Rochester diocese’s proposed settlement with insurers questioned

Rochester Beacon [Rochester NY]

July 6, 2021

By Will Astor

As the two-year mark in the Roman Catholic Diocese of Rochester’s bankruptcy draws nigh, a $35 million settlement proposed between the diocese and a handful of its insurers is not sitting well with the bankruptcy’s official creditors committee.

How the court comes down on the proposed Rochester diocese settlement could set the tone, not just for the Rochester case, but also for Chapter 11 bankruptcies of three other New York Catholic dioceses that asked for court protection months after the Rochester diocese’s September 2019 filing. 

“I believe that the settlement of $35 million is within the range of reasonableness and should be approved by the Court,” wrote diocese special insurance counsel James Murray in a June 24 brief supporting the proposal. Murray is a Washington, D.C.-based partner with Blank Rome LLP. He heads the firm’s policyholder-only insurance recovery group.

“We hope for the Court’s approval and we pray this settlement will be a catalyst for fruitful dialogue and progress in negotiations among the remaining concerned parties in the case,” the diocese said in a June 11 statement announcing the deal.  

The settlement between diocese and a dozen insurance companies that had balked at paying any claims came after nearly two years of stalled talks in a court-arranged mediation between the diocese and the companies.

Not so fast, says creditors committee counsel Ilan Scharf, however. If the settlement is approved as proposed, it will either give abuse survivors short shrift or push the diocese into dire financial straits.

Organized by the U.S. trustee, creditors committees are formed to represent the interests of creditors making claims in Chapter 11 cases. As a rule, creditors’ approval is required before a judge will sign off on any Chapter 11 plan a debtor proposes. The 12 members of the creditors committee in the diocese bankruptcy are all abuse survivors. 

Four hundred and eighty-five such survivors have filed claims in the case. Not yet clear is what sort of financial compensation each might win. What kind of claims the diocese proposes to pay will be largely determined by how much dozens of insurance companies that wrote liability coverage for the diocese decades ago contribute.

Early in the case, diocese officials including Bishop Salvatore Matano and the diocese’s chief financial officer, Lisa Passero, testified that the diocese’s assets fall far short of abuse-claim liabilities that could top $100 million. 

Scharf has not yet filed an official objection to the deal worked out between the diocese and a dozen insurers but says he plans to do so by the filing deadline Bankruptcy Judge Paul Warren set for papers for and against the proposal. 

Scharf has filed papers supporting a request by 20 of the 485 abuse survivors who have brought claims in the Chapter 11 case to be allowed to press their claims in state court. The 20 survivors’ request to lift the freeze the diocese’s bankruptcy filing automatically imposed on their state-court actions and the proposed settlement are related developments in the long-stalled case, Scharf says. Determinations in state court would help clarify how much compensation survivors should get. 

The Rochester diocese’s Chapter 11 came in response to the state’s passage of the Child Victims Act, a 2019 measure that temporarily lifted a two-year statute of limitations on sexual abuse claims. 

The CVA opened the door for scores of adult survivors who had never sued over abuse they claim to have suffered as children to file court actions that would otherwise have been time barred. At the start of the Rochester diocese’s filing, church officials estimated its potential liabilities at as much as $100 million. 

Scharf believes the outcome of the Rochester diocese settlement dispute will also be a key turning point in the Chapter 11 cases filed by the dioceses in Buffalo, Syracuse and Rockville Centre, Long Island. Those dioceses were also hit with scores of CVA claims but waited to seek protection until months after the Rochester diocese’s filing. 

An attorney with the New York City bankruptcy boutique Pachulski, Stang, Ziehl & Jones, Scharf also represents the official creditors committees in the Buffalo and Rockville Centre bankruptcies. Rockville Centre is the state’s largest Catholic diocese. 

Attorneys representing London Market Insurers and Underwriters first asked for court approval of the proposed settlement in a motion filed June 16 as part of an ongoing adversarial proceeding in the bankruptcy. Bankruptcy attorney Stephen Donato simultaneously filed papers stating the diocese’s approval of the deal. Donato, who heads Bond, Schoeneck & King PLLC’s bankruptcy group, also represents the Buffalo and Rockville Center dioceses. 

Known as APs, adversarial proceeding are sub-disputes dealing with a set of closely defined specific issues in bankruptcies. They are argued apart from the main case. The presiding bankruptcy judge hears the dispute. 

The AP that the settlement motion is filed in traces to a 2019 complaint the diocese filed against a dozen insurance companies that sought to force the insurers to honor abuse claims. The insurance companies at the time were seeking to reduce or totally avoid liability. Acceding to Warren’s suggestion, the insurance companies and the diocese agreed to seek a resolution in mediation instead of fighting in court. The proposed settlement comes out of that mediation.  

A key problem Scharf sees with the $35 million deal is its scope. The deal would cover claims pressed by roughly only a quarter of the 485 survivors seeking compensation in the case, leaving too much still to be decided and letting insurers off the hook too cheaply, the creditors committee lawyer maintains. 

While the funding provided under this settlement is only a portion of the eventual “Survivors Fund” to be established to settle those claims, “it is a significant and substantial one,” the diocese stated in its Jun. 11 announcement.

But if the deal goes through as proposed, Scharf counters, the diocese’s own past statements show that it would be hard pressed to come up with enough cash to adequately compensate survivors. That would set off a court fight that could literally bankrupt the diocese or tank the Chapter 11, sending scores of cases back to state court, he believes.

If the proposed $35 million settlement were to mean that survivors get short shrift, Scharf says, survivors will be forced to seek to make up the difference by extracting cash not paid by insurance directly from the diocese, an outcome that could force the diocese to liquidate assets. 

Such a fight would raise questions discussed but left unsettled in the bankruptcy—whether individual parishes’ and Catholic schools’ assets could be tapped and whether the diocese can be held liable for offenses committed by members of legally separate teaching orders. 

Scharf maintains that since all priests and teachers working in a diocese are supposed to be vetted by that diocese’s bishop and serve at the bishop’s pleasure, dioceses are ultimately responsible for priests’ and teachers’ conduct. Because individual parishes and schools run by teaching orders are legally not part of dioceses, the diocese could reasonably be expected to argue the opposite.

Another objection the creditors committee attorney raises to the proposed settlement is that abuse survivors played no role in drafting its terms. The deal was originally filed as a motion in the AP instead of being filed in the Chapter 11’s main docket, Scharf notes. Had it stayed only as part of the AP, the creditors committee, which is not a party to that case, could not have objected to the settlement. Scharf says Donato promptly agreed to docket the proposal in the main case, but only after he complained.

Approval of the proposed settlement at this point in the bankruptcy would “put the cart before the horse,” Scharf maintains, noting that the diocese has yet to draft a plan for its exit from Chapter 11. If the settlement is approved as proposed, its parameters would set the limits for diocese’s plan instead of an overall plan setting terms for a global settlement. 

Warren is slated to hear oral arguments for and against the settlement proposal and the 20 abuse survivors’ lift-stay request in a July 9 telephonic session.

Will Astor is Rochester Beacon senior writer.