Angry that creditors have received nothing in three years, Bankruptcy Judge Robert J. Kressel denied dueling chapter 11 plans submitted by the victims of sexual abuse and by the Archdiocese of St. Paul & Minneapolis. Noting that so far only lawyers have been paid during the reorganization, which will mark its third anniversary on Jan. 16, Judge Kressel handed out a tongue-lashing to everyone involved, including the debtor, the creditors, and insurance companies.
In three opinions on Dec. 28, Judge Kressel of Minneapolis made law in the Eighth Circuit governing the confirmation of reorganization plans dealing with mass torts, channeling injunctions, third-party releases, and insurance disputes.
Having found both plans fatally defective, Judge Kressel said the creditors’ committee “must put aside its desire for retribution.” The church, he said, “must put aside its desire to minimize pain, realizing that the personal pain its employees inflicted on victims is inevitably going to result in financial pain . . . by a new generation of parishioners.”
Judge Kressel also appeared to demand concessions from the victims’ lawyers. He said almost all of them had contingency agreements where they stood to collect one-third from each victim’s recovery. Estimating that the victims’ legal fees could be $40 million, he said that “is [a] pretty hefty sum for completing proofs of claim.”
Judge Kressel’s Dec. 28 opinion denying confirmation of the church’s plan is notable for its survey of law, circuit by circuit, on the ability to confirm a plan with so-called third-party releases. In the archdiocese’s case, the plan would have prevented creditors from suing individuals, parishes, and insurance companies.
The judge divided his analysis into groups: circuits that allow third-party injunctions, those that do not, appeals courts that permit injunctions on consent by the affected creditors, and circuits where third-party releases are not disallowed but may be possible.
With regard to the Ninth and Tenth Circuits, which are usually cited for the proposition that third-party releases are never allowed, Judge Kressel said, “I doubt that is what the cases really stand for.”
In the Eighth Circuit, where there is no definitive law, Judge Kressel said that “plans containing third-party releases can be confirmed under appropriate circumstances.” He then laid out four tests: (1) There must be numerous claims against the debtor and co-liable parties; (2) the non-debtors must make “a substantial contribution;” (3) the releases must be important to the reorganization; and (4) there must be “significant acceptance” of the plan by creditors who must give up their claims.
Although he also found defects in other aspects of the plan, he said the church’s plan “clearly” failed the fourth test because the “sexual abuse victims [have] overwhelmingly rejected the debtor’s plan.”
While Judge Kressel found that the church had submitted the plan in good faith, he said “that for decades the response by officials of the Archdiocese to sexual abuse of children was disgraceful.”
Similarly denying confirmation of the plan submitted by the committee representing victims, Judge Kressel said it “would be a boon for lawyers” but would spawn years of litigation that “will frustrate the creditors’ legitimate rights.”
Among the particular objections he sustained, Judge Kressel faulted the creditors’ plan for having no provisions to pay the contribution claims of parishes. He also said that the victims’ plan would cut off the parishes’ rights to have their indemnification claims paid from insurance or the trust created to pay claims.
On an issue that touches on the First Amendment, Judge Kressel held that the creditors’ plan “impermissibly interferes with the church’s governance” by virtue of provisions that would restrict the ability of the archdiocese “to support and maintain the priests.”
Judge Kressel also found the creditors’ plan infeasible because it would leave the church “with no assets but responsible for significantly large financial obligations,” including the claims of victims who chose to sue the archdiocese. “On the face of the plan,” he said, “further reorganization would be necessary.”
The opinions urging the parties to compromise and denying confirmation of the debtor’s and the committee’s plans are in In re Archdiocese of St. Paul & Minneapolis, 15-30125 (Bankr. D. Minn. Dec. 28, 2017).