The archdiocese has filed for bankruptcy. Now what?

The Archdiocese of St. Paul and Minneapolis has filed for Chapter 11 bankruptcy protection. But what does that mean? And what will it mean for local parishes, schools and parishioners?

What is bankruptcy?

Filing for bankruptcy allows an organization to put together a plan to pay its debts by dividing its assets among its creditors. When an organization files for bankruptcy, it must declare its assets (what it owns) and its liabilities (what it owes).

But just because an organization files for bankruptcy doesn't mean it will automatically be granted that status.

A federal bankruptcy judge must approve the organization's petition for the bankruptcy to move forward.

Bankruptcy law is governed at the federal level — states do not have the authority to regulate bankruptcy — and is handled in U.S. Bankruptcy Court, which is a branch of U.S. District Courts. The Minnesota district has locations in St. Paul, Minneapolis, Duluth and Fergus Falls.

Why is the church declaring bankruptcy?

Church leaders have said for more than a year that they're weighing bankruptcy as they face huge potential costs tied to clergy abuse.

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

In November, archdiocese chief financial officer Thomas Mertens called bankruptcy protection "a way to respond to all victims/survivors by allowing the available funds to be equitably distributed to all who have made claims..."

The archdiocese in November reported a $9.1 million operating deficit for fiscal year 2014, more than a week after it announced it was cutting its budget by 20 percent and making unspecified staff cuts.

The archdiocese said the operating deficit could be partly attributed to $4.1 million spent to address allegations of clergy sexual abuse since May 2013, when a three-year window opened for abuse victims to file claims that were otherwise barred under the statute of limitations.

The archdiocese on Friday published its own explanation for the filing. "We tried to identify other options, but were unable to find a solution that was as fair as Reorganization to address the many current claims and the potential future claims arising from the lifting of the Minnesota civil statute of limitations on sexual abuse of a minor," it said.

What happens to the archdiocese and its churches, schools and charities during the bankruptcy?

A bankruptcy filing like this is designed to reorganize. It puts a hold on assets (limiting what the archdiocese can do with what it owns), but allows a business to continue operating as usual. It's possible that the federal bankruptcy court could take control of some of the archdiocese's business functions and money handling as it moves through the process.

The ultimate goal of a bankruptcy like this is to allow the archdiocese to emerge from the process as a functional business.

Is my parish going to close? What about my school?

In November, as it announced a $9.1 million deficit for fiscal year 2014, the archdiocese explained how a potential Chapter 11 reorganization would affect operations.

The Chancery Corp., which is the administrative arm of the archdiocese, would expect to be allowed to function as usual, and separately incorporated parishes and schools would not be part of a reorganization.

The archdiocese has said it's premature to speculate on whether a bankruptcy filing would affect pensions, medical or other employee or priest benefits, but it would seek court approval to keep such plans going during the process.

Ultimately, the fate of parishes, schools, hospitals and other entities within the archdiocese falls to the federal bankruptcy court and the judge presiding over the case.

In most of the 11 other diocesan bankruptcy cases, parishes and schools were treated as separate entities. If the Archdiocese of St. Paul and Minneapolis were to file for bankruptcy, chances are good, based on what we know from most other cases, that the doors of its churches and schools would remain open.

In three dioceses' filings — Tucson, Spokane and Wilmington — schools, parishes and other entities were directly affected. The Diocese of Tucson's settlement classified parishes as independent corporations and froze parish expansion projects. During the Diocese of Spokane's 89-month bankruptcy, a judge ruled the opposite: that churches, schools and other assets belonged to the diocese, and could be sold, if necessary, to pay victims.

In the case of the Wilmington, Del., diocese, many parishes' investments were found to have been commingled with diocesan funds, which made them available to creditors. Despite the fact that parishes believed their assets to be safe, they were lost in the proceedings. A bankruptcy judge later told parishes they had the right to sue the diocese.

In its explanation of the filing, the archdiocese said parishes and schools won't be part of this process:

Parishes, Catholic schools and other local Catholic entities are separately incorporated and are not part of this filling for Reorganization.

(Most Catholic schools are parish ministries. Those that are not, such as most local Catholic high schools, are separately incorporated and are often run by religious orders.)

How long will this process take?

Not every bankruptcy is the same. St. Paul attorney Jeff Anderson suggested at a news conference addressing the bankruptcy filing Friday that he expects this process will take about two years.

In the cases of 11 other dioceses across the country that have filed for Chapter 11 reorganization, the process has taken between six months and more than 7 years.

In Milwaukee, for instance, the process has been slow — it moved into its fourth year in January. The process in Portland, Ore., lasted 33 months. The Diocese of Spokane's complicated bankruptcy lasted 89 months.

What does it mean to file for Chapter 11 bankruptcy?

A Chapter 11 filing is designed to reorganize. It puts a hold on assets, but allows a business to continue operating. The goal is to allow the organization to emerge from the process as a functional business.

During a reorganization, assets are scrutinized, claims are made and the court decides who gets what.

What we won't know until a claim goes before a bankruptcy judge is whether entities like the new Catholic Services Appeal Foundation, created as a legally separate entity last year, will be treated separately.

Chapter 11 is a specific type of bankruptcy that allows an organization to restructure so it can pay its debts (Another type of bankruptcy filing, under Chapter 7, is when an organization liquidates to pay its creditors).

Once the bankruptcy petition is filed, creditors' claims are put on hold. In the case of an archdiocese with legal action pending against it, all lawsuits are suspended and plaintiffs become creditors.

During the proceedings, an organization that files for Chapter 11 bankruptcy can be required to surrender its business operations — control of its assets, liabilities and even potentially major financial decisions — to the bankruptcy court, and ultimately to the judge in the case.

One of the goals of a Chapter 11 filing is to allow the organization to operate as normally and steadily as possible, without any major financial disruptions, given its situation. It is a petition for rehabilitation, not liquidation.

How common is it for a Catholic diocese to file for Chapter 11 protection?

At least 11 dioceses in the U.S. — there are nearly 200 dioceses in the country — have filed for bankruptcy in the past 10 years. Today's filing brings the total to 12. It's becoming more common, especially as dioceses are hit with a large number of clergy sex abuse lawsuits at once.

Three of those bankruptcies — in Milwaukee, Gallup, N.M., and Helena, Mont. — are still underway.

Not every bankruptcy is the same, however. In Milwaukee, for instance, the process has been slow, and victims haven't seen compensation. The process in Portland, Ore., lasted 33 months. The Diocese of Spokane's bankruptcy lasted 89 months.

But in other places, such as San Diego, where the diocese's bankruptcy filing was dismissed, the process lasted only six months.

What does bankruptcy mean for the abuse lawsuits?

While St. Paul attorney Jeff Anderson settled a public nuisance lawsuit in October 2014 that he had filed against the archdiocese, other cases were still pending or moving forward.

The archdiocese has been sued by more than a dozen alleged victims of clergy sex abuse under a state law that gives victims of child sex abuse three years to file lawsuits for older claims. The three-year window closes in May 2016.

Three clergy sex abuse lawsuits against the Twin Cities archdiocese were scheduled to begin Jan. 26 in Ramsey County District Court, amid uncertainty about whether the archdiocese will file for bankruptcy.

Two other cases set for trial involve alleged abuse by the Revs. Robert Thurner and Jerome Kern. Those plaintiffs are represented by Anderson, who has been suing the archdiocese on behalf of clergy sex abuse victims for nearly 30 years.

The trials are immediately put on hold — stayed — now that the archdiocese has filed for bankruptcy. Instead of handling claims through civil suits, alleged victims will have to file claims as creditors in federal bankruptcy court if the bankruptcy is allowed to proceed.

What happens next?

While every case is different, Chapter 11 cases typically follow a general chronology.

Petition

First, the archdiocese files its Chapter 11 bankruptcy petition, requesting that the court help facilitate a reorganization.

Judge's review

Then, a federal bankruptcy judge must grant the petition in order to allow the reorganization to move forward. In 10 of the 11 previous cases of dioceses filing for bankruptcy, only one petition — the Diocese of San Diego's — was dismissed.

Debts, creditors and business as usual

If a judge approves the filing and allows the bankruptcy and reorganization to move forward, all action against the organization are put on hold. If it owes money to a roofer for fixing its shingles before the bankruptcy was filed, for instance, the roofer can't pursue payments while the bankruptcy is in progress. It also can't sue the organization over the debt. That is considered an "automatic stay of litigation."

The debts the organization incurs during the proceedings, however, are allowed to be paid. (If, for instance, a pipe bursts in the organization's offices, the organization is allowed to pay a plumber to fix the burst pipe.) This is part of the Chapter 11 goal of maintaining business as usual.

Creditors

It is the responsibility of the organization that files for bankruptcy to draw up and submit to the court a list of its creditors. The court then opens a filing period for additional would-be creditors to make their claims.

Reorganization plan

Because the ultimate goal of a Chapter 11 filing is to restructure and rehabilitate, the archdiocese must file a reorganization plan, which is considered a contract between the debtor and its creditors. The plan must be approved by the judge in the case, and is overseen by the federal bankruptcy court.

According to bankruptcy law, the first 120 days of a bankruptcy are considered the period of exclusivity, during which only the organization that filed for bankruptcy can submit a reorganization plan for consideration. After that period, any related group (creditors, the debtor, etc.) can file a plan.

Sufficient information

Once the archdiocese has filed a reorganization plan, the court holds a hearing about 30 days later to determine whether the plan provides enough information to creditors, who will ultimately vote on it.

Judge's approval

If the court determines that the plan does include enough information, it files a second hearing, roughly another 30 days later, during which it will confirm or reject the reorganization plan.

Creditors' approval

Once a judge determines a reorganization plan suitable, lawful and proposed in good faith, it is sent along to the organization's creditors, who will vote on it. If creditors accept the plan, it is considered a binding legal contract between creditors and the debtor.

Putting the plan into action

If creditors confirm the debtor's reorganization plan, the debtor is required to execute it. The bankruptcy court relinquishes any control it might have taken over the organization's daily operations, and the organization is expected to transition from Chapter 11 status to normal business function. If the organization fails to follow through with the plan, creditors are allowed to request that the Chapter 11 case be dismissed (which would reactivate their claims against the organization), that it be converted to a Chapter 7 liquidation case or pursue other action that's outlined in the plan itself.

Archdiocese files for Chapter 11 bankruptcy: The petition