The strategy is fraught with risks and could backfire, possibly inflicting a catastrophic toll on Catholic parishes, schools and hospitals throughout Wisconsin.
This week the Archdiocese of Milwaukee joined at least seven other U.S. Catholic dioceses in seeking Chapter 11 bankruptcy protection amid fraud lawsuits fueled by sex abuse cover-ups.
The goal is to keep the archdiocese running and also compensate current and future sex abuse claimants. But if the archdiocese and claimants aren’t able to agree on a bankruptcy settlement, a subsequent bankruptcy trial could pull in other Catholic organizations.
“If you push this and litigate, there’s obviously some risk that the court could rule against some of the parishes or some of the other related entities and drag more assets into the bankruptcy estate in a way that would have long-term consequences,” said Stephen Lubben, a professor at Seton Hall Law School in New Jersey and bankruptcy expert. “It’s usually best to try to work out some sort of reasonable settlement.”
Bankruptcy trials can be particularly unfavorable to dioceses because it’s often unclear what property the diocese owns and which assets it has spun off. For example, if a diocese isn’t sufficiently independent from a local Catholic Charities organization, the two could be lumped together in a court judgment.
“This has been a big issue in some of the prior diocese bankruptcies,” Lubben said. “That would obviously have devastating consequences for the charity’s ability to fulfill its mission, because its assets would suddenly be available to pay towards (claimants).”
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