puerto Rico. Stated differently, the filing gave the bankruptcy court jurisdiction over all of the Catholic Church of Puerto Rico's assets and liabilities. And the case continues. As of now, the parties still are working through typical first day motions, including the debtor's post-petition financing request.

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