Special Report-Boy Scouts, Catholic dioceses find haven from sex abuse suits in bankruptcy

[December 30, 2022]  By Kristina Cooke, Mike Spector, Benjamin Lesser, Dan Levine and Disha Raychaudhuri

(Reuters) - Lawmakers around the United States have tried to grant justice to victims of decades-old incidents of child sexual abuse by giving them extra time to file lawsuits. Now some of the defendants in these cases, including church and youth organizations, are finding a safe haven: America’s bankruptcy courts.

In New York, nearly 11,000 cases flooded state courts, many seeking to hold Catholic dioceses responsible for sexual abuse by clergy, after a 2019 law suspended statutes of limitations that would have otherwise barred many of the lawsuits. In response, four New York dioceses that collectively faced more than 500 sexual-abuse claims filed for bankruptcy. That halted the cases — and blocked those from anyone who might sue later — and forced the plaintiffs to negotiate a one-time settlement for all abuse claims in bankruptcy court.

The pattern has taken hold across the United States, a Reuters review of bankruptcies precipitated by mass child sexual-abuse litigation found.
 

Many of the defendants turning to bankruptcy court are nonprofit organizations. In court filings dating back to 2009, the Boy Scouts of America, a New York boys & girls club and 13 separate Catholic institutions each have cited state laws extending abuse victims’ right to sue as factors in their decisions to seek bankruptcy protection.

Such bankruptcies are “the counterpunch” to the state laws enabling more victims to seek justice and compensation through lawsuits, said Stephen Rubino, a lawyer who’s represented clergy abuse victims for more than 30 years.

In all, 23 states, two territories and Washington, D.C., have passed laws that suspend statutes of limitations for sexual-abuse victims who were previously prevented from suing over older cases. The suspensions typically last a year or more, allowing plaintiffs to file new lawsuits involving old abuse cases during that period. California, New York and several other states passed such laws in 2019.

Bankruptcy courts are undermining the impact of the statutes, some legal experts and victims’ advocates say. Judges overseeing these Chapter 11 filings set their own deadlines to file a sexual-abuse claim for compensation from the bankruptcy settlement.

Victims who miss the bankruptcy claims-filing deadline receive nothing or are forced to compete for limited funds set aside for unknown future claimants, the Reuters review of bankruptcies found.
 

“As we dramatically increase access to justice through statutes-of-limitations reform, we have more organizations going into bankruptcy because, frankly, bankruptcy law favors the organizations,” said Marci Hamilton, the founder of Child USA, a group that has advocated for laws expanding sexual-abuse victims’ rights to sue.

Child sexual-abuse victims often don’t come forward until much later in life, sometimes past the age of 50, according to several victims’ lawyers and studies on abuse disclosure. Some are not aware of bankruptcy proceedings that affect them until it is too late.

Bankruptcy claims-filing deadlines can force victims to come forward before they are ready, Hamilton said. And abuse claimants have limited leverage in Chapter 11 cases that halt their litigation and shield organizations such as dioceses, schools or youth organizations from current and future lawsuits, she said.

“The federal bankruptcy law is just defective when it comes to sexual-abuse victims,” Hamilton said. “Their voice is just stolen from them.”

Reuters identified settlements in 23 bankruptcies precipitated by child sexual-abuse scandals that halted current and future lawsuits and forced claimants to seek compensation from a trust. The cases involved the Boy Scouts, 21 Catholic organizations and USA Gymnastics. The youth gymnastics organization filed for Chapter 11 protection in 2018 amid a surge of lawsuits alleging abuse by convicted child sexual abuser Larry Nassar. (Now in prison, Nassar could not be reached for comment.)

The Boy Scouts and USA Gymnastics did not comment for this story.
 

The Boy Scouts and others have argued that their bankruptcy plans seek to pay claimants fairly and equitably, whereas civil litigation can result in some victims winning large jury verdicts and others receiving smaller judgments or nothing. USA Gymnastics has said it sought bankruptcy protection “to pave the way toward a settlement” with abuse survivors, who last year approved a plan paying them $380 million.

The organizations also often conduct extensive marketing campaigns to ensure that potential victims know they can seek compensation in the Chapter 11 cases, a review of the cases shows. The Boy Scouts, for instance, said on a website the group set up for restructuring that it launched a “comprehensive noticing campaign” in the media.

The Madison Square Boys & Girls Club in New York City referred Reuters to a bankruptcy-court declaration filed in June by its chief financial officer, Jeffrey Dold. Dold said the organization sought Chapter 11 protection after trying and failing to resolve about 140 pending claims of sexual abuse by club employees and volunteers between the 1940s and 1980s, all filed after the passage of New York’s claims-revival law. The club filed bankruptcy, Dold said, “to provide a forum to address those claims fairly and equitably.”

The U.S. Conference of Catholic Bishops had no comment on the new state laws or their impact nationwide on Catholic organizations facing sexual-abuse lawsuits. In a statement to Reuters, it said it defers to state and local catholic leadership organizations on state laws and bankruptcies. The conference noted the importance of “pastoral outreach” to abuse victims and said that local dioceses have victim assistance coordinators to “assist survivors and accompany them as they seek healing.”
 

The nonprofit organizations’ bankruptcies don’t protect the individual abusers themselves, whom victims can still sue. But they do grant lawsuit immunity to the entities that oversaw employees or volunteers accused of abuse.

Lawyers defending organizations targeted by sexual-abuse claims, along with some plaintiffs lawyers, say bankruptcy provides a fair way to compensate victims, many of whom want to avoid the ordeal of a lawsuit and a potential trial. Moreover, organizations and insurers paying the settlements won’t agree to any deal that doesn’t shield them from additional liability, said Susan Boswell, a retired lawyer who represented dioceses in bankruptcies from Arizona to Minnesota.

“If you can’t have finality,” she said, “then you are not ever going to be able to get one of these cases done.”

America’s federal bankruptcy courts play a critical role in justice and commerce by giving businesses overwhelmed by debt an orderly process to settle with creditors during a reorganization or liquidation. Those debts can include liability from lawsuits over deadly products, fraud, sexual abuse or other wrongdoing.

The power of U.S. bankruptcy courts to grant lawsuit immunity to organizations in bankruptcy, their leaders and affiliated entities has expanded over time. And so have the legal tactics of entities seeking Chapter 11 protection: Some corporations engulfed in scandals are now creating subsidiaries solely to absorb their lawsuit liability and declare bankruptcy.

Nonprofit organizations facing sexual-abuse lawsuits have pulled another page from the corporate bankruptcy playbook: In striking settlements, they typically seek “nondebtor releases” for their associated entities, such as religious schools and individual parishes. Such releases shield people and entities from lawsuits over issues taken up in bankruptcy settlements. By piggybacking on a nonprofit’s Chapter 11 filing, its affiliated organizations or leaders often get these liability shields without having to file for bankruptcy themselves.
 

Judges often appoint someone to advocate for the interests of potential victims who have not yet sued or made a claim in bankruptcy court. Known as future claims representatives, these appointees are often lawyers or financial professionals who are paid by the debtor and tasked with estimating the number of future claims and the funds needed to cover them. The reality, however, is that late filers often end up competing for smaller amounts than those who meet the deadline, according to court records reviewed by Reuters and attorneys involved in the proceedings. Unknown claimants become “numbers on a chart,” Rubino said.

JUSTICE DENIED

A former Boy Scout, C, alleges a Scout leader abused him when he was a teenager. Reuters agreed to identify the former Scout, now 40, only by his first initial.

He sought compensation in the Boy Scouts bankruptcy in June, long after a deadline of November 16, 2020 for filing claims. C is now unlikely to recover much, if anything, from the $2.46 billion settlement the Boy Scouts reached with claimants alleging sexual abuse, his lawyer said. That’s because claimants who miss the deadline face a gauntlet of additional hurdles and conditions, according to C’s lawyer and a review of the Boy Scouts settlement terms.

The Boy Scouts bankruptcy reorganization plan, approved by a judge in September, halts all lawsuits against the Boy Scouts, local councils, churches and other organizations that chartered scouting activities.

A victim of child sexual abuse, who Reuters agreed only to identify by his first initial, C, is pictured here at a California state park, December 23, 2022. REUTERS/Carlos Barria

The bankruptcy’s claims-filing rules take precedence over a recent law passed in California, where C says he was abused, that expanded sexual-abuse victims’ rights to sue. The bankruptcy proceedings generally trump state laws because bankruptcy courts are federal, and typically have the power to override state statutes and halt state lawsuits or court orders.

U.S. Bankruptcy Judge Laurie Selber Silverstein reasoned in approving the Boy Scouts settlement that it was a better solution for victims than seeking compensation in trial courts.

Silverstein declined to comment for this story. In a July opinion approving aspects of the Scouts’ reorganization plan, she noted that insurance carriers, local Scouts councils and chartered organizations would not contribute to the settlement without receiving nondebtor releases from liability. She agreed with lawyers for the Boy Scouts and some claimants that the only alternative to a settlement was a “‘death trap’ of litigation with minimal recoveries in sight.”

“These boys–now men–seek and deserve compensation,” the judge wrote, for “abuse which has had a profound effect on their lives and for which no compensation will ever be enough.”

Beyond questions of fair compensation, C said the bankruptcy is preventing him from getting his day in court against the Boy Scouts to present what happened to him.
 

C grew up in an unstable home in northern California. His mother considered the Boy Scouts a safe environment for her son. For years after a Scout leader allegedly abused him and other boys, C struggled with acknowledging that what had happened to him was wrong, he told Reuters. He had trusted his Scout leader.

Within the past couple of years, he spoke at length with another former Scout about the leader’s behavior, he said. The emotional conversation prompted C to reflect on the damage in his own life stemming from the abuse. He said in an interview that his own struggles relating to others began to make more sense. C lives with his mother, sometimes sleeps in his car and has struggled to find a steady career.

“I’m waiting to stand in front of a judge,” C said, and hoping for that judge to say: “‘What happened to you was wrong.’”

‘THE PRIEST WOULD NEVER DO THAT’

Some plaintiffs’ attorneys say bankruptcy proceedings can provide a better way to compensate many sexual-abuse victims than trial courts. Victims often don’t want to go through the ordeal of suing their abusers or the organizations that may have enabled them, said Dan Lapinski, a Motley Rice LLC lawyer representing Boy Scouts claimants. For them, seeking compensation through bankruptcy can allow victims to file a claim confidentially and avoid reliving their trauma in open court.

“I have clients who fall into that category” in the Scouts matter, Lapinski said, noting that these victims might not have pursued their claim at all outside of bankruptcy court.
 

Financial coffers of individual dioceses are usually smaller than those of large corporations, said Boswell, the retired lawyer who has represented dioceses facing abuse allegations in bankruptcies. Expensive litigation cuts into the money available for compensation, she said, but a bankruptcy reorganization can attempt to pay all claimants equitably.

Still, there is often little left for claimants who come forward later, after bankruptcy filing deadlines pass.

In January 2020, a 59-year old former altar boy named Henry attended a church service in Minnesota on a visit back to the state to see family. After the service, Henry said, the priest spoke to parishioners about the financial impact of the 2018 bankruptcy of the local Winona-Rochester diocese, caused in part by sexual-abuse claims.

Henry knew the abuse first-hand. When he was 17, a priest assaulted Henry in a pool shower after swimming, he said in an interview. He had kept what happened to himself in part because he thought nobody would believe him, said Henry, who spoke on condition that he be identified only by his middle name.

Before clergy sexual-abuse scandals emerged worldwide, his community’s attitude was “the church would never do that, the priest would never do that,” he said. “You’re kind of squelched from the get-go.”

Finding out about the bankruptcy in church that day emboldened Henry to come forward, too, he said. Two days after the priest’s comments, he contacted a lawyer who filed a late claim on his behalf. But relatively little money — a maximum of $750,000 — had been set aside for claimants who came forward after a 2019 deadline. Henry received $20,000, which he described as “an almost laughable“ amount.
 

Henry could receive more money later, depending on how many additional claims are filed and how a trustee who determines payouts views his claim. But a final determination won’t be made until a deadline for filing late claims passes several years from now, according to documents Reuters reviewed. The judge in the case declined to comment.

By comparison, the settlement covering the 145 sexual-abuse claimants who filed on time was nearly $28 million. That would equate to about $190,000 per victim. The amount individual claimants might receive varies, depending on factors including the duration, severity and impact of their alleged abuse, according to court documents.

“What I don’t like is that they put some arbitrary cap on anybody who filed after” the deadline, Henry said.

Peter Martin, a spokesperson for the Winona-Rochester diocese, declined to comment on its bankruptcy proceedings. Martin did not respond to inquiries about Henry’s allegations of sexual abuse.

POWER AND TRUST

Statutes of limitations exist for good reason, some legal scholars say.

Historically, states enacted them to encourage plaintiffs to file timely lawsuits based on “reasonably fresh” evidence, said Marie T. Reilly, a professor at Penn State Law in University Park, Pennsylvania. Reilly argues that allowing victims to sue long after their alleged abuse threatens the integrity of the legal system in the name of exacting retribution against institutions such as Catholic dioceses.

Over time, memories deteriorate, witnesses die and documents can go missing, she said. “The ability to mount a defense deteriorates with the passage of time,” Reilly said.
 

New York State Senator Brad Hoylman, a Democrat, sponsored the state’s bipartisan legislation reviving child sexual-abuse claims. He told Reuters he pushed the bill because it can be especially difficult for individuals to come forward with allegations against abusers who are often “in positions of power and trust.”

For thousands of victims with revived legal rights to seek accountability from institutions in trial courts, bankruptcy filings can be crushing.

Doug Kennedy was a teenage Boy Scouts camp staffer in upstate New York when a camp director raped him repeatedly and forced him to engage in other sexual activity, according to a lawsuit he filed. His case was halted by the Boy Scouts bankruptcy. In the years after the assaults, he told Reuters, he buried his memories of the abuse.

The man Kennedy accused of abuse, Bruce DeSandre, declined to comment through his attorney. In a court filing, DeSandre denied Kennedy’s allegations of sexual abuse and argued that New York state’s revival law was unconstitutional.

When Kennedy, now a college professor, finally came to grips with his abuse, the statute of limitations for filing a lawsuit had passed.

In January 2019, he retreated to his office at Virginia Wesleyan University, drew the shades and watched a streaming feed of the New York state legislature’s vote to change the law and allow victims like Kennedy to file lawsuits over abuse that occurred long ago.

“I broke down, completely broke down,” he said.

He thought he would finally get a chance to get accountability for what was allowed to happen to him. Later that year, in August, he filed his lawsuit against defendants including a Boy Scouts local council and DeSandre.

About six months later, the Boy Scouts filed for bankruptcy. Kennedy said his feeling of hope drained away when he heard the news.
 

“Bankruptcy is not justice,” he said. “Bankruptcy is business.”

(Reporting by Kristina Cooke, Benjamin Lesser, Dan Levine, Mike Spector and Disha Raychaudhuri; editing by Janet Roberts and Brian Thevenot.)

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