Reorganization plans stall in diocese bankruptcy

It was the first time since COVID closed the federal courts that the Rochester Bankruptcy Court held an in-person hearing. Dozens of abuse survivors crowded Judge Paul Warren’s court on Jan. 30.

They were hoping to see a solid step forward in the Roman Catholic Diocese of Rochester’s four-year-old and counting Chapter 11 bankruptcy. After three hours of often testy exchanges between a legion of lawyers whose numbers nearly matched but fell short of the anxious survivors’ numbers, the survivors came away disappointed.

At the start of the hearing, Warren ticked off items on the agenda, identifying the last two as the proceeding’s main event: his decision to let a vote on one or the other, both or neither of two rival plans of reorganization move forward.

Plans of reorganization are the first step toward resolving Chapter 11 cases. Usually proposed by debtors, they set terms under which creditors will be paid. Before becoming final, plans need to be approved first by a vote of creditors and finally by the presiding judge.

In the end, Warren said neither plan proposed in the diocese bankruptcy can go to a vote yet.  

Instead, he set an Apr. 16 date for the hearing to be continued. It would be the hearing’s second continuation and third session. Warren had previously called off an early October hearing that was to have dealt with the rival plans.

While survivors wait for some resolution, attorneys, accountants and consultants working on the case have been paid by the diocese in monthly six-figure installments. At last count, such payments as of Nov. 30 totaled $13 million.

Accounting for much of the complication is that insurance companies balked at payment amounts survivors sought as compensation.

By the end of last year only one insurer, the Continental Insurance Co., also known as CNA, had not come to terms. Instead it offered a rival plan of reorganization to a joint plan offered earlier by the diocese and a committee representing survivors.

The survivors’ committee has made it clear that it sees CNA’s plan as an inadequate take-it-or-leave-it offer.

The court’s go-ahead on a vote on one or both plans after the April 16 date assumes the diocese and CNA will have met series of conditions the judge laid out, many having to do with more clearly explaining legal issues to the nearly 500 abuse survivors who account for most of the diocese’s creditors.

Despite his 40 years as a lawyer, even he could not fathom the all the intricacies of the arguments bandied about by the army of lawyers seeking to make their cases, Warren offered more than once at the Jan. 30 hearing. If he could not do so, the judge wondered, what hope might there be for abuse survivors to make sense of the case?

Most of the conditions Warren set for letting the case move forward after April 16 have to do with having lawyers on both sides boil the case’s convoluted legal disputes down to terms “a non-lawyer can understand.”

It was a task he had already set for the lawyers at which he found them to have largely failed.

Still, at its core, the only remaining issue at dispute seems simple: the failure of the diocese and the official committee of creditors to reach an agreement with CNA to agree to amount that CNA will kick in to a trust out of which survivors would be paid.

At its start, “I reasonably thought this case settle in under two years,” the judge lamented at one point.

Hoping for such a relatively quick resolution four years ago, Warren ordered the diocese, the official committee of unsecured creditors, the committee appointed by the U.S. Trustee that represents survivors’ interests, and the diocese’s several liability carriers into mediation in 2019 a month or so after the case began.

Only last year did insurers except CNA agree to terms acceptable to the survivors.

Warren said he had tried as the bankruptcy dragged on to signal his hope that the parties might work things out among themselves with a minimum of legal jousting. He wondered: “Maybe I didn’t signal enough.”

As far as his client is concerned, how much it will ultimately pay remains the sticking point, CNA attorney David Christian declared during the Jan. 30 proceeding.

“We’ve settled with other insurers for substantially higher amounts,” countered creditors committee attorney Ilan Scharf.

Still, Warren wondered: Might there still not be a possibility that CNA and the diocese and the creditors committee would sit down and work out a global settlement that could cut through the thicket of legal questions that now sits before him?

The opposing attorneys shook their heads in apparent doubt.

A long road

Beset by an avalanche of claims it expected to be hit with after the New York’s Child Victims’ Act took effect, the diocese filed its Chapter 11 case in September 2019, a month after the CVA took effect.

The act temporarily granted survivors of decades-old sexual abuse the right to pursue abusers who otherwise would have been protected by a seven-year statute of limitations.

Such statutes, survivors-rights advocates have argued, set a terms long past the time when many sexually abused 11- or 12-year-olds who had been told by their abusers to keep quiet would have dared to come forward.

Ultimately, 485 abuse survivors filed claims in the diocese bankruptcy. Early on, diocese officials declared that they expected the church’s liability carriers to shoulder much of what they predicted would be more than $100 million in claims.

Many of the twists that, Warren laments, are now burying survivors’ hopes in a legal morass are summarized in papers filed by the U.S. Trustee asking Warren to delay putting CNA’s and the diocese’s plans to a vote on grounds that both as written are unconfirmable.

Among objections the U.S. Trustee raises are a feature of the diocese’s plan that would have non-bankruptcy complaints leveled against parishes and other so-called related third parties voided by the parishes’ agreement to kick in more than $10 million to the $55 million the diocese and the parishes would pay to the survivors’ trust.

This is an issue because of a split between the Catholic church’s legal code, known as canon law, and New York law. Under canon law, parishes, parochial schools and other church entities fall under direct of a diocese’s bishop, while under New York law, each is separate corporation headed by a diocese’s bishop. Similarly, teaching orders like the Jesuits are legally separate but subject to the control of a local bishop.

Similarities with Purdue

How this sort of conflict plays out in bankruptcies happens at this time to be a hotly contested matter before the U.S. Supreme Court.

The case now before the high court concerns Purdue Pharma, the maker and promoter of Oxycontin, the drug widely known to hold outsize responsibility for spurring the current opioid crisis.

Publicly held, Purdue was founded and controlled by members of the Sackler family who personally profited to the tune of billions of dollars in Oxycontin sales from the drug’s promotion.

Facing billions of dollars in claims in class action brought by numerous state attorneys general and pursued by the U.S. Department of Justice, Purdue, like the Rochester diocese, sought refuge in a Chapter 11 bankruptcy.

Like the diocese’s parishes, members of the Purdue family, despite having conceived and directed the company’s aggressive Oxycontin marketing campaign, are not direct parties in the company’s bankruptcy.

Prior to filing the bankruptcy, Purdue agreed to a global settlement with the U.S. Justice Department. It would pay $8.2 billion to settle criminal and civil claims, and members of the Sackler family, who had previously drained billions from Purdue, would pay $250 million.

Facing strong objections in the bankruptcy over what many saw as the family’s light treatment, Sackler family members agreed to kick in an additional $6 billion in exchange for immunity from further prosecution.

The U.S. Trustee program challenged the deal, arguing that offering such immunity is beyond the Bankruptcy Court’s scope. A U.S. district judge and an appellate court agreed. The dispute went before the Supreme Court in December where justices appeared split. A decision might not be forthcoming until June.

In the Rochester diocese bankruptcy, the U.S. Trustee argues that by not listing individual contributions of third parties to the settlement they propose, the diocese and the CNA plans have not met the standard for related third-party disclosure set forth by the U.S. Court of Appeals for the Second Circuit, the most recent court to rule on Purdue.

In December, Warren suggested putting off action in the diocese bankruptcy until June when the Supreme Court is expected to hand down its ruling on Purdue. Diocese attorney Stephen Donato strongly objected, arguing that survivors should not be subjected to a further wait.

Raising another third-party question, the Catholic teaching order, the Sisters of St. Joseph, filed objections to the diocese plan in early December, arguing that including the order in the bankruptcy could prejudice any decision that might be reached in a state-court CVA claim charging the nuns with responsibility for abuse by a priest in the 1970s at St. Joseph’s Villa, which at the time was supervised by a Sisters of St. Joseph nun.

Another possible problem Warren raised with the diocese plan is that a provision under which it would have CNA as the only non-settling insurer to face further legal action in state courts could be read as violating the insurance company’s rights.

As the hearing continued, a pair of survivors rose and headed for the courtroom door.

“You’re losing them,” Warren chided the dozen or more attorneys on both sides of the case.

“We already know how this will end up,” one of the departing survivors explained, calling over his shoulder in apparent protest or perhaps more in disgust.

Minutes later Warren wrapped up the proceeding, revealing that he would again postpone a decision.

“This will go into next year now,” one survivor muttered as he stood and stretched, not bothering to hide his scorn.

Will Astor is Rochester Beacon senior writer. The Beacon welcomes comments and letters from readers who adhere to our comment policy including use of their full, real name. Submissions to the Letters page should be sent to [email protected].