Electing not to follow a decision by the Bankruptcy Appellate Panel in his circuit, Bankruptcy Judge David T. Thuma of Albuquerque, N.M., granted derivative standing permitting the official creditors’ committee to bring fraudulent transfer claims in the chapter 11 reorganization of the Archdiocese of Santa Fe.
Although he did not rule on the merits of the committee’s proposed claims, Judge Thuma said there were “difficult” issues. He admonished the parties not to spend money in litigation that should be paid to claimants.
Restructuring the Parishes
Some of the 90 Catholic parishes in northern New Mexico were established centuries before the Vatican recognized the archdiocese in 1875. The archdiocese itself was not incorporated until 1951.
In early 2013, the archdiocese formed a real estate trust and a financial asset trust into which the church made transfers of about $60 million. In addition, the archdiocese claims it is holding $57 million in real estate for the benefit of parishes.
Beset with claims of sexual abuse, the archdiocese filed a chapter 11 petition in December 2018.
The committee crafted three fraudulent transfer complaints aiming to recover over $150 million. Judge Thuma said the claims were “potentially” the largest assets of the estate. Believing the claims lacked merit, the archdiocese declined to bring the suits on its own, so the committee sought derivative standing from the court.
The BAP Opinion Against Derivative Standing
The church opposed the motion for derivative standing, citing a decision by the Tenth Circuit Bankruptcy Appellate Panel holding that the court may not confer derivative standing on a creditor to assert a fraudulent transfer claim. In re Fox, 305 B.R. 912 (B.A.P. 10th Cir. 2004).
Judge Thuma said that the BAP’s Fox decision represented a “tiny minority.” The seven circuits reaching the issue have allowed derivative standing, he said, along with “[a]lmost all bankruptcy courts,” BAPs and district courts.
Judge Thuma listed provisions in the Bankruptcy Code from which the power to confer derivative standing might be inferred. He cited the Third Circuit for saying that the power is a “straightforward application of the bankruptcy court’s equitable powers.” In re Cybergenics Corp., 330 F.3d 548, 568 (3d Cir. 2003).
Judge Thuma concluded that BAP opinions in his circuit are “persuasive authority but not binding precedent.” He adopted the majority view and ruled that the court has power to confer derivative standing.
Are the Claims Colorable?
Judge Thuma turned to the question of whether the committee had made the requisite showing. Whether the claims are “colorable” was the issue, he said.
The church contends that the claims are barred by the First Amendment. Judge Thuma said “it may be difficult” to find a violation of the Free Exercise Clause because fraudulent transfer laws are “neutral and of general applicability.”
Next, the church raised the Religious Freedom Restoration Act, but Judge Thuma cited three circuits for holding that it only applies when the government is a party. To prevail, he said, the church would be obliged to show that the circuit authority was “not correctly decided.”
On the merits, Judge Thuma said that the “difficult issue” would be the claim of the church that it was holding property in trust for the parishes. The committee countered by contending that the parishes were not incorporated until 2013 and could not be trust beneficiaries because they were “legal nonentities.”
Citing “many factual issues,” Judge Thuma said it was “not prudent” to rule on the merits “at this time” with “so much at stake.”
Given that the Tenth Circuit has not reached the issue, Judge Thuma granted the committee’s motion to be given derivative standing.
The Admonition
Ending the opinion, Judge Thuma recognized that the litigation “will be very expensive and time-consuming.” There “will be a point,” he said, where the cost of “litigation will outweigh the benefit.” If there is no settlement, he said that “the parishes, and the abuse victims, will be the poorer for it.”
Electing not to follow a decision by the Bankruptcy Appellate Panel in his circuit, Bankruptcy Judge David T. Thuma of Albuquerque, N.M., granted derivative standing permitting the official creditors’ committee to bring fraudulent transfer claims in the chapter 11 reorganization of the Archdiocese of Santa Fe.
Although he did not rule on the merits of the committee’s proposed claims, Judge Thuma said there were “difficult” issues. He admonished the parties not to spend money in litigation that should be paid to claimants.
Restructuring the Parishes
Some of the 90 Catholic parishes in northern New Mexico were established centuries before the Vatican recognized the archdiocese in 1875. The archdiocese itself was not incorporated until 1951.
In early 2013, the archdiocese formed a real estate trust and a financial asset trust into which the church made transfers of about $60 million. In addition, the archdiocese claims it is holding $57 million in real estate for the benefit of parishes.
Beset with claims of sexual abuse, the archdiocese filed a chapter 11 petition in December 2018.