* Professor of Law, University of Pennsylvania Law School. I am grateful to Mark Chopko, Bruce Markell, David Novak, Pat Schiltz, and participants at The Impact of Clergy Sexual Misconduct Litigation on Religious Liberty Symposium on April 4, 2003 at Boston College Law School for helpful comments on earlier drafts; and to Michael Sherman for research assistance. Special thanks to Jo Ann Brighton for extensive discussions (and debates) about these issues.
1 For discussion, see, for example, David A. Skeel, Jr., Debt’s Dominion: A History of Bankruptcy Law in America 217 (2001) (quoting Kevin J. Delaney, Strategic Bankruptcy: How Corporations and Creditors Use Chapter 11 to Their Advantage 60–61 (1992)).
2 Congress is currently considering legislation that would put statutory limits on asbestos claims, but it remains unclear whether the legislation will be enacted. See Fairness in Asbestos Injury Resolution Act, S. 1125, 108th Cong. (2003).
3 Skeel, supra note 1, at 217–21.
4 Id. at 217–18.
5 See, e.g., Howard Brod Brownstein, Bethlehem Steel: Death in the Family, Phila. Inquirer, May 4, 2003, http://www.nhcteam.com/death_in_family.html (“Some two dozen American steelmakers have now gone bankrupt since 1998.”).
6 Orange County filed for bankruptcy under Chapter 9. For a description of the Orange County crisis, see Peter H. Huang et al., Derivatives on TV: A Tale of Two Derivatives Debacles in Prime-Time, 4 Green Bag 2d 257, 259–60 (2001).
7 For fascinating accounts of the role of money in evangelical ministry, see God and Mammon: Protestants, Money, and the Market, 1790–1860 (Mark A. Noll ed., 2002) and More Money, More Ministry (Larry Eskridge & Mark A. Noll eds., 2000).
8 Alan Wolfe is the director of the Boisi Center for Religion and American Public Life at Boston College.
9 Alan Wolfe, The Men Who Disappeared, Boston Globe, Dec. 22, 2002, at D1, available at http://www.boston.com/globe/spotlight/abuse/stories4/122202_wolfe.htm.
10 See infra Part I.
11 See infra Part II.
12 See infra Part III.
13 See infra Part IV.
14 See infra Part V.
15 See Wolfe, supra note 9, at D1.
16 11 U.S.C. � 109 (2000). The “persons” who cannot file for Chapter 11 include stockbrokers, who can file for Chapter 7 (which provides for liquidation rather than reorganization) but not Chapter 11, and banks and insurance companies, which have their own, separate regulatory structures and are therefore excluded from both Chapter 7 and Chapter 11. Id.
17 Id. � 101(41) (defining “person”).
18 Id. � 101(9) (defining “corporation”).
19 Nearly every state has a statute authorizing the formation of a corporation sole and vesting decision-making authority in the head of the religious organization in question. For a useful description and analysis of one state’s corporation sole provisions, see Utah Div. of Corps. and Commercial Code, Corporation Sole: How to Incorporate (2002), at http://www.commerce.utah.gov.
20 See, e.g., Lawrence Ponoroff & F. Stephen Knippenberg, The Implied Good Faith Filing Requirement: Sentinel of an Evolving Bankruptcy Policy, 85 Nw. U. L. Rev. 919, 921 n.7 (“Conspicuous by its absence from the Bankruptcy Code is any requirement that the debtor be insolvent in either an equity or balance sheet sense.”).
21 Id.
22 The principal statutory basis for dismissing a bankruptcy petition on good faith grounds is 11 U.S.C. � 1112(b), which authorizes the bankruptcy court to dismiss a case “for cause.” Section 1112(b) gives a laundry list of bases for dismissal, including factors such as the absence of a reasonable likelihood of reorganization. Lack of good faith is not listed, but some courts have deemed it an implicit requirement; see also 11 U.S.C. � 305 (authorizing bankruptcy court to dismiss a case if “the interests of creditors and the debtor would be better served by such dismissal or suspension”).
23 See generally In re Johns-Manville Corp., 36 B.R. 727 (Bankr. S.D.N.Y. 1984); In re Continental Airlines Corp., 38 B.R. 67 (Bankr. S.D. Tex. 1984). For a thorough discussion of the cases, see Ponoroff & Knippenberg, supra note 20, at 933–38.
24 200 F.3d 154, 165–66 (3d Cir. 1999).
25 The facts discussed below are described at the outset of the SGL Carbon opinion. Id. at 156–58.
26 Indeed, the clergy sexual misconduct liability could probably not be discharged by any of the priests themselves if they filed a Chapter 7 bankruptcy petition on their own behalf. Under 11 U.S.C. � 523(a)(6), willful and malicious injuries cannot be discharged in Chapter 7, although they can be discharged if the individual involved proposes a three- to five-year rehabilitation plan pursuant to Chapter 13 instead. See 11 U.S.C. �� 523, 1328. Because the nondischargability provision applies only to individuals, not to entities, it would not preclude an archdiocese or church from obtaining a bankruptcy discharge. For further discussion of the implications of Chapter 13 for individual priests, see infra note 43.
27 SGL Carbon, 200 F.3d at 162.
28 Id. at 165.
29 Id. at 162–63.
30 See, e.g., Johns-Manville, 36 B.R. at 729; Continental Airlines, 38 B.R. at 71. The single most dramatic example of bankruptcy being used to achieve a litigation objective came in the Texaco bankruptcy, in which the good faith issue was debated but never formally decided. Texaco was able to reorganize in Chapter 11 even though it was fully solvent and filed for bankruptcy solely to renegotiate the terms of a $10.53 billion judgment it owed to Pennzoil after being found liable for interfering with Pennzoil’s attempted acquisition of Getty Oil. See Delaney, supra note 1, at 144–54; see also Ponoroff & Knippenberg, supra note 20, at 938–39.
31 See, e.g., Pam Belluck, Boston Church Panel Will Allow Archdiocese to Weigh Bankruptcy, N.Y. Times, Dec. 5, 2002, at A1, A38 (suggesting that bankruptcy would “giv[e] a judge control over which church land or buildings might be sold to pay plaintiffs”).
32 11 U.S.C. � 362(a) (2000).
33 See id. The automatic stay is commonly described as giving the debtor “relief from its creditors.”
34 Although the Archdiocese seems to hold title to the property as a corporation sole, Church lawyers have hinted that they might contend that the property is actually held in trust for the parishioners within the Archdiocese, and that the head of the Archdiocese is simply a trustee for the interests of the parishioners. See, e.g., Justin Pope, Questions and Answers About the Boston Archdiocese Chapter 11 Bankruptcy, Dec. 11, 2002 (unpublished manuscript, on file with author).
35 11 U.S.C. � 1112(b) (conversion to Chapter 7 when this is in the best interest of creditors).
36 Id. � 303(a) (excluding nonprofits from involuntary bankruptcy).
37 Id. � 1112(c).
38 If any of the Archdiocese’s churches or schools were subject to a significant mortgage, the mortgagee could ask the court to lift the stay in order to permit a foreclosure. Id. � 362(d) (providing several bases for lifting the stay, including “cause” and the absence of equity in property that is not necessary to an effective reorganization). The Archdiocese’s property, however, does not seem to be subject to any substantial mortgages, which makes this step unlikely.
39 Id. � 362(b)(1) (criminal actions not stayed).
40 788 F.2d 994, 1001, 1007–08 (4th Cir. 1986).
41 Id. at 1008.
42 Although the Archdiocese had roughly $100 million in liability insurance, the amount of coverage in place in any given year was quite small. See, e.g., Justin Pope, Bankruptcy Wouldn’t Solve All Archdiocese Problems, Associated Press, Aug. 9, 2002.
43 The possibility that the priests themselves might file for bankruptcy raises several additional issues, which are worth briefly noting here. The principal choices for an individual who files for bankruptcy are Chapter 7, which provides for an immediate discharge, and Chapter 13, which contemplates a three- to five-year repayment plan. As noted earlier, if a priest filed for Chapter 7, he would not be permitted to discharge any sexual misconduct liability if the liability constituted “willful and malicious injury by the debtor.” 11 U.S.C. � 523(a)(6). Under the so-called “superdischarge” of Chapter 13, on the other hand, even liability for willful and malicious injury can be discharged. Id. � 1328(a). This would make Chapter 13 the obvious choice. But to invoke Chapter 13, the priest would need to show that he had “regular income” (which could be difficult unless the church is paying the priest a salary or pension), and Chapter 13 would not be available if a plaintiff had already obtained a large judgment. Chapter 13 is only available to debtors who have less than $807,750 in secured debt and less than $269,250 in unsecured debt. See id. � 109(e) (requirements for filing under Chapter 13).
44 Recent veil-piercing cases are extensively surveyed in Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76 Cornell L. Rev. 1036 (1991). For a classic defense of holding the separate parts of a larger enterprise liable for one another’s obligations, see generally Adolph A. Berle, Jr., The Theory of Enterprise Entity, 47 Colum. L. Rev. 343 (1947).
45 See 11 U.S.C. � 1129(a)(3) (“good faith” requirement for confirmation of reorganization plan).
46 See Religion & Ethics Newsweekly: Catholic Church Finances (Thirteen/WNET New York television broadcast, July 12, 2002), http://www.pbs.org/wnet/religionandethics/ week545/feature.html (transcript).
47 11 U.S.C. � 521(1).
48 See, e.g., Fed. R. Bankr. P. 2004 (authorizing examination, including right to compel attendance and production of documentary evidence).
49 Telephone interview with Jo Ann Brighton, Partner, Nixon Peabody LLP (Apr. 1, 2003).
50 11 U.S.C. � 363(b).
51 Id. � 1104 (emphasis added).
52 Id. � 904(1). This section also prevents the court from interfering with “any of the property or revenues of the debtor,” or “the debtor’s use or enjoyment of any income-producing property.” Id. � 904(2)–(3).
53 See, e.g., Grogan v. Garner, 654 U.S. 278, 286 (1991) (citing United States v. Kras, 409 U.S. 434, 445–46 (1973)).
54 See, e.g., Langenkamp v. Culp, 498 U.S. 42, 45 (1990) (creditor who files claim waives right to a jury trial).
55 Psalms 37:21 (“The wicked borrow . . . .”); Romans 13:8 (“Let no debt remain . . . .”).
56 The most prominent Christian financial writers—including Larry Burkett and Ron Blue—have tended to take this view, suggesting that Christians should never file for bankruptcy. See, e.g., Ron Blue, The Debt Squeeze: How Your Family Can Become Financially Free 42–43 (1989) (concluding that borrowers have “no alternative” other than to repay, and that “[f]ailing to repay is to violate the command in Psalm[s] 37:21”); Larry Burkett, Debt-Free Living 59–60 (1989) (citing Ecclesiastes 5:5 and concluding that borrowers have an absolute commitment to repay).
57 For a secular moral argument that it is more defensible to discharge tort obligations than contractual ones due to the absence of a promise to pay, see generally Philip Shuchman, An Attempt at a “Philosophy” of Bankruptcy, 21 UCLA L. Rev. 403 (1974).
58 Psalms 72:13–:14.
59 See Amanda E. Dawsey & Lawrence M. Ausubel, Informal Bankruptcy (Feb. 2002), at http://www.ausubel.com/creditcard-papers/informal-bankruptcy.pdf; Michelle J. White, Why it Pays to File for Bankruptcy: A Critical Look at Incentives Under U.S. Personal Bankruptcy Law and a Proposal for Change, 65 U. Chi. L. Rev. 685, 697–99 (1998) (concluding that many American families could gain financially if they were to file for bankruptcy).
60 The number of bankruptcy filings exceeded one million per year for the first time in 1996, and it has hovered around 1.5 million the past several years. The numbers seem to reflect both a decrease in the stigma of filing for bankruptcy and a dramatic increase in access to credit cards and other consumer debt. See Skeel, supra note 1, at 188 (table showing 1978–98 filing data); Todd Zywicki, Why So Many Bankruptcies and What to Do About It: An Economic Analysis of Consumer Bankruptcy Law and Bankruptcy Reform, at 5, http://ssrn.com/abstract=454121 (2003) (“In 2002 bankruptcy filings for the first time exceeded 1.5 million; early reports for 2003 indicate a further rise this year.”).
61 Wallace Stevens, The Well-Dressed Man with a Beard, in The Collected Poems of Wallace Stevens 247 (1954).
62 See Catharine Pierce Wells, Churches, Charities, and Corrective Justice: Making Churches Pay for the Sins of Their Clergy, 44 B.C. L. Rev. 1201, 1202–03, 1214–15 (2003).
63 See supra notes 3–4 and accompanying text.
64 The trust fund strategy employed in the In re Johns-Manville Corp. case has now been enshrined in the Bankruptcy Code. 11 U.S.C. � 524(g) (2000) (procedures for trust funds in asbestos cases); see Skeel, supra note 1, at 217–18.
65 Patrick Schiltz, for instance, noted at the Boston College Law School Symposium that he has made this argument in a variety of contexts in recent years.
66 For a criticism of the limitations placed on damages in A.H. Robins Co. v. Piccinin, see, for example, Richard B. Sobol, Bending the Law: The Story of the Dalkon Shield Bankruptcy 197–208 (1991).
67 11 U.S.C. � 1126 (approval of a majority in number and two-thirds in amount constitutes approval by a class of creditors).