Supreme Court ruling clouds Rochester diocese bankruptcy

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As the Roman Catholic Diocese of Rochester’s nearly five-year-old bankruptcy inches closer to a to a final settlement, a new U.S. Supreme Court decision could have an untold effect on the diocese’s case.

In a 5-4 vote last Thursday, the court majority blocked the bankruptcy plan for OxyContin maker Purdue Pharma, ruling that it shields members of the Sackler family—who did not declare bankruptcy—from liability for opioid-related claims.

The diocese first sought bankruptcy protection in September 2019, a month after the New York Child Victims Act took effect. The CVA opened a two-year window for survivors of decades-old sex abuse to file claims against abusers who otherwise would have been protected by a statute of limitations. Maintaining they were abused as children by priests and other church officials, some 485 people have filed claims in the Rochester diocese bankruptcy.

After years of negotiations and several false starts, rival plans of reorganization were filed this year, laying out terms for the diocese to finally settle with survivors. One plan was penned by the diocese and a committee representing survivors with claims in the bankruptcy. The other was filed by the Continental Insurance Co., an insurer that was the lone holdout in a settlement deal reached by the diocese and several other liability carriers.

Survivors face the choice of accepting or rejecting either plan, accepting both plans, or rejecting both. Voting on the plans closed yesterday. The court has not yet announced results.

Acceptance by creditors of a reorganization plan is the next to last final steps in settling Chapter 11 cases. The final step is approval by the presiding judge.

Paul Warren, Western District of New York Rochester Division bankruptcy judge, has scheduled an early September confirmation hearing at which he could approve a plan or plans voted by survivors. Warren’s stamp of approval would clear the way for a long-awaited payout in the hard-fought case.

Attorneys involved in the diocese bankruptcy do not expect the Purdue Pharma decision to completely upend either plan but say the Supreme Court ruling raises thorny questions that will have to be worked out before a final settlement can be reached.

In court sessions, Warren has pointedly suggested that a ruling in the Supreme Court case, Harrington v. Purdue Pharma L.P., would affect the diocese bankruptcy in undetermined ways. He has not openly speculated on what those effects might be.

More on this Supreme Court ruling: Why rejecting the Purdue Pharma bankruptcy plan is a good long-run verdict.

Founded, owned and run by members of the Sackler family, Purdue Pharma aggressively marketed Oxycontin to doctors in the 1990s. In a campaign devised by Sackler family members, the company portrayed the powerful opiate as a safe, non-addictive pain medication. Many see that wildly successful campaign as a primary driver of what became a nationwide opiate crisis.

After opiate-plagued states sued Purdue Pharma, the Sacklers put the company into bankruptcy. Because family members are legally separate from the corporation, some $14 billion in profits the Sacklers had pulled out of the company will not be available to settle Purdue Pharma’s bankruptcy case.

Under a deal worked out in the bankruptcy, the Sacklers agreed to contribute $6 billion to a fund set up to help states deal with their opiate problems. In exchange, the bankruptcy court gave the Sacklers immunity from further lawsuits.  

Holding that a bankruptcy judge did not have the power to grant such relief, the U.S. Trustee sued to overturn the decision. A district court agreed with the trustee. An appeals court reversed the district court ruling and the case finally went to the Supreme Court.

In Thursday’s ruling, a high court majority reversed the appeals court, finding that bankruptcy courts do not have the power to indemnify so-called related third parties like the Sacklers.  

Both of the proposed Rochester diocese bankruptcy reorganization plans hinge partly on a deal that, like the one granted to the Sacklers, give related third parties immunity in exchange for a financial contribution.

Despite falling fully under their diocesan bishop’s control, individual parishes in this state’s Catholic dioceses are legally registered as separate corporations.

Each parish corporation is headed by its parent diocese’s bishop, but as legally separate corporations they cannot be part of the diocese bankruptcy. Other organizations falling under diocese control like parochial schools and the Catholic Youth Organization similarly fall outside the diocese’s Chapter 11.

If Warren strictly hews to the Supreme Court ruling, he could scrap the parish deal, which sits at the heart of both proposed diocese reorganization plans.

But a door could be also be open to leave the plans in place.

The latter would seem to be more likely, believes Leander James. An Idaho lawyer who represents 76 claimants in the Rochester diocese case, James says that too much has time and effort gone into negotiations among survivors, the diocese and insurance companies to scrap the nearly complete settlement deal.

Associate Justice Neil Gorsuch’s majority Purdue ruling leaves apparent room for Warren to leave either plan in place. Third parties can be indemnified as long as all parties agree, Gorsuch reasoned.  

Still, in a dissent asserting that bankruptcy judges should be able to offer such deals, Associate Justice Brett Kavanaugh suggested that even when parties agree, a host of deal-killing complications could occur.   

Both Rochester diocese plans call for the diocese and its parishes to settle survivors’ claims by jointly contributing $55 million as part of more than $120 million settlement.

Some survivors have separately targeted parishes in state-court suits, James notes. As proposed, both reorganization plans would shield parishes from such actions if plaintiffs accept a bankruptcy settlement. But under the Purdue ruling, the Rochester Bankruptcy Court cannot indemnify parishes.

While a number of survivors with claims in the bankruptcy also have separately sued parishes, relatively few would want to pursue a further action after getting a settlement in the diocese case, James believes. How the specter of such suits might affect reorganization plans is unknown.

And James wonders, what effect would even a few holdouts have on the plans as they are now proposed?

Under terms currently agreed on, approval by 75 percent of survivors is needed to hold all to either deal. If 1 percent do not agree, now how might that affect a plan?

Known as CNA, Continental wrote policies covering more than half of the survivors’ claims.

To forge the diocese’s and survivors committee’s joint plan, all diocesan insurers but CNA agreed to jointly add a total $72.3 million to the diocese’s and parishes’ $55 million contribution and in exchange be indemnified against future lawsuits.

CNA refused to sign on to that deal but instead proposed a separate plan in which it would kick in $75 million.

The diocese’s proposal calls for any insurer not signing on to its plan to be potentially held liable in other court actions. CNA’s plan calls for its $75 million contribution to shield it from such actions.

Another wrinkle that needs to be worked out before any plan can be confirmed is CNA’s claim that the diocese owes it millions of dollars as compensation for work it put in to hammer out a settlement that the diocese pulled out of.

In that deal, CNA and the diocese agreed to have CNA settle for $65 million. Ilan Scharf, an attorney representing the case’s survivors committee, objected, complaining that CNA and the diocese did not consult with survivors and that $65 million was inadequate. The diocese withdrew from the deal. Scharf has similarly scorned CNA’s more recent $75 million offer as woefully short of what other insurers have agreed to pay on a per-survivor basis.

Last year, CNA sued the diocese in Bankruptcy Court, accusing the diocese of breaching a contract by pulling out of the $65 million settlement deal.

CNA’s court action seeks unspecified damages as compensation for time and money it spent to put together the $65 million deal. Warren has slated a July 29 hearing to air the insurance company’s complaint.

If the insurer succeeds in winning substantial damages from the diocese, James says, it would almost certainly add a layer of complication to negotiations that might occur around the Purdue ruling.

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]

2 thoughts on “Supreme Court ruling clouds Rochester diocese bankruptcy

  1. It’s been five decades. I’ve journeyed through life with this soul sucking vampire attached to my mind and neck. The sexual abuse I suffered from this pedophile priest and his evil companions, is so reprehensible and repugnant. That catergizing it as evil. Pales in comparison to the depths of despair, self loathing and worthlessness as a child this caused me. Now the most corrupt Supreme Court in the history of our great nation is weighing in. I feel used up,stomped upon and marginalized. The Catholic Church, and the CNA insurance company. Are inherently evil. To fight over a monetary settlement. That supercedes the suffering and pain we surviors have endured is unconscionable. Evil, and sub human. Judge please help us and end this nightmare. Thank you

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