Diocese of Milwaukee Seeks Chapter 11 Protection From Sexual Abuse Claims

The Diocese of Milwaukee filed a petition for chapter 11 relief on January 4, 2011 after twenty years of dealing with sexual abuse claims and an unfavorable ruling on its insurance coverage. In re Diocese of Milwaukee, Case No. 11-20059 (Bankr. E.D. Wisc. 1/4/11). Milwaukee is the eighth U.S. Catholic Diocese out of 194 to seek bankruptcy protection as the result of sex abuse claims. The Catholic Diocese bankruptcies illustrate how bankruptcy can help to resolve complex social problems as well as mere contractual disputes.

The Diocese bankruptcies share several common factors.

1. They are precipitated by overwhelming tort claims involving horrific crimes perpetrated by persons in positions of authority. According to the Diocese of Milwaukee, "A tragedy that runs contrary to every teaching and tradition of the Church has unfolded in the Church as a whole and in the Archdiocese in particular: a small number of clergy and others took advantage of their positions of trust and respect in the community to sexually abuse children. ("The Abuse")." The website of the Archdiocese lists 44 priests who have "substantiated reports of abuse of a minor." Whether this is a "small number" can be debated.

2. Many of these incidents happened a long time ago. Of the 44 priests listed on the website, 17 are deceased. According to the Archdiocese, it took formal steps to address the abuse problem in 1989. According to published reports in other cases, much of the abuse dates back to the 1950s and very little has occurred since the 1980s.

3. The financial cost of the tort claims is substantial. According to the Archdiocese, it had incurred costs of $29,564,678 based upon claims resulting from abuse of a minor as of June 30, 2010. There are currently claims from 17 plaintiffs pending with another seven who have given notice.

4. The Catholic Diocese bankruptcies pose a perplexing social problem. Who should pay for the abuse? Almost half of the priests who committed the abuse are deceased. The Diocese itself is an artificial entity. It is dependent upon the 657,519 registered Catholics for its income. It employs 177 persons, many of whom are engaged in good works. How do you apportion the blame for at least 24 persons who may have been wronged among 657,519 registered Catholics and 177 employees, many of whom were not even born when the abuse took place?

5. Chapter 11 provides a structure for resolving the claims. Claimants must come forward within a reasonable period of time so that claims do not continue to show up decades later. Assets can be mobilized to pay claims. In the case of the Archdiocese of Milwaukee, the courts have absolved their insurance carriers and the Archdiocese claims that the assets of individual parishes are held in separate corporations. As a result, donations from the faithful are the most likely source of compensation to the victims. On the one hand, it is horribly unfair. Parishioners who had no complicity in the abuse must voluntarily pay for its consequences. On the other hand, it is at least somewhat fair. The faithful take responsibility for their shepherds. If the clergy betray the faithful, the faithful have an obligation to make it right. Therein lies the dilemma. The faithful didn't cause the problem. The faithful don't have unlimited resources. How do you strike a balance between the interest of those who have faced horrific wrongdoing and those have committed no wrong? Chapter 11 provides a framework for answering these questions.