Canon vs secular law in the bankruptcies of Catholic dioceses

I’ve written a lot about financially distressed Catholic dioceses and how the financial structure of the Catholic Church insulates the Vatican from accountability. I came across this very interesting article about how dioceses have started moving funds and property into charitable trusts as abuse lawsuits have piled up.

Is it a coincidence of management or a conspiracy to shelter assets from victims? Is it just or desirable to allow alleged victims to go after the assets of schools and other auxiliary charitable causes of dioceses, essentially forcing them out of business over the behavior of an individual clergyman – transferring the damages from individuals to the entire community? Some of these claims involve priests who are no longer alive or allegations that are decades old and can’t be proven or disputed effectively. These are the sort of problems the courts have to sort out.

There seems to be considerable debate over whether this is legal or not. Some scholars argue that the dioceses adopting the charitable trust structure is unrelated to the abuse scandals, and is more about the church stepping into the modern era of nonprofit finance, which can be quite complex.

Any institutional bankruptcy attorney will tell you, however, that if you do this in anticipation of a bankruptcy filing for the specific purpose of sheltering specific assets from specific creditors, it’s likely to be considered fraudulent conveyance.

Pragmatic Catholic dioceses are still likely to adopt the structure because bankruptcy proceedings can drag on for so long that victims are likely to settle anyway. The movement of assets to trusts is a sample of what they are dealing with that puts creditors in their place before the legal fight even begins. By the time the issue is settled, so much of the proceeds will be going to lawyers’ fees that the fight isn’t even worth it.

At any rate, I found the discussion on the collision of canon law and secular law from a historical perspective fascinating:

With millions of dollars at stake, lawyers for dioceses and victims have taken to courts and conference rooms to decide whether money should be allocated to victims or sustain the Church’s ministry. There, they reference two legal codes to answer the question:

Who owns the Church’s property?

Debate about the structure of dioceses did not originate with clerical sex abuse lawsuits.

In the late 19th century, many state legislatures addressed the gap between how secular and canon law view the Catholic Church’s property. They developed the idea of the ‘corporation sole’ for dioceses – allowing bishops to control financial matters, while still allowing the next bishop to take over once his predecessor died or moved dioceses.

“It’s almost like a feudal structure,” said Marie Reilly, a law professor at Penn State who studies the intersection of bankruptcy and canon law. “You needed a way for the king to survive as a political entity so the property of the kingdom wouldn’t pass to his heirs but would remain property of the crown.”

Reilly sees the corporation sole as a ‘centralized model,’ where all diocesan entities are pooled together, and the bishop controls it all from the top.

Meanwhile, in the ‘decentralized model,’ schools and parishes exist as individual corporations or trusts. Instead of directly controlling church entities, the bishop serves as a trustee and the pastor or president of the smaller entity as the trust administrator.

The centralized model is more prevalent in older dioceses on the coasts, while the decentralized model was established in newer dioceses after laws began to define more clearly the status of non-profit corporations.

While both the centralized and decentralized models attempt to realize what is written in canon law, Reilly told Crux that she thinks the corporation sole model falls flat.

“The bishop doesn’t own parish property, property belongs to the juridical entity that acquired it,” she said. “So, when a parishioner or somebody makes a donation to a parish, that property belongs to the parish.”

That is why some dioceses decided to reconfigure their corporate status over a period stretching from roughly 2006 to 2012, including places like Erie, Pensylvania. In the process they moved from a corporation sole, the ‘centralized model,’ and transferred parishes into their own charitable trusts, a move which diocesan officials say better reflects canon law.

While it might look like parishes and other entities belong to the bishop, the diocese and parishes are separate juridical entities, meaning they own different things.

Dr. Kurt Martens, a canon lawyer at the Catholic University of America, said the bishop might oversee the activities of a parish, comparing the system to checks-and-balances, but is bound from doing more by canon law.

“The bishop, canonically speaking, does not own, through the diocese, the assets of a parish,” Martens said in an interview.

While canon law clearly separates bishops from parishes, the argument under secular law is more complicated. As a trustee, the bishop has secular authority over the parish charitable trust, a detail which diocesan lawyers contest is beside the point.

“The distinction between [diocesan] assets and parish charitable trust assets is not eliminated simply because the bishop is a trustee of a parish charitable trust,” said John Fessler, a lawyer for the Diocese of Erie.

The possibility for a bishop to control parish assets in secular law is outweighed by canon law, Fessler explained. Instead, the pastor and finance council of the parish, as trust administrators, would make financial decisions on behalf of the charitable trust.

“[The bishop] is the trustee of the parish charitable trust, he’s not a dictator,” Fessler said.

I also found this academic article from O’Reilly on the battle between canonical and secular legal frameworks, which goes into much more detail. It’s quite a fun topic for finance geeks.

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