Stockton Catholic Diocese to file for Chapter 11 protection

snowicki@modbee.comJanuary 13, 2014 

  • At a glance

    Wednesday: Stockton Diocese will file for Chapter 11 protection

    Diocese: Will file a plan within 120 days to pay its creditors, with extensions available

    Creditors: Will hire own attorneys and try to get additional diocesan funds (such as parish property) added to the assets listed

    Bankruptcy judge: Will oversee diocesan operations until matter is resolved; can approve of diocesan plan to settle with its creditors or can order another plan to be put into place

The Stockton Diocese announced Monday afternoon it will file Wednesday for Chapter 11 bankruptcy protection. The move affects only the diocesan budget and property and will not have an impact on the individually incorporated parishes or ministries, Bishop Stephen Blaire said. The creditors, mostly victims of sexual abuse by priests, are expected to challenge that statement.

“This has been a difficult decision,” Blaire said in a press release. “Nevertheless, I am convinced this step will allow us to achieve two essential goals. First, it will provide a process to compensate as fairly as possible the victims of sexual abuse, including those who have not yet come forward or had their day in court. At the same time, the process will provide a way for us to continue the ministry and support we provide to the parishes, the poor and the communities located within our diocese.”

The Stockton Diocese becomes the 10th in the country and the second in the state to move under the protection of the bankruptcy court. The action was taken to reduce the amount of money the diocese must pay in civil cases involving priests and sexual-abuse victims. It also will put a time limit on filing any new lawsuits concerning past sexual abuse. But in an interview with The Bee on Monday afternoon, Blaire said he wasn’t trying to hide assets or blame the legal action on the abuse victims, some of whom have received multimillion-dollar awards.

“Very simply, we are in this situation because of those priests in our diocese who perpetrated grave, evil acts of child sexual abuse,” he said. “We can never forget that these evil acts, not the victims of the abuse, are responsible for the financial difficulties we now face.”

In June 2013, Blaire said the diocesan reserve account, which has been used to pay such lawsuits, totaled about $10 million when he took over as bishop in 1999, but has been depleted to less than $1 million. On Monday, diocesan officials said its total assets are about $15 million, with $17 million in liabilities.

To date, the diocese has been hit with nearly $32 million in damages for civil lawsuits in 38 clergy sexual-abuse cases. The diocese has paid $13.7 million of those awards; the rest came from insurance proceeds. The largest settlement, $3.75 million, was awarded in 2012 in a case involving the Rev. Michael Kelly, who once served at Our Lady of Fatima in Modesto and helped start the Modesto Youth Soccer Association.

Three civil lawsuits – two involving Kelly and one naming the diocese’s most notorious pedophile priest, Oliver O’Grady – are still active and have been working their way through the courts, said diocesan attorney Paul Balestracci. The Chapter 11 filing will move those cases, along with any others concerning past abuse that come forward, from the state courts and into the bankruptcy court with other diocesan creditors. The diocese must come up with a plan to pay the creditors an amount acceptable to them, or the entire process will be decided by the bankruptcy judge.

“I don’t think it will hurt my cases financially, but it will delay them,” said John Manly, a Southern California attorney who filed the three Kelly lawsuits and several concerning O’Grady. “It stops discovery. But I don’t think they’ll get a nickel less than if they went to trial.”

He also doesn’t believe a bankruptcy judge will allow the diocese to claim the parishes and individual ministries are separate corporations and thus immune from the creditors.

“Every diocese that has tried this argument has lost,” he said. “It just defies logic to think that the bishop doesn’t control the parishes. Can the parish leave the diocese? The answer is no. And every parish priest is appointed by the bishop.”

Blaire disagreed. He said the parishes and other ministries and special funds were incorporated in 2002.

“It wasn’t done to hide assets,” he said. “Parishes are set up as corporations in the (eastern United States), but they weren’t set up that way in the West. Incorporating them was a better way for us to operate the church. Why should one parish bear the responsibility for what happens in another parish?”

As it stands, the diocesan property involved in the Chapter 11 reorganization includes five properties: The diocesan center in downtown Stockton, the bishop’s residence, a convent for Eucharistic Franciscan Missionary Sisters in Stockton, the Newman House/St. John Vianney center near the University of the Pacific and land in Valley Springs donated for a future parish. Some or all of them might have to be sold to raise funds for the creditors.

When the parish files for Chapter 11 on Wednesday, it will also file the specific list of assets and liabilities. The creditors will hire their own attorney and can ask that the rest of the diocese’s incorporated properties and ministries be included in the action. Blaire said all of the diocesan attorneys, bankruptcy experts and corporation law attorneys that the diocese consulted assured him that the 2002 incorporation of parishes will protect them from becoming part of the case.

“But I’ve told them they should hire their own attorney,” he said. “It’s federal court, and it’s all about facts. The judge could do anything. We don’t know. But it’s a good process, actually. It brings all the creditors, the insurance companies, the diocese together and makes a fair resolution for everyone.”

It is a long and expensive process, said Warren Jones, a professor at the University of the Pacific’s McGeorge School of Law.

“It’s a big step for the church to take,” he said. “It’s a big deal; it’s an expensive deal. It’s terrible (public relations) for the church. It’s going to be a long, drawn-out process. But it will get all the issues resolved so maybe five years down the road, they can move on. One of the terms in the bankruptcy code is ‘fresh start.’ All the debtors (in this case, the diocese) are trying to get a fresh start and move on.”

Steve Felderstein, one of the diocesan bankruptcy attorneys, said he thought the process would take one to two years.

“The time really depends on whether we can negotiate our way through the questions that come up, or whether we have to litigate and fight everything in bankruptcy court,” he said Monday evening. “I am guardedly optimistic. Given the (small) number of cases and the assets available, we believe we can work with the plaintiffs’ lawyers fairly quickly. This isn’t the plaintiffs’ lawyers’ first rodeos. It isn’t ours. Hopefully, we know the issues and we can work through them.”

Manly questioned the action, saying he doubted that Chapter 11 protection will be the answer for the diocese.

“At the end of the day, I think it will be more expensive and painful (for them),” Manly said.

But Blaire said it’s the right thing to do.

“When we first started talking about this, I felt very stressed by it. I didn’t really want to do this. The more we got into it, the more I realized it’s a difficult and challenging process. But I realized it was designed to help us get out of the dilemma we’re in. I’ve now come to a positive appreciation of the fact that Chapter 11 brings everyone to the table to bring about a resolution. I know there will be some very painful moments, but I see this now as something that has merit. I have my anxieties about it, but basically I’m at peace. I believe we’re doing the right thing.”

Other dioceses that have filed for Chapter 11 are those in Portland, Ore.; Tucson, Ariz.; Davenport, Iowa; Spokane, Wash.; San Diego; Wilmington, Del.; Milwaukee; Fairbanks, Ala.; and Gallup, N.M.

Bee staff writer Sue Nowicki can be reached at snowicki@modbee.com or (209) 578-2012.

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