Parties return to the drawing board in diocese bankruptcy

In the first step toward a settlement since the Roman Catholic Diocese of Rochester’s bankruptcy case was upended by the U.S. Supreme Court’s ruling in Harrington v Purdue Pharma LP, Bankruptcy Judge Paul Warren has sent the parties back to the drawing board.

In an Oct. 7 order, Warren named Shelley Chapman, a retired bankruptcy judge, and Paul Finn, a professional mediator, to oversee a renewed round of talks among parties.

Both experienced bankruptcy mediators, Chapman and Finn, are new to the Rochester diocese case. After more than four years of talks led by other mediators, the case resulted in a diocese plan of reorganization that had to be scrubbed after the high court’s June 7 ruling in the Purdue Pharma case.

When the new round of talks might start or long it might take to hammer out an agreement is not clear.

Parties to the talks are to include attorneys representing abuse survivors with claims in the bankruptcy, attorneys representing a creditors committee that represents the interests of abuse survivors in the case, the diocese, and lawyers for the Continental Insurance Co, also known as CNA.

The diocese’s plan, which was jointly submitted with the creditors committee, had been overwhelmingly approved by the more than 400 sexual abuse survivors with claims in the bankruptcy. However, by the vote’s certification in July, the Purdue ruling had mooted it, and it faced complications due to CNA’s refusal to join other diocesan liability carriers in contributing to a settlement.

The diocese plan called for establishing a $127.3 million trust fund to pay survivors’ claims in the bankruptcy. The trust was to consist of $55 million jointly contributed by the Rochester diocese and its 83 parishes, with the balance supplied by diocesan insurers.

The primary challenge in the new round of talks will be figuring out how to preserve the agreement in light of the Purdue ruling.

In Purdue, the high court said bankruptcy judges cannot indemnify so-called related third parties as part of a bankruptcy settlement. This meant that despite the parishes’ contribution to the settlement, they could still be sued in state court. Many are already facing such claims in cases put on hold when the diocese filed its Chapter 11 bid for court protection five years ago.

Though firmly under the authority of diocesan bishops under the church’s legal code, known as Canon Law, Catholic parishes in New York State are legally registered as separate corporations, with each individual corporation headed by its diocese’s bishop.

Notably absent from insurers contributing to the trust in the diocese plan was CNA, which had first offered to contribute $63.5 million and then upped its offer to $75 million. Both offers were roundly rejected by creditors committee attorney Ilan Scharf, who objected that on a per-survivor basis, the offers fell woefully short of what the other insurers were willing to pay.

CNA’s second $75 million offer came in a rival reorganization plan, which it submitted alongside the diocese’s and creditors committee plan. In the same vote in which they overwhelmingly approved the diocese plan, survivors just as overwhelmingly voted down CNA’s plan. Still, CNA stated in a post-Purdue filing that it would consider submitting a second rival plan.

In an Oct. 7 ruling, Warren removed a further complication that could have hung over the embattled Chapter 11, a claim by CNA that the diocese owed it unstated damages that could have totaled millions of dollars for allegedly backing out of the $63.5 million deal.

While Warren’s dismissal removes a stumbling block to a hoped-for global settlement, he wrote in the ruling, it “does not advance the Chapter 11 bankruptcy case one inch.”

The diocese filed the Chapter 11 in September 2019, one month after New York’s Child Victims Act took effect. The CVA created a two-year window during which victims of decades-old sexual abuse could pursue abusers who otherwise would have been protected by a statute of limitations.

The Rochester diocese shortly faced hundreds of state claims of abuse by priests and other church officials. Four hundred eighty-five abuse survivors have filed claims in the Rochester diocese bankruptcy. Some 300 also have state-court claims against parishes and other church-related entities.

As of June 30, the diocese has spent more than $14 million to pay lawyers, accountants, consultants, and other professionals working on the case. Such expenses continue to mount by six figures monthly.

In the CNA ruling, Warren strongly signaled that his patience had worn thin, writing that “the time has come for the Court to appoint a new team of mediators to try to bring the abuse victims and CNA to a settlement. CNA and the abuse victims are urged not to waste this opportunity to finally settle their differences.”

Indicating a willingness to directly intervene should the parties not come to terms, Warren further warned, “both CNA and the state court attorneys representing the abuse victims need to reexamine the lines in the sand they have drawn and find a way to move toward a realistic framework for settlement; if they can’t or won’t, then CNA and the abuse victims must be prepared to live with the consequences of their unwillingness to bend.”

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].