Some dioceses that filed for bankruptcy months after the Buffalo Diocese are much further along in their efforts to emerge from Chapter 11.
The Syracuse Diocese sought court approval earlier this month for a disclosure statement outlining how it will pay $100 million to settle 411 sex abuse claims. The Diocese of Rockville Centre is awaiting the results of a vote by claimants on its $200 million plan to settle child sex abuse allegations. The tallies were due by Friday.
And in the Diocese of Camden, N.J., a federal judge recently approved an $87.5 million plan to compensate 300 abuse victims, opening the door for victims to receive checks from a settlement trust, although insurers have sought to block it.
Yet, after more than four years in bankruptcy, the Buffalo Diocese has no deal with 900 claimants who allege they were abused by priests, nuns and other employees.
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And the diocese, its insurers and the official committee of unsecured creditors that represents sex abuse claimants are unlikely to make significant headway with their settlement talks until the U.S. Supreme Court rules in two federal cases with potentially broad implications for current and future bankruptcy cases, according to legal experts.
“The bankruptcy judges, as well as all of the big players in these cases, are reluctant to work on a settlement when there’s at least two really big questions that the Supreme Court has agreed to decide by June,” said Penn State law professor Marie T. Reilly, a bankruptcy expert who for years has been tracking cases involving dioceses and other Catholic entities.
Reilly described the pending decisions in two cases being deliberated by the nation’s highest court as possible “leverage shifters” in the Chapter 11 mass tort settlement arena.
“It’s just going to change who has power and what kind of power in negotiated solutions,” said Reilly. “That’s why these seemingly dry cases are super interesting and important.”
Buffalo Diocese Bishop Michael W. Fisher acknowledged that the Supreme Court decisions could have implications for the diocese, but he said those decisions were not holding up progress toward a bankruptcy resolution.
“We’re doing all we can to try to move forward as best we can,” Fisher said in an interview with The News.
The bishop said the diocese is “working diligently” to examine its assets and determine how to meet the demands of claimant creditors.
“At the same time, it’s not a liquidation of our diocese,” he said.
Fisher said he wants to exit bankruptcy as soon as possible, and the diocese has no interest in stalling.
“The longer we go, the less assets we have to care for the victims,” he said. “We want to make sure we provide for whatever healing they need.”
Purdue Pharma case
In one of the cases, Harrington v. Purdue Pharma, the Supreme Court is examining whether a bankruptcy court may release a nondebtor entity in a Chapter 11 plan over the objection of a creditor.
A 2nd Circuit ruling in 2023 reversed a U.S. District Court judge’s finding that federal law did not allow releases from liability granted to members of the Sackler family as part of the reorganization of Purdue Pharma, makers of the opioid Oxycontin. The Sacklers, who founded Purdue Pharma but did not file for personal bankruptcy protection, agreed to provide as much as $6 million toward a settlement of more than 1,000 Oxycontin abuse and overdose lawsuits, in exchange for the liability releases. The overwhelming majority of claimants approved of the settlement plan in a vote in 2021, but about 5% of creditors objected and the U.S trustee sued to block the settlement and potentially allow claimants the option to sue the Sacklers in state courts.
The Supreme Court heard arguments in December in the Purdue Pharma case.
If the court sides with the 2nd Circuit, it will allow parishes and Catholic schools to get third-party releases through a diocese’s reorganization plan, as they had in many previously settled diocese bankruptcies.
But if the Supreme Court overrules, all bets might be off going forward, with parishes and schools forced to defend against potentially costly sex abuse lawsuits in state courts – unless Congress makes new laws on the issue.
Kaiser Gypsum case
A second Supreme Court case, Truck Insurance Exchange v. Kaiser Gypsum, could be just as significant for dioceses like Buffalo and others, said Reilly.
The case, argued before the Supreme Court in March, deals with whether an insurer has “standing” to object to a debtor’s reorganization plan.
In Kaiser Gypsum’s plan, approved by 100% of asbestos claimants and the bankruptcy judge, the company will assign its insurance rights under Truck Insurance policies to a trust that would pay the deductibles for insured claims. Claimants would then be able to continue their lawsuits in state courts to determine liability and recover insurance proceeds, according to court papers.
Truck objected, arguing in court papers that Kaiser Gypsum “colluded with representatives for asbestos claimants” on a plan that includes fraud-prevention measures for uninsured asbestos claims, but not for 14,000 claims insured by Truck.
Dioceses such as Camden and Syracuse, which struggled with insurers over coverage issues, are now following a similar strategy of assigning their insurance policies to a trust, in the hopes that doing so will help them settle with abuse claimants and emerge more quickly from bankruptcy.
Insurance companies are pushing back, though.
In the Syracuse case, LMI and Interstate contend that if the diocese assigns rights under their policies to a trust, the trustee must then vigorously defend against the abuse claims, which would violate the trustee’s fiduciary duty to the abuse claimants, according to court documents.
If the claims are not vigorously defended, the trustee would violate its duties to LMI and Interstate, the insurers argued in court papers. In Camden, insurers are seeking an emergency court order that would halt funding of the $87 million settlement trust until the court considers their appeal of the bankruptcy plan confirmation.
A Supreme Court ruling that grants insurance companies standing in bankruptcy reorganization could undercut the confirmation order in the Camden diocese, said Reilly.
It could also throw a major wrench into the Syracuse plan.
U.S. Bankruptcy Judge Wendy A. Kinsella indicated at a recent hearing that future pivotal hearings for confirming a Syracuse Diocese bankruptcy reorganization weren’t likely to happen until August or September.
The Syracuse Diocese said in a statement earlier in the year that it was moving ahead with its bankruptcy proceedings under current law.
Kevin Braney said the committee of unsecured creditors in the Syracuse Diocese bankruptcy is aware of the Supreme Court cases but remains focused on getting the best possible plan confirmed as soon as possible for survivors of clergy sexual abuse.
“Our cases don’t belong in this setting at all,” said Braney, committee chairman. “This bankruptcy process – it does not lend itself to providing support for people who are trying to heal from trauma.”
The hearing on April 2 was “a positive step towards getting the case across the finish line,” said Braney.
But he also criticized what he called “the duplicative and shameful efforts of insurance carriers” aimed at preventing the diocese from exiting bankruptcy and abuse victims from getting compensation.
21 diocese bankruptcies settled
Dioceses have used bankruptcy since about 2004 to help settle child sex abuse lawsuits, often relying on insurance coverages as a major source of funding for the settlements.
Since 2007, 21 dioceses settled their bankruptcy claims for a total of more than $1 billion, with $574 million of that coming from insurance companies, according to Reilly.
The Buffalo Diocese filed for Chapter 11 protection in 2020, followed by Syracuse three months later and Camden and Rockville Centre seven months later.
Over the past five years, insurers have taken a harder stance to try and limit their losses by denying coverage and challenging the validity and value of abuse claims, said Reilly.
Dioceses like Camden and Syracuse responded by making deals with creditors committees in which they contribute their insurance assets to a settlement trust – an approach sometimes used in other bankruptcy cases that don’t involve sex abuse claims.
Insurers are now arguing in court that dioceses must get their consent before making such a move.