MILWAUKEE — Two decisions by U.S. Bankruptcy Judge Susan V. Kelley have kept the assets of Catholic parishes in southeastern Wisconsin out of reach of the Official Committee of Unsecured Creditors seeking compensation for victims/survivors of clergy sexual abuse in the Archdiocese of Milwaukee’s Chapter 11 reorganization.

On Dec. 7, the judge denied an Oct. 25 motion by the creditors’ committee in which it maintained parishes were “alter egos” of the archdiocese, and in which it sought a “substantive consolidation of the parishes and the debtor” (archdiocese). Approval of the creditors’ committee motion would have made the parishes’ assets available for potential settlements with victims/survivors of clergy sexual abuse.

Since 1883, parish corporations in Wisconsin have been incorporated separately. Kelley referred to that state statute in denying the motion, quoting twice from a Jan. 4, 2011 affidavit of John Marek, chief financial officer of the archdiocese: “Parish corporations own their own property, finance their own activities, manage their own assets and are responsible for their own corporate activities.”

The judge wrote “… it is apparent that the parishes and their creditors would suffer immense harm if they were forced to participate in this bankruptcy case. Moreover, the court cannot ignore the outrageous expense and extreme delay that would no doubt accompany substantive consolidation in this case.”

In denying the creditors’ committee request for derivative standing – which would allow the creditors’ committee to sue in the name of the archdiocese – Judge Kelley wrote, “The committee failed to show facts suggesting that consolidation of the debtor with 210 non-debtor entities would offset the significant harm caused to these non-debtor entities; it has not stated a plausible claim of a substantial identity of the parties to be consolidated; it has not demonstrated a sufficient entanglement of affairs warranting consolidation; and it has not plausibly stated that creditors did not rely on the separate identity between the debtor and the parishes in extending credit. Given the prejudice to the non-debtor parishes and their creditors that would result from substantive consolidation, it would be wholly improper in this case to consolidate the debtor with the non-debtor parishes.”

On Dec. 10, Judge Kelley ruled that $35 million in parish investment funds, that were returned to the parishes and other Catholic entities, never belonged to the archdiocese. In her 23-page memorandum decision on the creditors committee’s motion for standing on fraudulent transfer claims, she wrote, “There is no fact alleged that the archbishop controlled the receipt of the transfer by the parishes – in fact, as shown by the debtor’s (archbishop’s) letter, the parishes, independently of the archbishop, had the option of return of their funds (from the Parish Deposit Fund) or participation in the new Southeastern Parish Trust. To impute allegedly fraudulent intent under these circumstances goes too far.”

When the Parish Deposit Fund was closed in June 2005, parishes were given the option of having their funds returned or putting them in the newly-established trust.

In court on Dec. 6, Jim Stang of Pachulski, Stang, Ziehl & Jones and an attorney for the creditors’ committee, had argued that the archbishop controlled the money, but Daryl Diesing of Whyte Hirschboeck Dudek SC, who along with Frank Lococo represented the archdiocese, replied, “It (control of parish funds) rests under canon law absolutely with the parish priest. The archbishop could never have had management or control of these funds or make investment decisions or receipt of these funds.”

“… if the bishop was really in control of it, he would just have made the decision for them,” Kelley added.

Cost vs. benefits

A major point of discussion on Dec. 6 was the cost of litigation, if the parishes were to be sued, versus the benefit to the unsecured creditors.

“What we don’t think the committee has done is they haven’t done cost/benefit analysis. They have not given the court any reason why this makes sense,” said Diesing. “They have not shown the massive cost of litigation, they have not considered the unlikelihood of recovering significant amounts of money from non-profit schools, parishes, who are generally short of money or insolvent. Nothing on collectability…”

He added that the creditors’ committee had “not assessed whether the archdiocese is going to have the sufficient funds feasible to fund the things it needs to do, to fund the plan, to fund the food pantries, the charitable or missions or the victims’ (claims).”

“… if the committee is successful, the parishes’ ability to worship, to provide religious outreach and to continue operations will be severely impacted and burdened,” Diesing said.

Stang admitted, “This litigation is not going to be cheap. Would it run more than a million dollars? Yes, it would run more than a million dollars.”

“All these parishes live on the margins, you ask them to that will end many of these places or severely cut back on what they are able to do,” Lococo added.

In her memorandum, Kelley wrote, “The committee contends that the potential $35 million award substantially justifies the expense. But the committee oversimplifies the analysis. First, the committee   would bear the burden of proving that the debtor committed intentional fraud in making the transfer. Although it is possible that discovery might reveal additional evidence, the debtor already gave thousands of documents to the committee in the course of informal discovery. Of these reams of paper, the only document evidencing intent to hinder, delay, or defraud creditors is the 2003 finance committee meeting minutes in which the committee seizes on one sentence:

“Currently, we are working on setting up a trust fund to shelter the Parish Deposit Fund.” The sentence, when read in context, does not necessarily constitute the smoking gun on which the committee hangs its hat. More evidence would be required to prove an intentional fraudulent transfer, and no proffer of that evidence has been made.”

In a statement released Dec. 11, Jerry Topczewski, chief of staff for Archbishop Jerome E. Listecki, wrote that in denying the creditors’ committee to sue the Parish Deposit Fund, Kelley made it “clear that the former Parish Deposit Fund was an investment vehicle for parishes and other Catholic entities and the monies invested were not part of the archdiocese.”

He continued, “It is also clear the archdiocese did nothing wrong when it could no longer administer this service and gave investors the option of having their monies returned or having their investments transferred to the newly-created Southeastern Wisconsin Catholic Parish Investment Management Trust.”

Calling the judge’s decision “the correct decision,” Topczewski said, “My hope is that this ruling will keep the Chapter 11 proceeding moving forward and bring us closer to reaching a resolution in the bankruptcy.”

Attorneys for both sides were scheduled to appear before Kelley on Dec. 13 as she hears the archdiocese’s objections to seven of the claims that have been made in the proceedings.