U.S. Bankruptcy Judge Patricia Williams threw out the agreement during a telephone conference hearing, according to lawyers who took part. The judge urged the dozens of lawyers representing the diocese, victims, parishes and other parties to enter into mediation.
The judge, noting that bankruptcy law calls for settlements to be "fair and equitable" to all parties, decided the deal favored the 75 people over other alleged victims, lawyers for both sides said.
The deal, announced earlier this year, was controversial from the start because it covered only a fraction of those who had filed lawsuits contending they were abused by priests in Spokane. About 185 individual claims have been filed against the diocese, although Williams has said some are duplicates and others are invalid.
"I think the elements of the settlement we proposed with the 75 victims still have merit. The judge clearly found concerns with some elements," said Shaun Cross, a lawyer representing the diocese.
Spokane Bishop William Skylstad, president of U.S. Catholic bishops, is among the clerics accused of abuse in the bankruptcy claims. He has vehemently denied having sexual relations with a woman in the 1960s.
The diocese filed for bankruptcy protection in 2004, citing abuse claims of about $81.3 million against assets of about $11 million. Spokane is one of three U.S. dioceses that have filed for bankruptcy because of the abuse crisis.
Mike Ross, a member of the Spokane chapter of Survivors Network of Those Abused by Priests, who would have been covered by the diocese's settlement offer, said the judge's ruling will ensure everyone gets compensated.
"I think it's positive. All victims need to be compensated for their pain and suffering," he said.
However, David Clohessy, national director of SNAP, said by e-mail from St. Louis that the judge's rejection of the diocese's offer will hurt victims who thought they would be compensated.
"Our hearts ache for the dozens of deeply wounded and still hurting victims who thought a deal with the bishop was a deal," Clohessy wrote. "Equality is a valuable goal, but so too is healing and closure."
Gayle Bush, a Seattle lawyer who co-wrote an alternative victim payment plan, said the diocese's proposed settlement failed to take into account victims who did not sue, or those who come forward in the future.
"The ruling today was a very clear statement from the court that the confirmation of a plan in bankruptcy requires fair and equal treatment for all members of the same class," he said. "Her conclusion was the proposed settlement agreement did not meet the bankruptcy code standards for fair and equal treatment."
Lawyers representing people not covered by the settlement earlier this week filed an alternative plan that would assess individual parishes nearly two-thirds of the market value of their churches and schools in exchange for avoiding possible foreclosures.
The diocese's $45.7-million settlement offer had been opposed by the individual parishes, which said it appeared to rely on parishes to act as unlimited guarantors for future payments.
Bob Hailey, a lay co-chairman of the Association of Parishes, was pleased with the judge's decision.
"The true significance of the ruling is the diocese is no longer bound by the terms of an unworkable settlement agreement," Hailey said. "The Association of Parishes had asked that the judge order the parties to participate in mediation. The judge did that, and we think that is a positive development."