The Diocese of Rochester – New York’s Child Victim’s Act Opens Claims Floodgate, Forces Debtor to Seek Sanctuary in Chapter 11

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September 12, 2019 − The Diocese of Rochester (“The Diocese” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Western District of New York, lead case number 19-20905. The Debtor, the "visible presence of the One, Holy, Catholic, and Apostolic Church in a 12-county region in western New York," is represented by Stephen A. Donato of Bond, Schoeneck & King, PLLC. 

The Debtors’ lead petition notes between 200 and 1,000 creditors; estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $100.0mn and $500.0mn. Documents filed with the Court list the Debtors’ top unsecured creditors as M&T Bank with a claim of $844k. In a move likely to be criticized, the next 19 unsecured creditors (on the list of the Debtor's top 20) are anonymous claimants in Child Victims Act ("CVA') lawsuits, each with a contingent claim of just $100k (why not leave these amounts blank?). Also likely to draw scrutiny is the casual reference to "Various Sex Abuse Claimants" on a mailing matrix furnished by the Chief Financial Officer of The Diocese of Rochester. But mostly what will draw criticism is the Debtor's use of the Chapter 11 process to further its insistence that it "must survive," regardless of liabilities stemming from child abuse; that secular law should be applied selectively to protect its canonical mission. This will be a very unusual and interesting Chapter 11 indeed.

In resolutions filed with the Court, the Debtor states that having reviewed “the assets and liabilities of the Diocese, particularly those liabilities arising or asserted in connection with the New York Child Victims Act, the impact of such liabilities on the continuation of the mission of the Diocese, and the strategic alternatives available to the Diocese; …BE IT RESOLVED, that in order to respond to claims stemming from the Child Victims Act in an equitable and comprehensive manner, and to reorganize the financial affairs of the Diocese in order to permit it to continue to fulfill its ministries to the Catholic faithful of the Diocese, the Diocese shall seek relief through reorganization under the provisions of chapter 11 of title 11 of…the Bankruptcy Code."

Objectives of the Chapter 11 Filing

The Passero Declaration (defined below) states: "The Diocese has commenced this Chapter 11 case in order to (a) provide an orderly claims administration process that will ensure a more equitable distribution of funds to creditors, including victims of sexual abuse; and (b) bring about a reorganization of the Diocese that will ensure that the mission of the Diocese…may continue to be fulfilled for the Catholic faithful that it serves."

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the "Passero Declaration”), Lisa M. Passero, the Debtors' 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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