Diocese of Milwaukee Seeks Chapter 11 Protection From Sexual Abuse Claims

The Diocese of Milwaukee filed a petition for chapter 11 relief on January 4, 2011 after twenty years of dealing with sexual abuse claims and an unfavorable ruling on its insurance coverage. In re Diocese of Milwaukee, Case No. 11-20059 (Bankr. E.D. Wisc. 1/4/11). Milwaukee is the eighth U.S. Catholic Diocese out of 194 to seek bankruptcy protection as the result of sex abuse claims. The Catholic Diocese bankruptcies illustrate how bankruptcy can help to resolve complex social problems as well as mere contractual disputes.

The Diocese bankruptcies share several common factors.

1. They are precipitated by overwhelming tort claims involving horrific crimes perpetrated by persons in positions of authority. According to the Diocese of Milwaukee, "A tragedy that runs contrary to every teaching and tradition of the Church has unfolded in the Church as a whole and in the Archdiocese in particular: a small number of clergy and others took advantage of their positions of trust and respect in the community to sexually abuse children. ("The Abuse")." The website of the Archdiocese lists 44 priests who have "substantiated reports of abuse of a minor." Whether this is a "small number" can be debated.

2. Many of these incidents happened a long time ago. Of the 44 priests listed on the website, 17 are deceased. According to the Archdiocese, it took formal steps to address the abuse problem in 1989. According to published reports in other cases, much of the abuse dates back to the 1950s and very little has occurred since the 1980s.

3. The financial cost of the tort claims is substantial. According to the Archdiocese, it had incurred costs of $29,564,678 based upon claims resulting from abuse of a minor as of June 30, 2010. There are currently claims from 17 plaintiffs pending with another seven who have given notice.

4. The Catholic Diocese bankruptcies pose a perplexing social problem. Who should pay for the abuse? Almost half of the priests who committed the abuse are deceased. The Diocese itself is an artificial entity. It is dependent upon the 657,519 registered Catholics for its income. It employs 177 persons, many of whom are engaged in good works. How do you apportion the blame for at least 24 persons who may have been wronged among 657,519 registered Catholics and 177 employees, many of whom were not even born when the abuse took place?

5. Chapter 11 provides a structure for resolving the claims. Claimants must come forward within a reasonable period of time so that claims do not continue to show up decades later. Assets can be mobilized to pay claims. In the case of the Archdiocese of Milwaukee, the courts have absolved their insurance carriers and the Archdiocese claims that the assets of individual parishes are held in separate corporations. As a result, donations from the faithful are the most likely source of compensation to the victims. On the one hand, it is horribly unfair. Parishioners who had no complicity in the abuse must voluntarily pay for its consequences. On the other hand, it is at least somewhat fair. The faithful take responsibility for their shepherds. If the clergy betray the faithful, the faithful have an obligation to make it right. Therein lies the dilemma. The faithful didn't cause the problem. The faithful don't have unlimited resources. How do you strike a balance between the interest of those who have faced horrific wrongdoing and those have committed no wrong? Chapter 11 provides a framework for answering these questions.

Fourth Catholic Diocese Files Chapter 11

This week the Diocese of Davenport filed for chapter 11 protection in the Southern District of Iowa (Case No. 06-02229). At least three other Catholic Dioceses have filed for chapter 11 protection in response to sexual abuse lawsuits. Each of the three other cases was filed during 2004. Of the prior cases, the Roman Catholic Church of the Diocese of Tucson has successfully confirmed a plan (although that order is under appeal), while the cases for the Roman Catholic Archbishop of Portland and the Catholic Bishop of Spokane are pending with competing plans. Together, the four dioceses serve nearly 900,000 parishioners.

The Difficult Dynamic

The Catholic Diocese cases present an unusual dynamic for a chapter 11 case.

(1) The cases were prompted by waves of sexual abuse tort claims dating back decades. In each instance, the case was precipitated by sexual abuse tort claims. The underlying acts of abuse occurred anywhere from the 1930s to the 1980s. However, the lawsuit claims did not emerge until the late 1990s and early 2000s. Although several of the dioceses were able to settle an initial wave of cases, they found more cases coming out of the woodwork as publicity spread and claims averaged in the millions. As a result, the dioceses could not determine how many claims would ultimately be filed and could not rely upon insurance and current assets to resolve claims as they came in.

(2) The cases created a conflict between the betrayed and the faithful. The bad acts were performed by a limited number of bad actors (approximately 15 in the Spokane case) and were allegedly covered up by a finite number of persons in positions of authority. However, it was not possible to get justice from the bad actors and their facilitators, some of whom were already dead themselves. Instead, the major liability would be borne by the dioceses and their insurance companies. The insurance companies, many of whom were defending under a reservation of rights, were able to limit their exposure through their contracts. That left the dioceses themselves holding the final liability. However, a diocese is nothing more than the current and accumulated contributions of the faithful. As a result, the current faithful were in a position of having to pay for the sins of their church. This conflict between the faithful and the betrayed was especially apparent in Spokane and Portland where the courts ruled that property used by the parishes was owned by the dioceses rather than the individual congregations.

The challenge for the Catholic Dioceses and the lawyers for the tort claimants was to find a solution which would provide compensation and vindication to those who had been sexually abused without so alienating the parishioners that they lost faith and allowed the diocese to collapse.

A Learning Process

The Catholic Dioceses appear to be learning from experience. The Portland case, which was the first filed, was marked by acrimony from day one. While first day motions are normally routine, one pro se creditor objected to a motion to maintain cash management systems on the ground that the church should not be allowed to use a bank with Catholic officers due to the potential for conflict of interest. In the subsequent cases, the first day motions were used as a vehicle to tell the Diocese's story with descriptions of the historic background of the diocese, the ministries provided, the persons served and the church's response to the sexual abuse crisis. The first day motions in the recent Davenport case show a remarkable similarity to those in the Tucson and Spokane cases.

In the Portland case, the Debtor did not file a plan for sixteen months (by which time it was docket entry #2389) and drew a competing plan shortly thereafter. However, in the Tucson case, the Debtor filed a plan on the first day of the case, which was ultimately confirmed.


In the Portland and Spokane cases, the Debtor was faced with adversary proceedings determining that parish properties were property of the estate. In the Tucson and Davenport cases, the Debtor entered the case with a position as to why the parish properties were not included in the estate.

Based on a review of the lengthy docket in the Portland case, it appears that every issue that could be committed to paper and litigated was. In at least the Tucson case, the process appeared to be more focused and battles were chosen more selectively.

A Note About Fees

One feature common to all of the Catholic Diocese cases has been the relatively low billing rates charged by Debtor's counsel. The rates charged by principal counsel include $200 per hour in Spokane, $230 per hour in Davenport, $300 per hour in Tucson and $325 per hour in Portland. This contrasts with the eye-popping rates of $500-$600 per hour starting to appear in some large cases. Perhaps the church lawyers realized that there was already plenty that would appear obscene in their cases without obscene billings.