Sexual abuse claimants cannot increase the pool of available assets by forcing a bankrupt Catholic diocese into substantive consolidation with non-bankrupt parishes and schools.
Although the official creditors’ committee had standing to pursue substantive consolidation, the motion failed on independent grounds, without reaching the First Amendment or the Religious Freedom Restoration Act, according to a July 28 opinion by Bankruptcy Judge Robert J. Kressel of Minneapolis.
The Archdiocese of St. Paul and Minneapolis filed a chapter 11 petition in January 2015, joining more than a dozen other Catholic institutions to resolve their liabilities arising from sexual abuse claims. In May, the creditors’ committee filed a motion for substantive consolidation among the archdiocese and about 200 parishes, schools and other non-bankrupt Catholic entities under the control of the archbishop.
Noting that the Eighth Circuit has not decided whether Section 105(a) allows substantive consolidation of debtors with non-debtors, Judge Kressel found the motion defective because broad equitable powers cannot be used to “contravene specific statutory provisions,” citing the Supreme Court’s 2014 decision in Law v. Siegel.
The substantive consolidation motion “squarely implicates” Section 303(a), Judge Kressel said, because that section prohibits involuntary petitions against churches, schools and eleemosynary institutions. To force substantive consolidation on non-bankrupt parishes and schools would “circumvent and contravene Section 303(a),” he held.
Even if the statute permitted, Judge Kressel said that the factual allegations in the motion fell short.
It was not enough to allege that the archbishop “exercises control” by presiding over an institution that is “hierarchical in its organization and authoritarian in doctrinal matters.” The motion, he said, did not allege that the finances were so “confusingly intertwined” that the court could ignore the separate corporate existence of the parishes and schools. The exercise of authority, by itself, fails to “constitute an abuse of the corporate form.”