The diocese’s costly bankruptcy

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Costs of the Roman Catholic Diocese of Rochester’s nearly 2½-year-old Chapter 11 bankruptcy have reached at least $5.4 million.

That figure tallies payments the diocese had made as of Nov. 30 to compensate a legion of lawyers, accountants and consultants. The total has more than tripled since the first round of fee requests reflecting bills for services rendered through Jan. 31, 2020.

While costs mount at a six-figure monthly pace, the 475 aging survivors of childhood sexual abuse who account for most of the diocese’s unsecured creditors have yet to see a penny.

According to parties familiar with the case, progress in a two-year-old, court-ordered mediation that was supposed to lead to a quick resolution remains at a virtual standstill.

Participants in the mediation are lawyers representing the diocese, insurance companies that wrote liability policies for the diocese, and an attorney for the case’s Committee of Unsecured Creditors, a group made up of abuse survivors. 

Talks in the mediation have been on hold. Last July, Bankruptcy Court Judge Paul Warren had stern words for participants, warning that aging abuse survivors could die before the parties reach a resolution. What effect those words might have as talks resume is not clear. The parties are expected to return to the table next month.

Citing the expected resumption of the mediation in February, creditors committee attorney Ilan Scharf declined to comment. Attorneys for insurers involved in the mediation did not respond to requests to comment for this article.

The Rochester diocese responded with a statement acknowledging that mediation sessions so far “have failed to secure a resolution.” But, while talks sit at a standstill, “Bishop (Salvatore) Matano continues to ask for prayers that a resolution first and foremost will provide justice and compassion for the survivors and their families, while at the same time ensuring that the numerous ministries of the Diocese can be sustained. He prays that the resolution, when it comes, provides for survivors and their families hope and renewed faith while assuring them that the Lord Jesus never abandons us, especially in our deepest struggles and heartaches.” 

For abuse survivor Jim Cali, 65, who chairs the creditors committee, the bankruptcy—initiated in September 2019—has been a frustrating ordeal in which the diocese and the insurance companies it hopes will pay much of the $50 million to $90 million the diocese has estimated it could owe survivors “are dragging their feet trying to wear us down, hoping we will go away.” 

A onetime altar boy who remains a practicing Catholic, Cali says his frustration and anger is shared by other survivors including some who, unwilling to be marked as survivors, have not filed claims in the bankruptcy. In the latter category, he cites two unnamed individuals personally known to him who, in addition to suffering abuse themselves, “were witnesses to my abuse.” 

Cali, who had not been aware of the bankruptcy’s legal costs until this week, expressed surprise upon hearing the total. 

Top payees

The top three of the bankruptcy’s payees in order are: Bond, Schoeneck & King PLLC, the Syracuse-based law firm serving as diocese’s main counsel in the case, which has been paid $2.24 million; Perinton-based Harris Beach PLLC, which also represents the diocese, at $1.13 million; and the New York City law firm representing the creditors committee, Pachulski, Stang, Ziehl & Jones, which has so far collected $1.06 million. 

On Jan. 3, a valuation consultant for the creditors committee, the Claro Group, filed an application for fees it racked up from June 16 to Sept. 30, 2021. If it is approved, the group’s $258,006.50 bill would bring the diocese’s total payout to $5.6 million. 

Citing the Claro Group’s delay in submitting the request and other factors, Bond, Schoeneck attorneys this week filed an objection to the consulting group’s claim, so it is not clear how soon or whether at all the Claro Group’s bill might be added to the total. Still, the diocese will have to pay at least for billable hours racked up by lawyers objecting to and defending the fee request.

Less than a year into case, the U.S. Trustee, a Justice Department watchdog charged with keeping tabs on bankruptcies, filed objections to fees charged by Bond, Schoeneck, Pachulski, Stang and Blank Rome LLP, a Philadelphia-based law firm hired by the diocese as an insurance specialist.

“Despite the level of experience of each of the Retained Professionals and their presumed familiarity with the Bankruptcy Code and the United States Trustee’s fee guidelines, there were numerous time entries that failed to meet the standards of the Bankruptcy Code and this court,” the trustee’s May 8, 2020, filing states. 

The filing cites a number of specific examples including attorneys charging two or more billable hours for attending a hearing that lasted an hour and three quarters. 

Assistant U.S. Trustee Kathleen Schmitt, who heads the Justice Department agency’s Rochester office, stated in the filing that she formed objections after making a “a line-by-line review” of bills submitted by the law firms and filed a formal objection only after extensive negotiations with the firms failed to yield results. 

However, a few weeks after Schmitt filed the omnibus objection to four law firms’ fee applications, Warren overruled the trustee, fully granting three of the four firms’ fee requests. Schmitt has filed no further objections. 

The fourth firm cited in Schmitt’s filing, Nixon Peabody, reached an accommodation with her, agreeing to pull back on some fees, Schmitt told the Rochester Beacon this week, declining to comment further.

No meeting ground yet

On its face, the dispute between the diocese and its insurers is not complicated. The diocese wants the insurance companies to cover most if not all of its cost to pay abuse survivors. The insurance companies want to limit the amount they need to pay. Finding a meeting ground between those poles has so far proved to be no easy task.

The Rochester diocese’s bankruptcy filing came on the heels of New York’s passage of the Child Victims Act

Signed into law in February 2019 and effective as of August of that year, the CVA opened the door for survivors of long-past sexual abuse to sue perpetrators who otherwise would have been protected by a seven-year statute of limitations. That door closed in August 2021, when the law expired.

Battle lines between the diocese and its insurers were drawn early on. Forty days after the diocese filed for bankruptcy protection, a group of insurers headed by the Continental Insurance Co. asked the Bankruptcy Court to allow them to litigate survivors’ claims in state court, the same venue the diocese sought to avoid with its bankruptcy filing. 

A draft of a proposed state court case appended to the insurers’ Bankruptcy Court filing shows the outcome the roughly dozen insurance companies hoped to achieve: state court rulings that insurers would not have to pay claims in cases where it could be shown that diocesan officials were aware of abusers’ conduct when the abuse occurred. Such claims might be bolstered by diocesan records detailing transfers of abusive priests to other dioceses or parishes, the draft brief notes. 

Ten days after the insurers filed the request, the diocese countered with a Bankruptcy Court filing objecting to the insurers’ request and asking that the dispute be settled in a separate Bankruptcy Court trial.

Judge Warren told both parties to lay their filings aside, ordering the diocese and the insurance companies to settle their differences in mediation. That kicked off the proceeding that now sits at a standstill.

Last July, the diocese announced it had reached a potential agreement with a group of insurers willing to pay $35 million toward a settlement of survivors’ claims. Hailed as a breakthrough by the diocese’s lawyers, the deal was viewed as a non-starter by the creditors committee. 

The proposal would see only 25 percent of survivors’ claims satisfied and was therefore unacceptable, creditors committee attorney Scharf told the Rochester Beacon at the time. 

A witness to the two most recent mediation sessions and a forensic accountant by trade, Cali believes the diocese could come up with money that would lead the balking insurers to settle but is unwilling to do so.

In an October 2019 Bankruptcy Court filing, the diocese stated that the $90 million in abuse claims it could be required to pay would outstrip its total assets, which then stood at $67 million. Since then, however, the diocese’s assets have grown by nearly $20 million, reaching $86.1 million as of June 30, 2021.  

Finding funds

More than two years ago, Rochester diocese officials including Bishop Matano and Chief Financial Officer Lisa Passero explained at the diocese’s first meeting with creditors that much of its assets sit in funds contributed by donors who set restrictions on how the money they donated can be used. 

Cali sees that explanation as disingenuous. 

The diocese’s most recent financial statement shows its assets split between unrestricted funds totaling $39.6 million and restricted assets of $46.5 million.

To come up with funds that might induce the insurance companies to settle, the diocese could let go of some unrestricted funds, Cali believes. Excess cash might also be extracted from restricted funds if those monies have already achieved the donor’s stated purpose, he adds.

As a forensic accountant, “I’d love to get my hands on those restricted funds books and see how much might be shaken loose,” Cali says. 

The diocese also could borrow money to contribute to a fund to pay survivors, he adds. Its real estate holdings or the $24.3 million in unrestricted invested funds the diocese declared on its most recent financial statement could be used as collateral to borrow cash to toward a settlement with survivors. The Vatican, which runs its own bank, could be a possible lender, Cali suggests.  

The diocese, which relies heavily on donations to fund its activities, also could ask donors to contribute to a special fund earmarked to help pay abuse survivors with claims in the bankruptcy, Cali adds. Instead, it has assured contributors that no money they donate will go toward paying such claims.

The diocese’s 2019 bankruptcy filing happened to coincide with the kickoff of its annual Catholic Ministries Appeal. 

“Some faithful may believe that, going forward, their charitable gifts to any Catholic entity will be diverted from their intended purpose and used to satisfy the claims of the debtor’s creditors rather than to fund the ongoing ministries of the church that benefit the faithful and their community. The debtor will use its best efforts to dispel this misconception,” stated Diocesan Chancellor Rev. Daniel Condon in a Sept. 12, 2019 court filing.

A month later, a disclaimer on the diocese’s website assured donors that “no CMA contributions are used for the settlement of legal cases.”

Matano indicated in 2019 that the diocese might indeed consider such a move. But since then, Cali laments, the diocese’s position has not changed.

“I feel a certain discomfort to make this simply about finances,” Matano told Cali at the 2019 meeting with creditors. “I want to express most clearly my sympathy for survivors. I do not want you to leave this meeting viewing it only as a financial event. My duties go beyond that. I want to do the best I can from a pastoral point view. I am also aware of my inadequacy. I have to rely on the grace of God and the foundation of the Holy Spirit.” 

In 2019, Cali said that he took Matano at his word and saw the bishop’s concern for survivors’ plight as sincere. But for Cali, it was then and remains very much about the money, but not precisely in the way Matano framed it.

Cali says he sees payment survivors might receive in a settlement not as a salve that would somehow heal the wounds abusers inflicted survivors, but as a sign that the church is genuinely repentant of its past sins. That the diocese so far appears unwilling to make such a sacrifice, says Cali, is to him a sign of that it has yet to fully take responsibility for those sins.

“We are in it for the long haul,” Cali insists. However long the bankruptcy’s standoff might last, he promises, “we will not be worn down.” 

Will Astor is Rochester Beacon senior writer.

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