Albany’s retired Bishop Edward Scharfenberger filed for bankruptcy this month, shortly after a New York court assigned him personal liability for the failure of a shuttered Catholic hospital’s pension plan.
In a December 12 judgement, Scharfenberger, who led the Albany diocese from 2014 until October of this year, was assigned 10% personal liability in a $54 million judgement for compensatory damages against the former board of St. Clare’s Hospital, which closed in 2008.
The bishop immediately filed for bankruptcy protections, with his personal assets estimated to cover between 2 and 5 percent of his liability for the hospital pensions.
The ruling is unique in that it held personally liable the bishop, as well as his deceased predecessor Howard Hubbard and deceased former diocesan vicar general, but not the Diocese of Albany as a corporation.
The ruling could end up reshaping the landscape of Catholic institutions in America - and will almost certainly trigger a national rethink about bishops’ involvement with Catholic institutions.
The New York verdict is made even stranger by the fact that Scharfenberger sat on the board of the hospital ex officio as local diocesan bishop, nominally responsible for overseeing its compliance with Catholic teaching and the Ethical and Religious Directives which are meant to ensure the Catholic character of affiliated healthcare institutions, but never during the hospital’s period of operation, since it closed its doors six years before his arrival.
St. Clare’s Hospital, originally an apostolate of the Franciscan Sisters of the Poor, ceased operations in 2008, but the civil corporation of the St. Clare’s Corporation was left intact, to administer the defined benefit pension scheme for former employees.
Because the hospital was a religious institution for tax purposes, its pension plan was exempt from the federal regulations of the Employee Retirement Income Security Act, including the obligation to pay into funds for the compensation of stakeholders in the event of the plan’s failure.
As result, the bishops of Albany continued to serve on the board after the hospital’s actual closure, though Scharfenberger testified that no board on which he served ever discussed the state of the pension plan, which closed in 2019 with a $50 million shortfall, leaving some 650 beneficiaries to receive nothing from the plan, and several hundred more getting only 70% of their pension.
Jurors determined that, even though Scharfenberger and his (deceased) predecessor sat on the hospital board in virtue of their office as diocesan bishop, they were personally liable for the pension shortfall, together with the former hospital president and other individuals.
At the same time, they excused the Diocese of Albany from any liability.
That decision is, in itself, curious, since it found the bishop personally liable for what was essentially an institutional obligation of his office, and for the failure of a pension programme outside of the scope of his involvement as he saw it - which was not to provide financial oversight of operations but to ensure compliance with Church ethical directives on healthcare.
Of course, it could equally be argued - and was in court - that the St. Clare’s Corporation retained its Catholic identity following the closure of the hospital specifically to preserve its status as a religious institution and the legal exemptions that status carries.
It is not clear what the exact rationale was that led the jury to assign no compensatory liability to the diocese but 10 and 20 percent liability to the last two bishops to serve on the board - Sharfenberger and Hubbard.
It is possible that the Diocese of Albany being already in Chapter 11 bankruptcy protections might have played into those deliberations, though it remains possible the diocese could yet be assessed punitive damages in a later stage of the legal process.
But, whatever the reason, the decision to hold the bishop personally liable while excusing the diocese would appear to break new legal ground in the U.S., and could trigger a revisiting of canonical arrangements across a range of Catholic institutions.
Bishops in the United States sit on a range of boards for Catholic institutions over which they are canonically expected to exercise a measure of vigilance regarding the Catholicity of their work and policies.
In the vast majority of those cases, the board seat, in many cases even chairmanship, is reserved to the serving diocesan bishop as part of the bylaws of the institution.
Individual bishops arriving at a new assignment are not, as a rule, so much asked if they would like to serve on these boards as given to understand it is part and parcel of the job they have taken on.
Saying “no” to any or all of them would be a bold -perhaps unthinkably disruptive - first act for an incoming bishop.
In many cases, the bishops attend only those meetings which they have to, and - as Scharfenberger apparently testified he did - concern themselves with matters bearing directly on the Catholic character of the institution.
If, as has now been established in a New York court, those bishops can now be held personally liable for financial failures of institutions with which they have only an ex officio relationship, this may trigger a wholesale re-evaluation of those arrangements.
While the St. Clare’s judgement is large in itself, potentially putting Scharfenberger on the hook for millions, it represents the failure of a single institution’s pension plan, and could pale in size compared to, for example, a large Catholic hospital network.
At the same time, unpicking entrenched relationships between bishops and various institutions which claim the name Catholic but over which the Church exercises no real direct governing authority, could prove complicated beyond easy reckoning.
Over previous decades, all manner of healthcare and educational institutions, often founded by religious orders, have been made functionally independent of the Church, led by lay boards and maintaining only the minimal Church affiliation in matters of faith and morals necessary to retain use of the term “Catholic” and the legal and tax privileges which that affords.
That arrangement may, in the light of the New York verdict, now simply be unviable - or at least unacceptable to the individuals involved.
That would almost certainly trigger a complicated and expensive process of disentanglement for all of the institutions, bishops, and dioceses concerned.
And the loss of the legal status as a “Catholic” religious institution could, in turn, threaten the economic viability of many hospitals and educational institutions.
It would also provide a considerable culture shock to the Church in the United States, and a further, perhaps final erosion of what remains of the Catholic footprint on American institutional life.
The alternative, at least with the current state of play in the New York case, is that bishops could now be expected to shoulder personal liability to a slew of ex officio roles as part of the burden of office.
How many serving bishops would be willing to assume this new standard of exposure is hard to estimate.
But it seems likely that many of those who would be would decide they needed to take a far more activist role with their various board positions - ironically, this would in turn seem likely to increase the odds of their, and their dioceses, being held liable in future cases.
An even more unforeseen result, though, could be that this new class of personal liability will become yet another grain in the balance for clerics to weigh when they receive a call from the apostolic nunciature asking them to accept an appointment to a diocese.
While no official statistics are released by the Church, it is a known and generally acknowledged reality of the post-Spotlight and post-McCarrick years that a significant number of priests turn down episcopal appointments when offered.
The example of Sharfenberger, who is now seeking to protect what provisions he has for his retirement against a multi-million dollar liability for a pension fund serving a hospital that was never even open during his tenure as local bishop, is going to be noted by a generation of priests already thinking twice before saying yes to episcopal consecration.