Bankruptcy could help Winona diocese avoid sex abuse lawsuits

If the Diocese of Winona files for bankruptcy as Bishop John Michael Quinn warned the Vatican in March, it could help the diocese negotiate its growing liability from monetary awards in clergy sex abuse lawsuits.

A bankruptcy filing would make the Winona diocese the first in the state — and at least the 12th in the nation — to seek bankruptcy protection.

• Timeline: U.S. Catholic dioceses and bankruptcy

A contemplation of bankruptcy is not surprising for the diocese, said Temple University law professor Jonathan Lipson, who has studied Catholic Church bankruptcies.

"So many dioceses have found that bankruptcy is an effective way, or could be an effective way, to manage liability of this sort," he said.

• Bishop: Abuse suits will push diocese into bankruptcy

Explore the full investigation Clergy abuse, cover-up and crisis in the Twin Cities Catholic church

A bankruptcy would freeze litigation against the church, including upcoming lawsuits involving sexual abuse. Its consideration was revealed in the thousands of pages of Catholic Church documents that Jeff Anderson, an attorney representing alleged victims of clergy sex abuse, released Tuesday, as part of one such case.

Among them was a draft letter to the Vatican from this past March from Winona Bishop John Michael Quinn.

In the letter, Quinn writes that the diocese anticipates existing and future sexual abuse lawsuits against priests will lead to bankruptcy.

It's not clear if the letter was sent. Diocese spokesman Joel Hennessy said Quinn was not available for an interview and he could not speak for the bishop.

"We have no plans to file bankruptcy at this time," Hennessy said. "Due to the unknown scope of the litigation, we can't rule out the possibility in the future. If litigation cannot be resolved, that may be a possibility."

He said much depends on how many people take advantage of a window of time in which they can sue over abuse committed many years ago, as well as the potential damages they could be awarded in court. Across the country, settlements have ranged from the tens to hundreds of millions of dollars.

"We don't have an infinite amount of resources to pay all the claims, if they continue to come," Hennessy said. "We've got two years left on the window. So, there's a lot of unknown yet."

Hennessy cast the March 25 letter as way to keep the Vatican informed.

"I think it's basically giving a heads-up or a for-your-information statement to the Vatican," he said.

In bankruptcy, the diocese could rework its finances and establish a plan to remain a viable ongoing entity. But it would do so while satisfying — as much as possible — the claims of creditors, including sexual abuse victims.

Hennessy indicated assets of Winona parishes, the Catholic Charities of Winona and other legally separated entities would be protected from creditors. He said contributions to local parishes would not be touched.

"Parish collections remain within the parish," he said. "And indeed, the parishes are not part of the lawsuits."

Local parishes do channel some money to the archdiocese. But Hennessy said those funds would not fund settlements with abuse victims and their attorneys.

James Stang, who has been an attorney for creditors in 10 church bankruptcy filings, said he has always asked church officials about bankruptcy talks with the Vatican.

"The answer very consistently has been, 'We did not ask for permission but we let them know we were going to do it,'" Stang said.

But Stang said he never got a read on how soon a bankruptcy followed a heads-up to the Vatican that a filing was in the cards.

What assets are available to compensate victims would largely depend on how the diocese and related entities are structured and legally connected.

"Some dioceses have gone to great lengths to protect their assets and shield them from lawsuits. I have no idea what Winona has done," said Charles Zech, director of the Center for Church Management at Villanova University. "But the impact will depend on how smart they were, and how they were able to shield their assets."

Anderson would be certain to scrutinize those assets should the diocese declare a bankruptcy. He represents several clients who claim they were abused by priests in the Winona diocese.

At this point, Anderson said he hasn't been assessing what diocese assets could be available to compensate victims.

"The question of what assets would be exposed in a bankruptcy is too early to answer," he said. "A bankruptcy hasn't been filed. And if it is, then we get into the process of what assets they have and what is fair to resolve claims."

Anderson said he hopes the diocese doesn't play the bankruptcy card. But he knows that card is in the church's hand. The threat of bankruptcy can weigh heavily in decisions to pursue lawsuits or negotiate settlements.

Lipson, the Temple University law professor, said a bankruptcy could be fast or painstakingly slow, as has been the case in Milwaukee.

"The one thing you hope in these cases is that they are less contentious than the case in Milwaukee has proved to be," he said. "Rather than spending years and untold amounts of money on the litigation process as the archdiocese in Milwaukee has chosen to do, you hope they follow the example of the archdiocese of Phoenix, for example, which worked out a settlement process and resolved their issues quickly, efficiently and, I think, fairly."

Timeline: U.S. Catholic dioceses and bankruptcy