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Secular bankruptcy law: Why the Catholic Church uses it

It’s not a lack of money; it’s about protecting image, pooling insurance, and finality.

Why does a non-secular organization like the Roman Catholic Church use secular bankruptcy law when faced with child sexual abuse claims? Many mistakenly assume it is because the Catholic diocese, order or institute does not have enough money to pay claims.  However, there are other benefits to bankruptcy, even when the Catholic entity can pay.

Chapter 11 of the United States Bankruptcy Code was created to allow secular corporations the opportunity to shed themselves of debt and continue to operate, keeping their employees employed. As discussed below, the Roman Catholic Church uses this law for other benefits.

There have been 17 Catholic bankruptcies to date.  Our firm represents a majority of abuse survivors in the 17th case, as reported in the Wall Street Journal.  Click here to read article.

In the past 16 bankruptcies, sexual abuse claimants were paid; Diocese, Orders and Institutes who file bankruptcy have enough money to partially compensate victims. (In the bankruptcy settlements, we negotiate that the church entity is also required to implement non-monetary changes for the protection of kids).   Catholic organizations who can pay claims file bankruptcy to take advantage of secular, corporate bankruptcy laws (Chapter 11) to protect their imagepool insurance, and create finality.

Protecting Image

By filing bankruptcy, the Catholic entity puts a stop to discovery of image-damaging information. Filing bankruptcy triggers the “automatic stay”. The automatic stay stops all action in any lawsuits against the entity, thereby preventing victims from uncovering embarrassing or revealing information that the church entity might have on the perpetrator, their attempts to cover up the perpetrator’s abuse history, or any other potentially image-damaging information.

Pooling Insurance

A Church entity uses bankruptcy to capture and identify the universe of insured claims so it can pool its insurance coverages to compensate abuse survivors.  The more insurance it uncovers, the more it is protected from having to liquidate its property and other assets to pay claims.  The insurance companies will pay an additional premium to the church entity to “buy back” their policies as one mechanism to avoid liability for future claims.  The other mechanisms they and the Church use are a “bar date” and “channeling injunction” (discussed below).

Finality

The Church entity will file bankruptcy to bring finality to claims against it for past abuse.  The first secular protection the Church seeks after filing bankruptcy is a “bar date”. This is a deadline for victims of abuse that occurred before the bankruptcy to file their claims.  Any victim of past abuse who does not file a proof of claim by this deadline generally loses his or her claim, except for “late filed claims” and “future claims”.

Late filed claims are claims filed after the bar date, but before the Church entity has been granted a “discharge” in bankruptcy.  In some circumstances, late filed claims are allowed.  Future claims are claims brought after the bankruptcy case ends that meet criteria set forth in the “plan of reorganization” (which contains the settlement agreement).  Future claims are “channeled” away from the Catholic entity and its insurance companies into a “future claimant fund” that is funded by the Church and the insurance companies as part of the bankruptcy settlement.  However, these future claims typically receive a fraction of the amount recovered by timely filed claimants.

Thus, by obtaining a bar date and a channeling injunction the Church and its insurance companies create finality and avoid ongoing liability for past abuse.

In summary, the Roman Catholic church entities file bankruptcy not because they don’t have enough money to pay claims, but for all the reasons listed above. They claim bankruptcy so they can get the secular protections of the United States bankruptcy law, protections originally drafted for U.S. corporations.

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Create bankruptcy law to shed someone of debt

The minute you file bankruptcy, all your creditors (anyone with a claim against you for money) has to stop collecting it. That’s the benefit of bankruptcy law, they stop the creditors for coming against you asking for money, otherwise they would violate the law. They have to put their money into their bankruptcy court.

The Debtor he/she/it has to notify its creditors that they have filed for bankruptcy, and if they want to make a claim, they can make a claim.

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