After 30 years in business, Pachulski Stang Ziehl & Jones knows all about bankruptcies. During the past decade, the Los Angeles-based boutique has carved out a niche representing survivors of sex abuse in bankruptcies filed by various archdioceses and religious orders of the Roman Catholic Church after being hit with demands to resolve hundreds of sex abuse claims.

Founding partner James Stang, whose firm is counsel to the official committees of unsecured creditors in the bankruptcies, talked to The National Law Journal about the unique legal issues involved and the ways on which courts have addressed some of those issues. He explained that the firm first attempted to win the work in bankruptcies filed by the Archdiocese of Portland, Ore., and the Diocese of Tuscon, Ariz., before being hired to handle a case involving the Diocese of Spokane, Wash. In all, the firm has been involved in nine such cases.

The remarks below have been edited for length and clarity.

NLJ: What’s it like representing these kinds of creditors?

Stang: These people are very brave. Given the statutes of limitations around the country, the likelihood of them being successful in litigation has been historically very low, but they come forth with a story that is about as personal as you get. I’ve been a bankruptcy lawyer since 1980 and it’s unlike anything I’ve ever worked on. Beyond the different kinds of legal issues we get to work on, working with these folks is really life-changing. It really is.

NLJ: What are some of those legal issues?

Stang: The First Amendment, which would be both freedom of religion and the establishment clause provisions of the First Amendment and, obviously, a prohibition against the establishment of religion. The way this comes up is [that] the church contends that the court does not have jurisdiction over what it’s doing, because that would impinge on its First Amendment right.

For example, in the Spokane case, the judge had a church lawyer in front of her and they were talking about assessing property, and he pointed out that for the bishop to honor that obligation….he would have to get Vatican approval for the sale of property valued at over $5 million.

There’s also a federal statute called the Religious Freedom Restoration Act (RFRA). It says the government cannot interfere with the exercise of someone’s faith. We are constantly fighting that statute and what it means to have the exercise of someone’s faith being interfered with. Also, a lot of issues deal with the creation of trusts, because the church gets most of its money from donations.

NLJ: On January 17, U.S. Bankruptcy Judge Susan Kelley ruled against the church’s RFRA defense in a case involving the Archdiocese of Milwaukee. Tell me a bit about this case.

Stang: In 2007, the diocese created…the Cemetery Perpetual Care Trust, and that was done by Cardinal [Timothy] Dolan, who is now archbishop of New York. In 2008, he took $57 million, which was sitting in the bank accounts of the archdiocese, and moved it to this express trust for the perpetual care of cemeteries. Dolan noted [that] one of the reasons he was moving the money was to protect it from litigation risks.

NLJ: What were the positions on both sides?

Stang: This law, this federal statute, says the government cannot impose a substantial burden on the exercise of religion unless it has a compelling interest to do so. [They said that] we cannot sue to recover cemetery trust funds in the bankruptcy estate because it’s an important part of the Catholic faith to maintain cemeteries. We don’t dispute that. But the statute says the government cannot do it. We took the position we are the creditors committee in the bankruptcy case, not the government.

NLJ: What did the judge say?

Stang: Judge Kelley ruled on the motion for summary judgment that RFRA did not apply because the creditors committee is not a government actor. For RFRA purposes, this is the first time a judge has ruled on that issue—whether the committee as a litigant is the equivalent of the government actor. It’s never been addressed by a court as far as I know. It’s always asserted, but Milwaukee was the first time it has been litigated in any of the church cases.

NLJ: How could this ruling affect other cases?

Stang: We represent a committee of the Christian Brothers of Ireland, a religious order in New York. We’re pursuing the recovery of a high school that was fraudulently conveyed 20 years ago. Before [U.S. Bankruptcy] Judge [Robert] Drain, the church raised the issue of religious freedom. That issue hasn’t been presented before Judge Drain formally, but now we have a ruling from Judge Kelley that RFRA does not apply when the creditors committee is suing, and we’ll use that decision in front of Judge Drain, hoping he’ll find guidance with it.

NLJ: How successful have creditors been in these cases?

Stang: Sex abuse survivors have had two agenda items. The first and foremost is that the church undertake operational reforms to prevent future abuse. And every plan that I have been involved in has had what we call non-monetary covenants. I’ve never seen this in a Chapter 11, but we’ve been successful in guaranteeing a commitment by the dioceses to change how they’re operating. The most significant change is the publication of documents. The Milwaukee archdiocese in the last week has agreed to release documents regarding priests who have credible accusations against them.

NLJ: And as for monetary claims?

Stang: The average distribution is probably diluted a little bit. It depends on the insurance coverage that exists, so a big part of my practice is to investigate the existence of insurance. We’re looking at cases from the ’50s and ’60s and finding insurance policies from the ’60s. You’ve got the church protecting its own assets, like cemetery trusts and real estate. And then you’ve got insurance companies, that typically—and I’m not saying it’s not true—assert they don’t have copies of these policies anymore.

NLJ: What’s your opinion on Pope Francis, who this month called on the Catholic Church to take action against sexually abusive priests?

Stang: This is a huge bureaucracy, and appointing someone who is a caretaker pope who isn’t going to be around long enough to make the institutional changes that have to be made is to me really the issue, when you look at this from a sex-abuse perspective. It’s important he addressed it early on in his reign. But how it translates down into local action is yet to be seen.

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