To have a discharge in Debt you must file Chapter 7, and corporations (like the Diocese) can NOT file chapter 7.
General Motors Style Chapter 11
Thus Chapter 11 is the option the Diocese has decided to do. Chapter 11 is an reorganization of debts, all debts still have to be paid (unless reduced for some reason, including agreement by the creditors). The GM Chapter 11, is a classic example. GM filed Chapter 11, sold most of its assets to a new General Motors Company (In August 2009 as it filed Bankruptcy, they was talk of GM changing in Logo from Blue to Green to show that the General Motors Company was NOT the GM of old, the change turned out to be just talk).
Thus today, there is two GM, General Motors Company, the company that Purchased what General Motors Corporation owned and was willing to sell to General Motors Company and Motors Liquidation Company, what General Motors Corporation changed its name to once all the good assets were sold to General Motors Company.
http://en.wikipedia.org/wiki/Motors_Liquidation_Company
General Motors Company LLC, was owned 60.8% by the US Government, 11.7% by the Government of Canada and 17.5% by the United Auto Workers and the remaining 10% to go to the General Creditors of General Motors Corporation. General Motors Company purchased most of the assets of General Motors Corporation. The money used to buy the assets are to pay off the various creditors of General Motors Corporation.
http://en.wikipedia.org/wiki/General_Motors_Chapter_11_reorganization
I bring it up, for while we think in terms of GM surviving the Chapter 11 reorganization, in legal reality what we call GM today is a new entity that just paid the Bankruptcy Courts for the assets of General Motors Corporation. GM Corporation is now Motor Liquidation Company (MLC) not GM.
Technically a Diocese may do the same, set up a new non-profit corporation, sell its assets, in an open auction supervised by the Bankruptcy Court, to that new non-profit, and then let the old non-profit use those assets to pay off the creditors of the Diocese. The Diocese, like GM, can get on with its works, while the old non-profit uses any assets it retains (including what it received in the auction) to pay off all Creditors.
Sears, K-Mart and other retailers Chapter 11
Another way Chapter 11 can be used is for the Diocese to file the Chapter 11, and then set up the Creditors into various classes. The Diocese can then tell them its total value and how much it can pay each class. Secured Creditors must be paid to the full value of anything they hold a security interest in (i.e. any mortgage on any property must be paid in full, unless the mortgage exceeds the value of the property, then only to the value of the property). Unsecured priority creditors must be paid (these are employee salary). Unsecured Creditor gets to divide up what is left. If both sides reach an agreement the retailer gets out of Chapter 11, if any of the classes of Creditors object, a hearing must be held and the Judge gets to decide if the objection to the proposal is correct.
In most such cases, the unsecured creditors are sellers to the retailers, and thus willing to come to terms (they have written off what had been sold, and know the only way for them to make money is to sell to the retailer, so they comes to terms). In cases where litigation is a class of creditors, it is often harder to get them to agree, for how much they are owned is often up to a jury to decide in a separate court action. Thus hard for each members of such a Class of Creditors to decide how much is the value of their claim, thus hard for them to agree to how many pennies on the dollar they are entitled to get.
Technically if no agreement is made with all classes of Creditors, the Bankruptcy Judge can order the sell of the assets and the creditors get to divide up what is received in such a sale (This is what happened to Schwinn, the assets of Schwinn came no where near the claims against Schwinn, and thus its assets, including its name was sold at auction in 1994).
In most cases, the Bankrupt company gets all of the Classes to agree and it emerges from Bankruptcy with new shareholders (who were the old unsecured Creditors), In the case of the Diocese, since it is a non-profit, it can sell its assets and used them to pay off its creditors. In the case of the cases in litigation it can hold off paying ALL of its Creditors, till that limitation is finished and the amount fixed as to number. Once the last lawsuit is resolved, all of the creditors (including the people who sured the Diocese) can divide up assets, once the assets are reduced to a dollar amount.
What I think will happened
The Diocese will file the Chapter 11. It will not want to sell its Churches for neither it, the people suing the Church and the Bankruptcy judge can come up with a good value for such property. Most Churches are barns, to large to convert to anything more then a warehouse. The Stain Glass windows, have value, but once removed from the Church has little resale value for most such Stain Glass is only appreciated in a large building like a church, and most other users of such large buildings see no value in having them. This goes for most of the items inside a Church, high value for the Church, limited if any value outside the church.
As I said, the Churches have value in themselves, but most are based on location. Most are in neighborhoods not business districts, so they have a very limited value to retailers. They have very limited value as warehouses, mostly do to being in locations away from other trucking infrastructure. While I know of two former protestant Churches converted to homes and businesses, these were small churches compared to most Catholic Churches (One church was converted to a one engine fire station, it still has its stain glass windows in its basement). Another to a Doctor's office. The reason for these re use was they was a demand for both in that area and the parish grew to large so they moved to a larger church and sold the smaller church. Churches tend to have no interior baring walls, thus like a barn you can build the inside as you see fit, but only if they is a demand for that type of building. In most cases they is no demand, thus it is not unusual to see old churches just be abandoned and fall apart for no one see how they can use it.
On top of this you have people who will object to the re use of a church, on the grounds it was sacred. These people tend to see such building collapse then restored but at times they have a point. Some Churches signify certain historical events and thus should be maintain to remember those events, even Stalin the enemy of the Orthodox Church saw this value in many of the old Orthodox Churches of Russia (and torn down some, many other Communists pointed out were even more historical).
Since this is DU I will concentrate on the financial and physical problems with selling Churches not the objection based on religion. I will only mention it in passing for the Court will have to consider those objection when it comes to selling these properties and how many potential bidders will stay away just because they do NOT want to be connected to the idea of selling a church.
Thus the assets of the Diocese is limited, but its ability to raise money is decent. On the other hand, if the Churches are sold, how does the Diocese raise money to pay off its creditors?
Thus I see a Chapter 11 filing, not as a delaying action, but as a way to get all of this behind the future of the Diocese. The Diocese will report to the Bankruptcy Judge and its Creditors all of its assets and what it things they can be sold for. The Debtors will have the right to object. Any dispute as to assets and assets value will be decided by the Bankruptcy Judge. People who have claims (including pedophile clams) will have to make a claim (and in pedophile claims ask permission to file a State Claim, such permission will be granted, and either the parties will agree to an amount or wait to how the State Action unfolds). Sooner or later all the parties will have to agree to the total value of the Assets of the Diocese, and the total amount of claims against the Diocese. When that is finally determined, how much each creditor will get (and when) will be set by agreement. If a party does not agree, the Bankruptcy Judge will have a hearing and decide what that Creditor is entitled to (and most often then not what the other parties have agreed to).
Give that pedophile cases take a few years to get through the Court System, this will be in Bankruptcy for a few years, till either the last pedophile is decided by judge and jury or by a consent agreement. Given most people prefer they money NOW not five years from now, most people will reach an agreement.
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