MINNESOTA
Lexology
Bryan Cave LLP
May 1 2018
Garrison Keillor once said, “Sometimes I look reality straight in the eye and deny it.”[1] Being that the case arose in Minnesota, perhaps Circuit Judge Michael Melloy channeled Keillor, one of that state’s great humorists, when he authored the opinion in The Official Committee of Unsecured Creditors v. The Archdiocese of Saint Paul and Minneapolis et al. (In re: The Archdiocese of Saint Paul and Minneapolis) Case No. 17-1079 2018 WL 1954482 (8th Cir. April 26, 2018) [a link to the opinion is here].[2] Regardless, the quote must sum up the Appellant’s view of the outcome. The unsecured creditors that make up the Committee, most of whom were victims of clergy sexual abuse, will not obtain access to the value of over 200 non-profit entities affiliated with the Archdiocese of Saint Paul and Minneapolis to pay their claims.
In a concise opinion, the 8th Circuit held that a bankruptcy court’s authority to issue “necessary or appropriate” orders did not give it the power to substantively consolidate a Chapter 11 estate of a bankrupt nonprofit entity, the Archdiocese, with the estates of non-debtor parishes and parish schools that also qualified as nonprofit entities under Minnesota law. Despite the breadth 11 U.S.C. § 105(a), the Court looked past weighty equitable interests and instead relied on to state law, and on the plain language of the Section 303(a) of the Bankruptcy Code (which prohibits an involuntary filing against “a corporation that is not a moneyed, business, or commercial corporation”).
Background
The case arose from the 2013 passage of Minnesota’s Child Victims Act, which allowed previously time-barred sexual abuse claims to be brought. Hundreds of claims of clergy sexual abuse were filed against the Archdiocese. In 2015 the Archdiocese filed Chapter 11 bankruptcy. In May 2016, the Committee, representing more than 400 clergy sexual abuse claimants, filed a motion in the bankruptcy case to substantively consolidate Debtor with over 200 affiliated non-profit entities. The bankruptcy court applied Rule 7012 of the Federal Rules of Bankruptcy Procedure to the Committee’s motion, converting the motion to an adversary proceeding and allowing the responding parties to file motions to dismiss, which many did. The Bankruptcy Court dismissed the Committee’s Complaint and the District Court upheld that decision.
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