Regardless of the moral issues surrounding the sexual abuse cases pending against the Catholic Church in San Diego, bankruptcy actually makes sense in terms of speedy compensation for the victims and putting these episodes behind us.

Sometimes organizations file for bankruptcy under Chapter 11 to "reorganize," regardless of whether the organization has sufficient assets to pay its liabilities. This may occur when the organization has cash-flow problems and can't pay its current creditors. For instance, a corporation may own $100 million in assets and have $90 million in liabilities. Unfortunately for the corporation, it doesn't have sufficient income at the present time to pay the portion of the $90 million that is currently due.

Theoretically, the corporation could pay its debts by "liquidating" - going out of business, selling its assets, and paying its debts. However, liquidating to pay debts puts the organization out of business, puts employees out of work, damages the local economy, and reduces tax revenues. It makes far more sense to let the organization "reorganize" under the bankruptcy code. It will file a petition that stays collection lawsuits by its creditors, while it comes up with a plan for paying its debts and staying in business. The creditors get to vote on the plan. If the creditors don’t think the plan is a good one, the plan won’t be approved unless those creditors receive 100 percent of their claims (plus interest).

Chapter 11 reorganization has also been used very effectively in mass tort litigation cases to the benefit of both the organization and the victims. A famous example is the asbestos litigation cases. One debtor, Johns Manville Corporation, was the primary manufacturer of asbestos, a product that caused long-term harm to its employees and others working with the material. Eventually, tens of thousands of lawsuits were commenced seeking compensation for harm. Johns Manville had sufficient income and assets to pay all of the claims. The problem was that the cost of settling, or litigating, tens of thousands of lawsuits was wasteful for Johns Manville and harmful to the victims. It was taking decades to resolve the litigation and costing hundreds of millions of dollars in lawyers fees for both the company and the victims. It takes time to assess the harms that were caused, the value of the victims claims, and settle or litigate the amount of payment to be made. The judicial system for resolving these types of mass tort claims is slow, expensive, and unsatisfying for all of the parties.

In the meantime, because of the uncertain outcome of the lawsuits, the business of Johns Manville stagnated. It was unable to borrow money, launch new ventures, expand its business, or hire more employees. After all, would you loan money to, or enter into long-term contracts with a business that was fighting 50,000 unresolved lawsuits?

So, Johns Manville filed a Chapter 11 bankruptcy case and proposed a plan of reorganization. The plan set up special committees and arbiters to determine the amount of victims’ claims. A fund was set up to compensate 100 percent of the value of victims’ claims, plus interest. The plan was voted on by the victims and confirmed. The bankruptcy reorganization process was far quicker than litigating the torts in state courts and, in most cases, victims received their compensation much earlier than if they had proceeded in state court. Johns Manville emerged from bankruptcy as a fully functioning company, operating its manufacturing plants, employing individuals, paying taxes, and freely participating in the U.S. economy. From the perspective of the victims, the company, the employees, and local communities where Johns Manville operated there were no losers.

So, Johns Manville filed a Chapter 11 bankruptcy case and proposed a plan of reorganization. The plan set up special committees and arbiters to determine the amount of victims’ claims. A fund was set up to compensate 100 percent of the value of victims’ claims, plus interest. The plan was voted on by the victims and confirmed. The bankruptcy reorganization process was far quicker than litigating the torts in state courts and, in most cases, victims received their compensation much earlier than if they had proceeded in state court. Johns Manville emerged from bankruptcy as a fully functioning company, operating its manufacturing plants, employing individuals, paying taxes, and freely participating in the U.S. economy. From the perspective of the victims, the company, the employees, and local communities where Johns Manville operated there were no losers.

A situation very similar to that of the San Diego Catholic Church was recently resolved in bankruptcy in Portland, Ore. On April 18, 2007, the Archdiocese of Portland received approval for a reorganization plan that set up a $75 million find to pay 175 claims (and any future claims), without the church having to tap into any of the assets of its many parishes, schools, and colleges. Part of the settlement leading to approval of the plan was an agreement by the Portland Archdiocese to release secret files dealing with priest sex abuse and an apology to the victims - something the victims attorneys had been seeking for 15 years!

Is the same true for the Catholic Church in San Diego? Is bankruptcy reorganization in the best interests of the victims, the church, and its membership, as well as the San Diego community? The answer is unequivocally yes. There are about 150 sexual abuse lawsuits currently pending against the church. These lawsuits may languish in the courts for years while both the Church and the victims stagger along, weighed down by the costs of litigating these lawsuits and the emotional trauma associated with sexual abuse issues. A Chapter 11 bankruptcy is beneficial in several ways.

First, victims get to participate in the Chapter 11 reorganization process and vote on the plan. A committee of victims will be appointed to represent their interests in the bankruptcy process. Once the plan and a disclosure statement are prepared (under the supervision of the court and creditors committees), victims will have an opportunity to vote on the plan. If the plan is less speedy or less compensatory than state court tort litigation, the victims can simply vote no.

Second, the bankruptcy process is going to be far less costly for both the church and the victims. The cost of processing all of the claims in one bankruptcy proceeding is going to be far less than the legal costs of 150 individual lawsuits. Both the Church and the victims will save stunning amounts of money that would have been paid to lawyers if the cases remain in the court system.

Third, it is so important that the healing and mending process begin for the victims as soon as possible. Healing can’t begin with economic compensation issues still pending. By using the bankruptcy system, the process of valuing the claims is shortened and the victims receive their monetary compensation faster. When that part of the process is completed, the victims can move on with the healing process.

Fourth, the church remains a source of sustenance and support to its members and the community. Bankruptcy allows the church to deal with its economic obligations quickly and fully, while continuing to serve its members and the communities of San Diego. By using Chapter 11 bankruptcy, the church can deal responsibly with its economic obligations to the victims while continuing to operate.

Of course, the moral obligations to the victims are not going to be resolved in bankruptcy court - but neither would they be resolved in the 150 lawsuits pending in state court.

Ehrlich is a professor at California Western specializing in bankruptcy law.