In a rare and blistering decree, a federal judge yesterday orderedBishop Robert Brom and his attorneys to show why she shouldn't dismissthe Diocese of San Diego's bankruptcy case for failing to exercise “thefinancial controls and transparency” required by law.
Citing the findings of a court-appointed financial expert, JudgeLouise DeCarl Adler said church officials have not reported trueproperty values, failed to keep parishes from deliberately hidingassets and misrepresented the diocese's wealth.
Some observers said yesterday's order will ratchetup pressure on the Roman Catholic diocese to settle about 150 claims ofchild sexual abuse that have languished through four years of legalwrangling.
On Monday, the diocese and attorneys for abuse victims arescheduled to start what is expected to be an intense week of secrettalks before a federal mediator.
The diocese has offered $95 million, or about $600,000 perclaim, to settle the cases. That is roughly half the per-case averagethat the Archdiocese of Los Angeles agreed to pay last month in arecord $660 million settlement of 508 abuse claims.
The San Diego diocese has asked the U.S. District Court to takeover setting the value of the abuse cases. The court is expected totake up the issue Friday.
If Adler dismisses the Chapter 11 bankruptcy case at a hearing set forSept. 6, the civil lawsuits alleging child sexual abuse by priests andother church workers would likely be scheduled for trials in statecourt. The first of those lawsuits had been set to begin Feb. 28, justone day after the diocese filed the bankruptcy petition.
Based on the report by financial expert R. Todd Neilson that was released July 30, Adler raised these red flags in her order:
The diocese told auditors, bankers and bond markets that it hasmillions of dollars deposited in a trust account, but it reported tothe bankruptcy court that those funds belong to its 98 parishes and arenot part of the diocese estate.
“Some parishes are actively and deliberately hiding assets ... orinappropriately designating donations as restricted to circumvent orevade the direction of the diocese and/or the court.”
“Bank accounts have not been fully disclosed on the diocese'sbankruptcy schedules.” And the “diocese failed to disclose materialfacts to the court with respect to its cash-management system.”
The “diocese has persisted in reporting its assets at assessedvaluation, rather than fair-market value as required by all debtors inbankruptcy proceedings.”
Attorneys on both sides in the bankruptcy case were surprisedby Adler's action, which she issued without a request from either side– an unusual step.
“What she's told (the diocese) is you can't keep ignoring courtorders and blithely continue to go along under Chapter 11 protection,”said attorney Jim Stang, who represents a committee of abuse victims.He added that in 27 years of practicing bankruptcy law, he hasn't seena motion like Adler's in a notable case.
Although pessimistic that a settlement will be reached duringnext week's negotiations, plaintiffs' attorney Andrea Leavitt said thejudge's actions show “she understands the full picture.”
“Things like the clandestine movement of money by the dioceseto insiders even after the bankruptcy was filed doesn't pass the smelltest,” Leavitt said. “Their actions just reek of bad faith andfraudulent conduct.”
Susan Boswell, the diocese's lead bankruptcy attorney, wouldnot discuss Adler's order. “I do not comment on matters that are beforethe court,” she said last night.
But Victor Vilaplana, an attorney for the clergy-ledOrganization of Parishes, which represents the parishes' interests,said he thinks the judge “is just wrong.” He said he hopes to clear upmisunderstandings concerning statements about the parishes on Aug. 23,when the court is scheduled to hold a hearing on Neilson's report.
A key point that has been highly contented is whether the parishes are part of the diocese's estate.
Vilaplana said Neilson's report found a few minor problems, “butthe fact is the parishes are separate entities. We are not in thebankruptcy.”
Earlier yesterday, before the court order was filed, Boswellwas upbeat about Neilson's report, saying the gist of the findings wasthat “all the funds are accounted for, the accounting system works andpeople are working hard and trying in good faith to do the rightthing.”
The diocese's official response to the report, filed lateThursday night, had the same tone. It disagreed with some findings butconcluded that the audit “confirmed that the debtor was operating in amanner consistent with the laws.”
Patrick Hazel, leader of a fledgling group of localparishioners, said he wished the diocese had been more contrite. “If Ihad written that (diocese response), I think I would have takensubstantially more responsibility for what happened,” he said.
Still, Hazel said he was shocked by Adler's order.
“I did not think it was a fair reading of the Neilson report,”said Hazel, who is president of the recently formed Parishioners forthe Churches and Schools. “The money is accounted for. The problem isit was not put in the right accounts.”
Although some insiders suggest that the order will spur asettlement, Hazel worries that it will hurt the ongoing mediationsessions with federal Magistrate Judge Leo Papas.
“I'm not sure how mediation can continue when the judge has basically thrown one side under the bus,” Hazel said.
Legal scholars echoed that Adler's move was unusual – and serious.
“A neutral expert told the court these things,” said LynnLoPucki, a University of California Los Angeles law professor whospecializes in bankruptcy issues. The diocese should be “veryconcerned.”
“When someone is in bankruptcy court and has violated therules, the expectation is they are going to go way out of their way tomake sure the problem does not continue,” LoPucki said. “They aresupposed to jump. The diocese has not been jumping.”
Scott Ehrlich, a bankruptcy specialist who teaches at SanDiego's California Western School of Law, suggested that the judge maybe sending a message that the diocese “needs to get serious” aboutsettling with victims.
“It's outrageous they are even arguing the point of whetherthey have sufficient assets to pay these claims,” Ehrlich said. “Theclaims are valid and they have plenty of money between the diocese, theparishes and their insurance to settle.
“Is the bishop getting bad advice? The unequivocal answer is yes,” he said.
Bishop Brom and diocesan attorneys have repeatedly said theirsettlement goal is two-fold: to justly compensate the victims and keepthe church's finances healthy enough that it can continue its missionof educating children and attending to the spiritual needs ofparishioners.
This is the second time since the diocese filed for bankruptcythat the judge has ordered its attorneys to court to answer questionsabout their conduct.
In April, she threatened some lawyers and priests with contemptafter learning that parishes were trying to open new bank accounts. Sherelented after they told her it was a misunderstanding and that theywere not intentionally misrepresenting their finances.
Yesterday, a national victims rights group said that regardless of which way Adler rules, they were encouraged by her actions.
Barbara Dorris, a spokeswoman for the Survivors Network of thoseAbused by Priests, said victims will be pleased that “the bishop isbeing called on his behavior.”