The Diocese of Rochester – Court Extends Exclusive Plan Filing Period until April 9, 2020 as Debtor Awaits Ruling on Mediation with Insurers

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January 9, 2020 – The Court hearing the Diocese of Rochester case has extended the periods during which the Debtor has an exclusive right to file a Chapter 11 Plan, and solicit acceptances thereof, through and including April 9, 2020 and June 8, 2020, respectively [Docket No. 355]. Absent the requested relief, the Plan filing and solicitation periods expire on January 10, 2020 and March 17, 2019, respectively.

On December 23, 2019, the Debtor filed a motion seeking a Court order referring the Debtor's adversary proceeding (No. 2-19-02021-PRW), filed by the Debtor against a group of 10 insurers, to mediation [Docket No. 337]. The Court is set to rule on that motion on January 14th. During the Debtor's Chapter 11, the insurers have put forward a number of arguments that would curtail their liability in respect of sexual abuse allegations lodged against the Debtor, these critically include the argument that the church's prior knowledge in respect of any accused priest’s malfeasance should bar or mitigate the insurers' obligations under existing policies. These arguments have so far been rejected by a Court which has been eager to push the parties towards a (now commenced) mediation process. The irony of the Debtor's efforts to increase insurance company exposure to priestly malfeasance while using Chapter 11 to curtail its own liability will not be lost on many

The Debtor's motion urging mediation stated: "In the Adversary Proceeding, the Debtor asserted claims against the Insurers for breach of contract and declaratory judgment, seeking a declaration of the rights, duties, and liabilities of the parties pursuant to the terms of certain insurance policies (the 'Policies') relating to the CVA Claims and for damages….The issues raised in the Adversary Proceeding with respect to the Debtor’s rights to insurance coverage under the Policies will play a considerable role in determining the pool of assets that will be available to satisfy claims against the Debtor and the resolution of such issues will have a substantial impact upon the Debtor’s ability to successfully reorganize. The Policies represent a significant source of potential recovery for abuse claimants and definitively ascertaining the scope and extent of coverage available thereunder is among the more important preconditions to the Debtor’s ability to formulate and confirm a successful plan of reorganization in the Chapter 11 Case."

As previously reported in respect of the Debtor's motion requesting the extensions [Docket No. 338], “This Chapter 11 Case is still in its infancy. Nonetheless, and despite the press of business associated with administering this complex Chapter 11 Case in its early phase, the Debtor has undertaken substantial steps that it believes will lead to the filing of a confirmable Chapter 11 plan of reorganization.

Additionally, in order to appropriately frame the outstanding questions concerning insurance coverage, bring all eleven of the affected insurance carriers before this Court and facilitate a global resolution of all insurance coverage issues, the Debtor recently commenced an adversary proceeding [Adv. Pro. Case No. 19-02021] in this Court by the filing of a complaint [Adv. Pro. Case No. 19-02021, Docket No. 1] against all of its insurers (the ‘Insurance Coverage Adversary Proceeding’).”

Further Background

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the "Passero Declaration”), Lisa M. Passero, the Debtor's Chief Financial Officer, detailed the events leading to the Debtor's Chapter 11 filing. Its a simple story. In respect of many cases of alleged abuse that are the basis of claims, the statute of limitations has been dramatically extended, resulting in 46 lawsuits involving 61 plaintiffs being filed in the month since New York state's CVA came into law. The Debtor expects "that many more claims will be asserted before the CVA window closes." Given that it has a near monopoly on information relating to abuse charges, very little of which it has shared publicly (notwithstanding its insistence otherwise), the Debtor's estimation of further claims should be given some weight; and of course the Petition provides some guidance in its estimation of 200-1000 creditors. The Passero Declaration states: "“On January 28, 2019, the New York State Legislature passed the Child Victims Act (A.2683/5.2440) (the ‘CVA’). New York's Governor signed the legislation on February 14, 2019. This legislation modified the statute of limitations and created a one-year ‘window’ during which victims of child sex abuse whose claim may have been time-barred may commence a timely civil action. In addition, the CVA extends the statute of limitations for claims that were not time-barred on its date of passage, permitting such child victims to commence timely civil actions until they reach 55 years of age.

Since the mid-1980's, the Diocese has settled 44 claims related to child sexual abuse. From the opening of the CVA window on August 14, 2019 through the Petition Date, approximately 46 lawsuits involving 61 plaintiffs who are seeking damages as a result of alleged abuse have been commenced against the Diocese. In addition, as of the Petition Date, approximately 12 demand letters and or notices have been received from other claimants who have not yet commenced lawsuits against the Diocese. The Diocese anticipates that many more claims will be asserted before the CVA window closes. The Diocese may have insurance coverage for some of the CVA claims it will face."

"The Diocese Must Survive"

The fact that a religious organization is using Chapter 11 to shield itself from the financial liability of allegations that its own staff preyed on minor members of its own congregation (and possibly then concealed that activity on an institutional, systemic basis) will make for a very unusual Chapter 11 case. The recent bankruptcy of USA Gymnastics, based on liability arising from similar allegations, did not give rise to a defense that "it must survive," nor do most bankrupts insist that creditors split whatever is left over after the bankrupt assures its own survival, but that is apparently what the Debtor is arguing. That after positing the rather secular argument that all creditors need to be treated equally (so, the golfing club bill and the ice cream bill and the parking bill…The Links at Greystone, Perry's Ice Cream and SJ Parking are all creditors…should not get short shrift because of a claim based on the sexual assault of a minor).  But mostly, what gets paid out, must not exceed what the Debtor can sustain and continue as a going concern. Not exactly how bankruptcy law generally works, but most bankupts don't invoke God and canonical law to help themselves get the most out of a Chapter 11.

In a declaration in support of the bankruptcy filing, Reverend Daniel J. Condon, the Debtor's Chancellor, states [Docket No. 7]: "The Debtor acknowledges its moral obligation to compensate all victims of abuse by church personnel fairly and equitably. Consistent with this moral obligation, it cannot allow any single plaintiff to recover a disproportionate share of the limited funds available from the Diocese simply because the plaintiff's case goes to trial first. Similarly, the Debtor cannot ignore the valid claims of other creditors who stand on equal footing with the CVA claimants as general unsecured creditors of the Debtor.

Beyond the Debtor's obligation to  all of its creditors, the Diocese has a fundamental and moral obligation to the Catholic faithful it serves, and to the donors who have entrusted the Diocese with the material fruits of their life's labor, to continue the ministries of the Church in fulfillment of the Debtor's canonical and secular legal purposes. In order to do this, the Diocese must survive. The Debtor's goals in seeking Chapter 11 relief are two-fold: First, to protect and preserve its assets that are properly available for distribution to the Debtor's unsecured creditors along with whatever additional assets can be marshaled so that those assets are distributed equitably to all creditors. Second, the Diocese must continue the work of the Church to the fullest extent possible, using the resources dedicated to that purpose."

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