'Abbreviated bankruptcy' strategy for parishes is a first in diocesan Chapter 11 abuse settlements

(OSV News) -- The terms of a recent diocesan bankruptcy settlement, which require parishes to declare an "abbreviated bankruptcy," are a first for such cases and shows the impact of a Supreme Court ruling in June, a legal scholar told OSV News.

The Diocese of Rockville Centre announced Sept. 26 that it had reached a preliminary $323 million settlement in its long-running -- and at points contentious -- bankruptcy case, facing a total of some 500 or more sex abuse claims due to two New York State lookback laws.

In its statement, the diocese said that no parishes would be closed -- but they would have to enter into "an abbreviated Chapter 11" bankruptcy, expected to "be resolved within 48 hours of filing," to secure a release from liability.

"The feature of the proposed settlement that has Rockville Centre's 135 or so parishes filing their own chapter 11 cases is a first in the Catholic bankruptcy cases," said Marie T. Reilly, a professor at Penn State Law and expert in bankruptcy law, in a Sept. 27 email to OSV News.

Reilly noted that an exact assessment of the case would need to wait until the court documents had been filed. OSV News confirmed that digital access to the transcript of the Sept. 26 court hearing has been restricted until the end of the year.

But given the diocesan press statement and what is known from accounts of the hearing, Reilly speculated the reason behind the parish bankruptcy move is "to get around the US Supreme Court's recent holding (in the Purdue Pharma case) that bankruptcy courts do not have the power to confirm a chapter 11 bankruptcy plan that includes releases for non-debtors unless all affected creditors consent to the releases."

Reilly referenced the Supreme Court's June decision in Harrington v. Purdue Pharma, which said the Sackler family behind the opioid manufacturer could not be shielded from legal claims against them without the consent of those who wished to sue them for damages related to the nation's opioid addiction crisis.

"The diocese and the insurers have made it clear that they must have a blanket release of sex abuse claims against the diocese and all of the parishes within the diocese," said Reilly. "So, the release of all the parishes and the diocese from all sexual abuse claims is essential to getting the insurers to agree to contribute to the settlement trust."

While the Diocese of Rockville Centre said that it along with parishes and other related entities will shoulder the bulk of the settlement ($234.8 million), insurance companies -- several of which have in recent years become increasingly reluctant to cover diocesan sex abuse lawsuits -- will pay just over $85 million, with counsel for the creditors' committee contributing $3 million.

"The insurers will only pay cash in if they can get complete assurance that all parties they insured (diocese and parishes) will be completely released from liability on any potentially covered claim," said Reilly. "If the parishes file their own chapter 11 cases, they can get releases because now they are debtors (and not 'non-debtors' who, per the Purdue Pharma case, can't be released without 100% consent of all affected creditors)."

Although she did not know "how this will work technically/legally," Reilly said she believed "the idea is that each individual parish bankruptcy case fits together with the joint plan agreed to by all the parishes, the diocese, and the insurers."

That joint diocesan plan, in turn, "will provide a release from all sex abuse claims for the diocese," and "each parish plan will provide for a release of that parish," with insurers issuing "policies that cover both parishes and the diocese," said Reilly.

"This sounds very complicated, and it is," she admitted.

Following the Supreme Court's ruling in the Purdue Pharma case, "bankruptcy courts have taken up the question of what is necessary to obtain a creditor's consent to a non-debtor release provision in a chapter 11 bankruptcy plan," Reilly said.

And although there have only been "a handful" of rulings by the bankruptcy courts to date on the matter, "the holdings so far have been creditor protective," she said. "A plan that includes non-debtor releases must get unanimous creditor consent to the non-debtor releases by affirmative vote of each creditor. It's not enough that a creditor votes in favor of the plan, or fail to return a ballot rejecting the plan."

In the case of sexual abuse claims, securing that unanimity is even trickier, Reilly said.

"Sexual abuse creditors are represented by different lawyers who tend to have their own agendas and it is difficult, if not impossible to acquire unanimous, affirmative creditor consent to anything," she said. "Any single sex abuse claimant can refuse to consent to releases of the parishes. That hold out power is a big threat to the confirmability of a joint plan that provides for non-debtor releases."

Reilly -- noting again that she was speculating based on the only available information -- said the abbreviated bankruptcy option offered a workaround to move the Rockville Centre diocesan settlement forward.

"To avoid the risk of a 'hold out' creditor ... the proposed settlement has the parishes becoming debtors -- although likely just for a short period, solely for the purpose of accomplishing an already worked out settlement with sex abuse claimants, and without any real change in how they operate," she said.