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FOLLOW-UP

Sex cases may cost church $100m

By Stephen Kurkjian and Walter V. Robinson, Globe Staff, 3/3/2002

he Roman Catholic Archdiocese of Boston, already in fiscal distress from years of spiraling costs, now faces the prospect of paying more than $40 million to settle 140 pending sexual molestation claims against priests and perhaps tens of millions of dollars beyond that to settle new claims that are pouring in.

In the end, the combination of past, pending, and new claims is expected to cost the archdiocese more than $100 million, according to estimates from advisers to Cardinal Bernard F. Law and others who are familiar with church finances.

Of the $40 million in pending settlements, less than $10 million is covered by insurance. The limits of the archdiocese's liability insurance coverage for the years when most of the abuse occurred is all but exhausted, and insurers are refusing to cover other cases, contending that Law and other officials acted recklessly in assigning priests they knew were molesters, according to one of the cardinal's advisers.

The estimated $30 million to $40 million already paid to victims over the last decade plus the $40 million for the pending cases will make Boston's the costliest priest abuse scandal in the history of the Catholic Church in the United States.

One hundred victims of just one priest, convicted pedophile John J. Geoghan, have already received $15 million, according to church officials. They estimate that 90 other pending claims against Geoghan could cost more than $25 million.

Despite the probable costs, some top advisers to Law believe that the archdiocese has no alternative but to make equitable out-of-court settlements.

''The archdiocese can survive financial insolvency,'' Robert Popeo Sr., chairman of the law firm Mintz Levin, said in an interview. ''But we cannot survive moral bankruptcy, and that's what we face right now, unless we eradicate this problem of pedophilia.''

The archdiocese is so concerned about the high costs that Law has been telephoning wealthy donors, hoping to raise $25 million for a special fund he wants to create to settle the sex abuse cases. Moreover, the cardinal and some of his advisers have considered seeking a long-term loan from the Knights of Columbus, a national Catholic fraternal organization that has substantial assets, or selling major parcels of real estate to fund the settlements.

But a Globe Spotlight Team review of church documents and public records, along with interviews with people involved in archdiocesan finances, shows that in recent years the archdiocese has sold off most of its investment portfolio and substantial real estate holdings from its central funds to cover revenue shortfalls in existing operations.

Moreover, despite the cardinal's assurances that no settlements have been or will be paid from donations by Catholic laity, the records, along with interviews, suggest that some of the settlement funds have come at least indirectly from parishoners.

Unlike Popeo, some of Law's outside lay advisers have proposed that the archdiocese take a tough negotiating posture on pending cases, including forcing some victims to go to trial, where judges would be forced by the state charitable immunity law to reduce any jury award to $20,000.

Their fiscal concerns appear to be warranted: In the five years that ended last June 30, the archdiocese sold off 60 percent of its stocks and 98 percent of its bonds, according to limited financial statements the archdiocese made available in response to a Globe request.

By far the largest block of stock sales were made in the final year of that period, when the archdiocese sold nearly $10 million in stock, in a down market, to pay for current operations.

Starting in 1994, soon after the archdiocese began paying secret settlements to people who had been sexually molested by priests, the sale of real estate soared, as well. From 1994 through last December, the property-rich, cash-poor archdiocese sold $33 million in real estate, with the proceeds going into its central funds or to its parishes.

Law and David W. Smith, the archdiocese's chief financial officer, have insisted that no archdiocesan general funds or parish collections have been used to pay settlements for sexual abuse victims. Instead, church officials blamed the financial losses on the fact that regular collections and fund-raising appeals have remained flat at about $28 million a year, while the archdiocese has had to increase spending for needy parishes and poor urban parochial schools, as well as for improved technology and Y2K conversion costs.

But some officials who have reviewed the archdiocese's finances said that church funds have been used, at least indirectly, to help pay victims of sexual abuse by priests. For example, most of the premiums used to finance the archdiocese's self-insurance fund are paid out of donations made to individual parishes.

One outside specialist who has been consulted by the archdiocese said that if Law can coax wealthy donors to give $25 million for the settlements, much of that money would otherwise have been donated for other church programs. Those programs will, in turn, require a greater cash infusion from collections taken up by parishes for the archdiocese.

Several Boston business leaders whom Law has consulted in recent weeks said that the spate of civil cases brought against the church for clergy sexual abuse will probably result in long-standing financial damage to the archdiocese.

In addition to the estimated $80 million to $90 million already paid or anticipated to be needed to close out pending cases, the archdiocese will probably face escalating demands from the scores of victims who have come forward in the two months since disclosure of the extent of sexual abuse by priests and revelations of the archdiocese's decade-long effort to keep the problem secret.

Last Sunday, the Globe reported that more than 200 people who say they were victimized have contacted lawyers from just three law firms. In addition, the archdiocese faces claims from more than 20 victims of Christopher Reardon, a lay youth worker at St. Agnes Parish in Middleton. In the face of growing evidence that the archdiocese failed to act on warnings about Reardon's behavior, there are estimates that the Reardon case alone could add another $10 million to the overall settlement costs.

Meanwhile, Law has already committed the archdiocese to creating what he hopes will become a nationally recognized ''Center for Excellence'' to study the problem of sexual abuse of minors. The estimated cost, according to one adviser: $10 million.

There is spirited debate among the cardinal's advisers on how generous the church should be in settling claims.

Under state law covering charitable organizations, even a multimillion dollar jury verdict against the archdiocese would automatically be reduced to $20,000. And judgments against clerical supervisors like Law, who have little in the way of personal assets, would probably be uncollectible.

But Popeo and others have urged Law to maintain the current practice of compensating victims as if the archdiocese were not protected by the $20,000 limit. Victims who have been raped by priests or have suffered long-term damage from sexual molestation have often received six-figure settlements.

While some prominent Catholic philanthropists, including John J. Shaughnessey, have said they would donate to the $25 million fund, others doubt that the goal is attainable. One business leader, who asked that he not be identified, said he and his peers might be able to raise $10 million. If more is needed, he said, ''all I can think of is for the archdiocese to sell off some buildings.''

In Boston alone, the archdiocese and its parishes own 249 pieces of real estate, which are assessed for $220 million, according to city assessing records. Assessments typically lag well behind actual property value.

Whatever the cardinal can raise, the archdiocese has little choice but to settle the cases reasonably, said an adviser who is involved in the issue. The adviser, who asked that he not be identified, said that any public trials, with Law testifying, would further erode the church's stature and drive away many of its major benefactors. Large out-of-court settlements would prove less costly in the end, the adviser argues.

Other dioceses around the country have kept secret the cost of settling sexual abuse claims. But major judgments after jury trials threatened the financial stability of some dioceses. In Dallas, plaintiffs agreed to accept $23 million in 1998 after the diocese there said it was unable to make good on a $119.6 million award made by a jury on a sexual abuse case against a single priest. During the mid-1990s, the Archdiocese of Santa Fe was driven to the brink of bankruptcy when it had to share costs with its insurance companies of settling more than $40 million in sexual molestation claims.

In Boston, the archdiocese and the three insurance companies that covered the church for sexual abuse claims for most of the past 40 years have steadfastly refused to say how much they have paid to settle cases during the period or to disclose how much was covered by the insurers.

Instead, the archdiocese provided the Globe with official audits since 1996 of its central funds, out of which the archdiocese pays administrative costs. Those documents show major annual revenue shortfalls.

Recent audits showed that the central funds had $10 million in losses in 2000 on an overall budget of $46 million, and they lost another $1 million last year. To make up for the losses, the archdiocese transferred $7.3 million into its central funds last year from other accounts, including those that operate St. John's Seminary, Catholic cemeteries, and clergy retirement. The archdiocese also sold off much of its investment portfolio.

Several accounting specialists said in interviews that it was impossible to gauge the financial health of the archdiocese from the audit of the central funds alone. An audit of all funds, particularly the insurance fund, would be needed to determine how the settlements have been paid, they said.

Without reviewing financial statements from all the funds, said William Coyle, an accounting professor at Babson College, ''it's like playing a shell game and only getting to look under one shell to see what's there.''

Smith, the archdiocese's chief financial officer, denied that proceeds from the sale of investments or property had gone to pay off the mounting number of settlements.

''No money for any settlement has ever come from the general funds of the archdiocese,'' Smith said. ''Every dollar for this purpose has come from the insurance fund of the archdiocese. It is only from our insurance business that monies have come to pay these claims.''

In virtually every claim against a priest, the archdiocese is represented by its law firm, and private lawyers have been retained to represent the priests, at substantial cost over the last decade. One person who has been involved with the settlement process said that the archdiocese established a separate fund to pay those legal bills and that the bills were paid in a way that appeared designed to conceal the transaction.

That person, who declined to be identified, said the private lawyers billed the priests. From the separate fund, the archdiocese made loans to the priests. In turn, the priests deposited the funds in their personal accounts and wrote checks to the lawyers. The loans, he said, were then forgiven by the church.

The church's insurers - first Kemper, then Aetna and Travelers - have also resisted contributing to many settlements. Among other issues, the archdiocese has long since exceeded its maximum coverage for incidents of abuse that occurred between 1950 and 1977. Since 1989, the archdiocese has been self-insured, and it purchases excess liability coverage through the National Catholic Risk Retention group, a self-insurance consortium of 56 dioceses.

Even though the church purchased the excess liability coverage for some years before 1989, the companies have rejected many other claims. According to one of the cardinal's advisers, the companies insist they are not responsible, because Law and his top deputies acted recklessly in keeping priests in active service, even though officials knew the priests had molested children.

As a result, the adviser said, the insurers will only contribute $6 million to $10 million to the pending settlements.

Church officials declined comment when asked about disagreements with the insurers regarding coverage.

Frederic N. Halstrom, who is negotiating settlements for several clients allegedly molested by priests, said the archdiocese is not relieved of responsibility to the victims because it is uninsured for many of the claims.

''The claims are not going to go away because the archdiocese doesn't have any more insurance to cover them,'' Halstrom said. ''They're going to have to find a way to make good on them themselves.''

Scott Bernard Nelson and Matt Carroll of the Globe Staff contributed to this report.

This story ran on page A1 of the Boston Globe on 3/3/2002.
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