Almost three years after the chapter 11 filing by the Diocese of Rochester (N.Y.), as the church was threatening to cram down a plan on sexual abuse claimants, the bankruptcy court is allowing sexual abuse claimants to sue nondebtor Catholic entities in state court.
You decide: Was the May 23 opinion by Bankruptcy Judge Paul R. Warren of Rochester, N.Y., a result of (1) the growing antagonism shown by some Article III courts to third-party, nondebtor injunctions; (2) the failure to achieve a consensual plan after almost three years in chapter 11; (3) a desire to cajole the warring factions into settling; or (4) all of the above?
Almost Three Years and No Consensual Plan
The diocese filed a chapter 11 petition in September 2019 to deal with sexual abuse claims and lawsuits. Only the diocese itself was in bankruptcy.
Other Catholic entities within the boundaries of the diocese, like parishes and schools, did not file for chapter 11 reorganization. The church took the position that the nondebtor Catholic entities are separate corporations whose assets do not belong to the diocese.
At the outset, there was no fight over expanding the automatic stay to cover the nondebtor entities. The claimants and the diocese agreed to a standstill agreement that was extended voluntarily 11 times.
With no agreement on a consensual plan, the official creditors’ committee refused to extend the standstill when it lapsed in March. In response, the diocese threatened to pursue confirmation of a nonconsensual plan, which would entail cramming a plan down on abuse claimants who would be the largest creditor class.
With the expiration of the standstill, the diocese filed an adversary proceeding and an essentially identical motion. Both asked Judge Warren to rule that the automatic stay precludes lawsuits against nondebtor Catholic entities in the diocese. Alternatively, the diocese wanted Judge Warren to impose a stay on abuse claimants under Section 105(a) to bar litigation against nondebtor entities until 90 days after the effective date of a confirmed plan.
The committee and some claimants “strenuously” opposed the complaint and the motion, Judge Warren said. He ruled that Section 362(a) did not automatically enjoin lawsuits against nondebtor entities, and he refused to issue a stay under Section 105(a). Without further order of the court, he did bar claimants from collecting judgments against policies of insurance where the diocese is a named insured.
Deep into a so far unsuccessful three-year chapter 11 case, Judge Warren said that the “appropriate remedy for the [nondebtor Catholic entities] is to seek bankruptcy protection themselves, should the need arise, not for this Court to issue a sweeping injunction that would continue to shield non-debtor [Catholic entities].”
No Automatic Stay
In short order, Judge Warren rejected the idea that the automatic stay in Section 362(a)(1) or (a)(6) barred lawsuits against nondebtors.
With regard to a lawsuit or an act to collect a claim, Judge Warren said that the “plain language” in both subsections only covers acts against a debtor. Given how the diocese had contended from the outset that the nondebtors were separate legal entities, he held that the two subsections did not extend the stay to cover nondebtors.
The diocese had no better success with Section 362(a)(3), which bars an act to obtain property of the estate.
Judge Warren rejected the broad argument by the diocese that lawsuits against nondebtors would diminish the diocese’s insurance coverage, thereby invoking the automatic stay in Section 362(a)(3). He said the diocese had proffered no evidence that any specific lawsuit would “have a materially adverse impact on the per-occurrence limits of a specific policy of insurance.” [Emphasis in original.]
If an appellate court were to disagree and believe that Section 362(a)(3) applied, Judge Warren had an answer. Absent further order of the court, he barred any claimant from collecting a judgment against an insurance policy naming the diocese as a named insured.
No Section 105(a) Injunction
If the automatic stay were not applicable, the diocese wanted Judge Warren to issue a preliminary injunction under Section 105(a).
Applying the standards for issuance of a preliminary injunction, Judge Warren did not see a likelihood of success because the diocese was avowedly pursuing a nonconsensual plan. Similarly, he saw no irreparable harm because no cases would come before a jury for months or years to come.
The balance of harm fell “decidedly” in favor of the claimants, Judge Warren said, because the state courts are “far better equipped” to handle sexual abuse trials.
Finally, Judge Warren found that the public interest “strongly favors” denial of a preliminary injunction.
The case had reached the point, Judge Warren said, “where a consensual resolution appears to be fading.” At the same time, he said that “the Diocese’s threat of pursuing a non-consensual plan — one that the Diocese would attempt to force on the Abuse Survivors — is no small matter. It makes the possibility of a successful reorganization far more difficult and far more remote.”
Contending that public interest was on its side, the diocese pointed to the “charitable good works” that it performs and will perform.
Judge Warren gave the diocese a tongue-lashing in return. He said:
[W]hat good are future charitable works if the people (children at the time) who suffered horrific acts of sexual abuse in the past (allegedly at the hands of clergy) are silenced? . . . The appropriate remedy for the [nondebtor Catholic entities] is to seek bankruptcy protection themselves, should the need arise, not for this Court to issue a sweeping injunction that would continue to shield non-debtor independent Catholic Corporations.
Judge Warren denied the motion for an injunction and dismissed the adversary proceeding. He directed the nondebtor entities to answer lawsuits in state courts within 21 days and gave claimants 30 days to file lawsuits that were not already pending.
Almost three years after the chapter 11 filing by the Diocese of Rochester (N.Y.), as the church was threatening to cram down a plan on sexual abuse claimants, the bankruptcy court is allowing sexual abuse claimants to sue nondebtor Catholic entities in state court.
You decide: Was the May 23 opinion by Bankruptcy Judge Paul R. Warren of Rochester, N.Y., a result of (1) the growing antagonism shown by some Article III courts to third-party, nondebtor injunctions; (2) the failure to achieve a consensual plan after almost three years in chapter 11; (3) a desire to cajole the warring factions into settling; or (4) all of the above?