Catholic Church Used Bankruptcy for Sexual-Assault Cases. Now Others Are Following Suit. – Wall Street Journal

Now the legal strategy is being adopted beyond religious groups. This month, USA Gymnastics filed for bankruptcy protection and the Boy Scouts of America hired bankruptcy lawyers to explore the option. Both groups are grappling with the legal and financial fallout of sexual-abuse claims.

“There is an expectation in the restructuring community that we will see more of these types of chapter 11 filings,” said Adam Paul, a lawyer with Kirkland & Ellis LLP who specializes in so-called mass tort bankruptcies.

Pioneered by the Catholic Church, the legal strategy uses the law that protects companies from creditors to help preserve its mission and shield assets from claims made by victims of sexual abuse. Filing for chapter 11 freezes lawsuits and provides breathing room to work out a plan to compensate abuse victims. Victims get a collective voice and a guaranteed seat at the negotiating table, and at the end of a bankruptcy a diocese gets a fresh start, free from liabilities tied to past abuse. A federal judge oversees the proceeding and must sign off on the final payment plan.

But the process is long. A typical commercial chapter 11 cases wraps up after about nine months, according to a 2015 study of public companies; diocesan cases on average take more than two years to resolve. Victims have also raised concerns that the process allows dioceses to shield too many assets from their claims.

Catholic dioceses and related entities have paid out nearly $4 billion in costs linked to about 19,000 sexual-abuse allegations, including bankruptcy settlements, according to reports issued by the U.S. Conference of Catholic Bishops.

More such filings are expected after a grand jury in Pennsylvania released this summer found hundreds of Catholic priests sexually abused thousands of children for decades and that church leaders covered it up. Attorneys general in New York, New Jersey, Florida and at least 10 other states have opened investigations into whether Catholic Church officials covered up allegations of abuse.

On Dec. 19, Illinois’s attorney general released a report criticizing the state’s Catholic dioceses for allegedly withholding the names of 500 priests accused of sexual abuse.

“We have to bring light; we have to bring heat,” said Jeff Anderson, a lawyer who represents many of the victims who have filed abuse claims against the Catholic Church. “The only way we know how to do that is to expose them using the legal system.”

The Boys Scouts are facing similar allegations and could be stuck with more liabilities as some states, including New York and Pennsylvania, consider lifting or lengthening the statute of limitations for abuse victims. The national organization has been named in more than 200 lawsuits that alleged child abuse, including one in Idaho that is set for a jury trial in May.

In its most recent annual report, Boys Scouts officials said they were “aware of threatened and expanding litigation.”

In a statement, Boy Scouts of America Chief Executive Michael Surbaugh said local and national programming for the Boy Scouts would continue uninterrupted no matter which path forward it chooses. He also said that at no time did the Boy Scouts knowingly allow a sexual predator to work with youth.

Leander James, a lawyer who represents victims with claims against both Catholic dioceses and the Boy Scouts, likens the Boy Scouts of America’s national organization to a very large archdiocese and local Boy Scouts councils to parishes.

“It’s a very similar structure,” he said. ”You have the larger institution with a great deal of control over the local institutions.”

Much like a Catholic diocese and its parishes, the Boy Scouts are divided into about 270 individual local councils, each of which is separately incorporated. The national organization has about $1.5 billion assets, but the local councils, and their associated trust funds have billions of dollars more. A review of tax records indicates that the combined wealth of the Boy Scouts totals more than $5 billion, according to a Wall Street Journal analysis.

It all goes back to the Archdiocese of Portland, which sought chapter 11 protection in 2004 on the eve of two abuse-related trials. One plaintiff was seeking more than $130 million in compensation and punitive damages and the other was seeking $25 million; it was more than the archdiocese said it could afford to pay.

Absent the appropriate corporate structures and legal walls under civil law, U.S. Bankruptcy Judge Elizabeth Perris ruled that victims did have a right to pursue parish assets. After more than two-and-a-half years in bankruptcy, 170 victims settled with the Archdiocese of Portland and its parishes for about $75 million.

Since then dioceses around the country have created structures to keep their assets in separate locations. Earlier this year, the Archdiocese of Detroit transferred hundreds of parishes to a separate corporation, according to incorporating documents filed by the archdiocese’s Director of Finance. In Pennsylvania, the Diocese of Erie has also begun transferring some of its assets to charitable trusts, according to the Erie County Recorder of Deeds.

Susan Boswell has represented Catholic dioceses and religious orders in bankruptcy and has worked to separately incorporate their parishes. “The bankruptcies, particularly the first ones that field such as Portland and Spokane, brought to the forefront the property issue,” she says.

According to Ms. Boswell, even dioceses that had no financial difficulties as a result of sexual-abuse claims have begun to separate parishes under civil law, even though under canon law parishes have always been separate.

—Katy Stech Ferek contributed to this article.

Write to Tom Corrigan at tom.corrigan@wsj.com