Special Topics in Religious Liberty Series #2: Sex-Abuse Litigation And Chapter 11 Issues for Religious Organizations

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Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's Practice Groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of Practice Group Teleforum calls, become a Federalist Society member today at fedsoc.org.

 

 

Nick Marr:  Welcome to The Federalist Society's Teleforum Conference call as this afternoon, September 10, 2020, we cover the second and final installment of our special topics in Religious Liberty Series. The topics today are "Sex Abuse Litigation and Chapter 11 Issues for Religious Organizations." My name is Nick Marr, and I am Assistant Director of Practice Groups at The Federalist Society.

 

      As always, please note that all expressions of opinion on today's call are those of the experts. And, I should note, they are also not the opinions of their law firm, Jones Day. They're here in their personal capacity.

 

And today, we are fortunate to have with us three partners from Jones Day, Corinne Ball, John Goetz, and Todd Geremia. After our speakers share their opening remarks and at about the 1:40, 1:45 mark, we'll go to audience Q&A. So for the audience, be thinking of questions and have those prepared for when we get to the Q&A portion of the call. I'll make an announcement about how you can request the floor to ask a question.

 

And with that, Todd, and everyone, thanks for being with us today. Todd, the floor is yours.  

 

Todd Geremia:  Thank you, Nick. And I want to thank all of those in attendance for giving us their time today. And thank you to The Federalist Society as well for the opportunity to make this presentation that concerns issues of paramount importance to Catholic entities, especially which are under immense pressure and have been for some time throughout the country due to litigation concerning abuse claims that arose in most cases decades ago and were long since time-barred under applicable state statutes of limitations but have been revived through various means in different estates.   

 

I will speak about the experience, fairly recent, in New York concerning this type of effort to revive time-barred claims, and my partner John Goetz will talk about the experience in Pennsylvania, and then my partner Corinne Ball will speak about restructuring concerns and other financial pressure due to Catholic entities and the unique concerns that arise in this setting.

 

So in New York, the legislation that revived formally time-barred claims for abuse is called the Child Victims Act. It was signed into law in February 2019. Shortly after, the Legislature turned over to Democratic control. It, among other things and most importantly for purposes of today's presentation, opened a one-year window that started in August 2019, August 14, 2019, during which certain time-barred claims based on allegations of sexual abuse of a minor may be brought regardless of when or whether they were time-barred.

 

In early May 2020, due to the pandemic, Governor Cuomo signed a five-month extension pursuant to executive order that would extend the time by which claimants may file their time-barred claims by five months. That was very likely to be subject to litigation as to the Governor's authority to implement that change by executive order, especially because when the Governor signed that executive order, there was then pending before the Legislature a proposal to add an additional year to the CVA's window to extend it to a total of two years.

 

That was signed eventually by Governor Cuomo in early August so mooted any issue concerning the Governor's authority to extend the window pursuant to executive order. Significantly, and this bares to some extent on Corinne's remarks, the effort to move the goal post, in effect, and add an additional year to the window changes the approach that Catholic and essentially any entity subject to the onslaught of this litigation may have because knowing the universe of claims that faces a defendant and for purposes of the defendant's insurers is quite important and a way to be able to achieve an out of court resolution of the claims.

 

But adding an additional year just adds to the uncertainty and of course adds to the time that plaintiff's counsel may be out there soliciting additional claimants. We found, on behalf of the Diocese of Rockville Centre, whom we represent in CVA litigation, that right before the one-year window was about to close, there was a real uptick in the number of claims largely because there was some uncertainty as to whether the Governor was going to sign that additional one year extension, which he did in early August.

 

There are approximately about 2,000 CVA actions in New York State, and that number is growing but growing slower now in light of the fact that the two-year extension was recently signed. About 100 of those cases are brought against Catholic dioceses, and in most instances, also brought against the parishes within those dioceses.

 

In some instances, the individual perpetrators are named. Of course, one of the problems with this type of litigation is that it dates back a long time. And in many cases, the alleged perpetrators are very old or deceased, and of course other material witnesses have long faded memories or themselves are unavailable.

 

Catholic dioceses in Rochester, Buffalo, and Syracuse have so far filed for bankruptcy protection. As I said, Corinne will have some further thoughts in that vein of the sorts of pressure that these cases put on dioceses.

 

With respect to the litigation, an initial question that any defendant, including large Catholic dioceses, faces is how to go about organizing large numbers of tort cases that in the typical instance you would not want necessarily to coordinate in any manner because defendants want to be able to point out the case-specific facts through which these cases should be seen and adjudicated. But being confronted with a large number of cases presents a different set of concerns for a defendant.

 

New York has the equivalent of a multi-district litigation mechanism which is called the Litigation Coordinating Panel. And at the outset of the CVA litigation, a consortium of plaintiff's counsel sought to coordinate all cases against Catholic entities. There was pending motion practice with respect to how or whether cases would be coordinated with several defendants not wanting to coordinate all Catholic cases but some seeking coordination of their cases in some significant manner, simply with respect to pre-trial proceedings.

 

That was mooted in the somewhat haphazard process before the one-year window opened in New York because the office of coordinative administration implemented a system of what it called regional coordination whereby courts throughout the state would get all of the CVA cases in a certain geographical region.

 

For example, in Long Island where the Diocese of Rockville Centre has a number of its cases, Nassau and Suffolk Counties were combined into one large CVA court. That was, notwithstanding its moniker, not exactly coordination because depending upon the judge, the cases were all brought before one judge, of course, by Office of Court Administration dictate, but some judges treated them just as a series of individual cases.

 

We brought a motion to coordinate the pre-trial proceedings in the cases in Long Island against the Diocese of Rockville Centre and proposed that the court adopt a case management order to allow for coordination of motion practice, discovery, and appointment of liaison counsel, using in some respects a model that was used for asbestos cases.

 

That was a little tricky in New York practice because it expressly allows for so-called consolidation of cases that are before one judge or actually it allows for removal of cases to a judge through the mechanism of consolidation. But that has the impact of under New York law making all of the cases subject to the consolidation order one and would allow for a mass trial of all those cases.

 

We didn't want that, but we invoked some statutory language and frankly pandered to the judge's common sense and notion that these cases needed to be organized by expressly asking for a pre-trial coordination, not consolidation. And we achieved that through the judge granting our motion and adopting a case management order that allowed for significant coordination of motion practice.

 

Our experience with coordinated motion practice was a good one in that it allowed the Diocese of Rockville Centre to make motions to dismiss as against large bodies of cases, even insofar as those cases may not have presented uniformly common issues but issues that arose repeatedly in certain cases.

 

We have been able to coordinate motions to compel in that way and coordinated a motion for a state pending appeal with respect to an issue that I'll start talking about on the merits next. It's also been useful to coordinate discovery. In many cases, over the objection of certain plaintiff's counsel, it was helpful in this regard that we, as a defendant, took the initiative to make the motion to coordinate pre-trial proceedings and have the court adopt a case management order that in the first instance, we, as the defendant, drafted and then plaintiff's counsel were shooting at to try to indicate certain shortcomings with that, but overall, we had momentum in our favor to adopt a case management order that coordinated the cases significantly.

 

As noted, we made a motion to dismiss at the outset of our cases and similar to the issues that a defendant faces in trying to coordinate large numbers of tort cases that you would normally want to litigate in a case by case basis, there are challenges in asserting case dispositive defenses that apply to all the cases. I'll talk in a moment about a due process issue that lingers over all the cases throughout the entire state concerning the Legislature's authority to revive time-barred claims versus case trimming cases where we move as against certain specific claims to apply established law.

 

We moved specifically to dismiss a series of more attenuated claims that stretched beyond the sorts of negligence claims that are appropriate to assert against a diocese in these types of cases. Many plaintiffs get creative in various ways, assert claims for a breach of fiduciary duty, negligent or intentional infliction of emotional distress, even assault and battery as against the dioceses or claims predicated on theories of responding of superior in local parentis and breach of a nondelegable duty.

 

We achieve favorable rulings on a large group of motions to dismiss to trim the complaints back to largely negligence and the critical element of notice to the dioceses as to whether an alleged perpetrator had the propensity to engage in the type of abuse alleged. That will be very important for purposes of pre-trial summary judgment motions or trial and is also a critical ruling to achieve for purposes of insurance coverage which is more widely available with respect to negligence claims than respect to other cases that have an element of intent built into the cause of action.

 

The due process issue that I alluded to is the largest one that, as I noted, lingers over all of the cases. There are three basic approaches to due process challenges to statutes that revive claims that were formerly time barred. There is a so-called vested rights approach, a per se bar, which is to the say that in some states that there is no mechanism to revive formerly time-barred claims, or a functionalist approach that balances interests, which is that third approach is the New York approach.

 

The federal approach is this vested rights approach. The basic concept there is that if by the passage of time, a defendant has a vested right not to be sued with respect to a claim, then that claim cannot be revived. For example, think of adverse possession that we all learned about in law school that if by squatting on a property for a period of time, the defendant acquires the right to the property or some property right, then a claim with respect to trespass or some other claim that sounds an ownership of the property cannot be revived. That, as you might imagine, makes it fairly straightforward for Congress to revive formerly time-barred claims because there are few instances whereby the passage of time alone, a defendant acquires a vested right.

 

New York has fairly recently adopted a standard of review for claim revival enactments. It did this on a certification from the Second Circuit to resolve an issue that arose with respect to claimants seeking to assert claims on the basis of injuries acquired while they cleaned up the World Trade Center site.

 

That standard sounds amorphous, but it is -- a claim revival statute will satisfy the due process clause of the state constitution if it was enacted as a reasonable response in order to remedy an injustice. While that is somewhat overarching statement of the standard, the very case that announced it, In Re: World Trade Center Lower Manhattan Disaster Site litigation, synthesized 100 plus year history of jurisprudence in New York, which the court highlighted in its discussion.

 

Every case where the Court of Appeals has ever held that a claims revival enactment withstands due process scrutiny, the claimants at issue were not able through various means to assert their claims in a timely manner. And so throughout a 100-year history, in about five or six cases, the New York Court of Appeals had, at every time, held when it was confronted with those facts, they're called salient facts, in its most recent decision that the Legislature was allowed to step in to remedy that sort of injustice where a plaintiff was not formerly able to bring his claim, then the Legislature may step in and revive those claims so that the plaintiffs would have a chance -- a viable chance to assert their claims.

 

This is coupled with an important holding where before the CVA was enacted, although at a time when other states were enacting claims revival statutes for sexual abuse litigation, the court of appeals dealt with an attempt by a series of plaintiffs to essentially revive their claims but through a different mechanism by invoking equitable doctrines to extend or delay their limitations period that had long passed for a series of claims for clergy abuse that they brought.

 

Court of Appeals, in a detailed analysis of this case, Zumpano v. Quinn, ruled that the plaintiffs in all these cases on a motion to dismiss knew all that they needed to know in order to bring their claims in a timely manner, and allegations that the Catholic church may have in various ways sought to avoid disclosure of the claims did not impact plaintiffs actual knowledge that they were allegedly abused and their ability to bring the claims.

 

So you couple these two things together, a 100-year history of jurisprudence whereby the only times that the Legislature has been held as a matter of due process to be permitted to revive formerly time-barred claims was when the plaintiffs could not have brought those claims in a timely manner and a recent holding by the Court of Appeals itself, the highest court in New York, that all claimants asserting claims for sexual abuse knew what they needed to know to bring timely claims at the time they were abused. This, in our view, gives rise to a very strong due process argument that the CVAs, at least that part of the CVA that revives claims that have been time barred for decades, does not withstand due process scrutiny.

 

We lost that argument in really what is a CVA court, a special court just for the CVA cases, and that's perhaps not surprising since it's a specially designated court that's supposed to deal with these claims. That argument -- that specific issue and only that specific issue is now on a consolidated appeal from 35 -- in 35 cases.

 

We have, at the same time, sought to stay all the litigation against the Diocese of Rockville Centre because like in issues they have qualified immunity, this is an essential matter of due process that if defendants are right about this, they should not even be subject to the litigation, and so therefore in our view, it's inappropriate to have to litigate for pre-trial matters these cases while that issue is subject to appellate scrutiny.

 

So that's where we are now. We are awaiting the briefing on the appellate issues and working through the New York Court system, so stay tuned everybody. And hopefully, we can have a follow-on conference where we can discuss the result of that we are hopeful will positively impact the Catholic entities subject to this litigation. And with that, I will hand it over to my partner John Goetz who's going to talk about the experience in Pennsylvania with respect to these issues.

 

John Goetz:  Thanks, Todd. Good afternoon everybody, and thanks for the opportunity to be with you this afternoon. I am a partner in Jones Day's Pittsburgh office. I've been very active in representing and defending Catholic dioceses and other religious organizations who find themselves sued for alleged actions occurring 40, 50, and even 60 years ago.

 

And I'll talk to you for 8 to 10 minutes about what is going on in my home state of Pennsylvania. I want to focus on three topics. First of all, the Rice case, which is pending right now before the Pennsylvania Supreme Court, give you a little primer on the Rice case and where things stand.

 

Secondly, what kind of civil cases that plaintiffs are filing now against Catholic dioceses and organizations for actions that occurred decades before, and the final topic I want to talk about is the constitutional amendment, which is pending in our general legislature, our assembly, to open a two-year window.

 

First, the Rice case. The Rice case, Ms. Rice sued the Diocese of Altoona-Johnstown and a current and former bishops, was really an outgrowth of the two highly flawed Pennsylvania grand jury reports which targeted Catholic dioceses in 2016 and 2018. The plaintiff, Ms. Rice, alleged clergy sexual abuse in the '70s and early '80s. She filed her suit in 2016 against the Diocese and its bishops, alleging claims of fraud, constructive fraud, and civil conspiracy based on a failure to disclose the history of the alleged clergy abuser.

 

And Ms. Rice claimed that the information regarding the Diocese' and bishop's culpability was learned only from a 2016 state grand jury report. The trial court dismissed Ms. Rice's claims, held straightforward that the claims were time-barred in 1983 under the applicable statute of limitations. This is a bright line rule that's going to apply for decades in Pennsylvania, two clergy sexual abuse claims.

 

The court held that the discovery rule, which you may know is that the vice that toll the running of the limitations period. The trial court held that that discovery rule does not apply to toll the limitations period because the identity of Ms. Rice's wrongdoer and her injury were clear at the time of the abuse.

 

So the Diocese and the bishops prevailed at the trial court level. The Superior Court then reversed, creating a new rule of law from decades of clear black letter law. The superior court, in a very convoluted opinion, expanded the discovery rule and the tolling doctrine to hold that it was a jury question regarding whether Ms. Rice had exercised reasonable diligence before 2016 to discover her alleged injury and its cause.

 

It also held that the limitations period for an ongoing civil conspiracy claim did not commence running until 2016, the release of the grand jury report, at the earliest. So here, we take a bright line rule that's been applied consistently in this area, and the Superior Court created a new rule of law holding that it's a jury question when the statute of limitations began to run.

 

Well, the Diocese filed a petition for review before the Pennsylvania Supreme Court. I filed an amicus brief in support of that petition, in support of the Catholic League for Religious and Civil Rights. The Court, this is our Supreme Court, accepted review of the case in March of 2020 and is considering a number of questions, most directly whether our state discovery rule, which has always been applied traditionally and merrily to cases involving latent disease and medical malpractice claims, whether that discovery rule should be expanded to claims such as these when the plaintiff knows of the abuse, the abuser, and fails to conduct any investigation. That's the principal rule that the Supreme Court is considering now. It's also considering the viability of an ongoing civil conspiracy claim, when the last act that harmed the plaintiff occurred in 1981.

 

So the Court took review of the case in March. Where does the case stand right now? The Diocese filed its brief. We filed a second amicus brief on May 27. The plaintiffs have completed their briefing on July 27, and the Court just set oral argument in a very hopeful manner, promptly as well. Oral argument is set for October the 20th and can be viewed on the Supreme Court's YouTube channel, in case anybody is interested.

 

If anybody would like to see the briefing, happy to share it. It's not overly dramatic to say that the fates of Catholic dioceses in Pennsylvania really hangs in the balance of how the Court's going to rule on this case.

 

As we've stated in our amicus briefs, the Supreme Court affirms the decision below. It simply would defy the overwhelming consensus of courts, not only in Pennsylvania, but around the country, that have rejected the attempts to invoke the discovery rule in cases like this one where the plaintiffs seek to sue a church by claiming abuse several decades ago by a church employee.

 

So that by far is the biggest issue right now that's going on in Pennsylvania, the Rice case. The second is just to give you a briefing on the ongoing civil claims that are being filed in this commonwealth. Well, you could imagine once the Superior Court created its new rule of law, the floodgates opened and there have been a large amount of copycat suits asserting Rice type claims against diocese defendants, alleging abuse anywhere from the 1960s to the 1980s.

 

The copycat suits plead right around and through the Superior Court's opinion, holding that it's a jury question when the statute of limitations run. And those cases have piled up quickly in many counties across the state, and the dioceses here in the commonwealth have been forced to expend substantial funds defending in addition to the victim compensation funds that the dioceses have setup to compensate victims of abuse regardless of whether the statute of limitations has run.

 

You may be aware that one diocese, the Harrisburg Diocese, has filed bankruptcy under the weight of defending these decade old claims. The other dioceses are hanging on awaiting a decision in Rice.

 

Some plaintiff's lawyers have agreed to stay their cases, as you would imagine, pending the Rice case. Others have not, and three dioceses have filed emergency petitions with the Supreme Court to order a stay in those cases pending a decision in the Rice case. One of those petitions is still pending right now.

 

So perhaps, in light of these emergency petitions but also because of the sea change in the law in this commonwealth, the Supreme Court has set what we think is an accelerated oral argument date of October 20. And we're very hopeful and optimistic that we will have a decision by the end of 2020. So that's Rice. That's our ongoing civil docket in this state against the diocese and religious organizations.

 

The final point I'll touch on briefly is the efforts to amend the Pennsylvania Constitution in Pennsylvania to open a two-year window, an amendment to our Constitution is required, not just legislation because to revive an otherwise barred claim needs an amendment because there's a vested property interest in the person who holds the right to dismiss the expired claim.

 

So our general assembly right now is considering a constitutional amendment under our State Constitution. Two successive general assemblies have to pass that constitutional amendment. One has already done so in November of 2019. A newly elected general assembly will consider the amendment in 2021. They approve and the governor signs it. Then the amendment will be scheduled for a popular vote by the electorate statewide in either May or November of 2021.

 

That's our way of considering whether window legislation should be enacted in this state. Apart from the legal issues, and I'll close with this thought, there's really no reason for the Pennsylvania Supreme Court to create a new black letter law or principle relating to the discovery rule when the efforts to amend the Pennsylvania Constitution are already afoot in the general assembly.

 

So as Todd mentioned, stay tuned for the efforts to amend the Constitution, but more directly, stay tuned for the Rice oral argument and hopefully a favorable decision for the dioceses and Catholic organizations in this state.

 

Thank you very much for your time. And with that, I will turn the floor over to Corinne Ball.

 

Corinne Ball:  Thank you, John. Good afternoon all. I spend all my time doing rescue and restructuring, generally of corporates but certainly now for the Catholic dioceses. They are confronting this horrific legacy of child sexual abuse. It's led to roughly 25 plus or minus Chapter 11 cases then. It has also led to a case filed by the Boy Scouts.

 

      But before you forget what John was just talking about, another thought occurred to me that the Pennsylvania experience has made quite clear the Rice case has caused these cases to be pled in the nature of intentional tort. That takes assets of the dioceses, known as insurance coverage, and puts them tremendously into question.

 

      The tension between the insurers not wanting to cover child sex abuse, given the magnitude and the nationwide issues experienced, it's kind of been made very clear in the Pennsylvania cases. It's very difficult for the dioceses to access insurance. And it's becoming an issue for insurers that they're raising everywhere else, which has now become yet another reason to think about Chapter 11.

 

      I know that at first blush, it may seem like filing a Chapter 11 case is like a surrender to the plaintiffs when cases against the dioceses, parishes, schools, and other affiliates are overwhelming, but it's due to the cost of defense or looming jury trial. Let me suggest that properly perceived and prosecuted, Chapter 11 is a strategic choice to close out this 20th century dark legacy.

 

      In a fair and equitable manner as among abuse claimants, as it's possible, and enabled the diocese and its affiliates to move on to focusing on the mission of the church. While tort generally is a state court issue, mass torts are not new to the federal courts and in particular bankruptcy. They are far better suited to rationally address for recovery. And although there are constitutional issues and limitations, particularly in the dioceses, the federal courts are prepared to address and deal with them.

 

      A pillar of religious organization Chapter 11 or ways to think about are first, upon the date and entity, including the dioceses, file for relief under Chapter 11, an automatic stay of all litigation and all cases arises. There's now one forum nationwide. That benefit of this automatic stay can often and usually be extended to the diocese' affiliated co-defendants, its parishes, its schools, and other affiliated entities.

 

      The bankruptcy court will have exclusive jurisdiction over all property wherever located. Critically in this circumstances, insurance policies, primary and excess. The bankruptcy court also has the ability to enter a bar date. A bar date is an order which will bar abuse claimants from ever making a claim unless they come forward and file a proof of claim in the bankruptcy case by a date served.

 

      Dioceses must meet rigorous due process standards for obtaining such an order, but once they have it, there is an end in sight and, belts and suspenders, the federal courts have also permitted future claims representatives to make sure that this chapter is closed and closed going forward forever.

 

      So now, we have the insurers and all the abuse claimants in the same forum with the same judge, the universe is defined. That doesn't happen very often outside of Chapter 11, used to happen more often under Rule 23. You had a limited fund, but it is more common in bankruptcy.

 

      The objective is to get to a plan which features permitting the diocese to move ahead while leaving behind likely two settlement trusts for constitutional reasons. And the key features that the diocese will seek to obtain in exchange for creating this settlement trust, largely funded, we hope, by insurance and other, I'm going to say, non-essential assets, what the diocese is looking for is a relief for itself and for its affiliates and an injunction directing all claimants, once and for all and forever, to make their claims against only the settlement trust.

 

      Well, that may all sound interesting but what is Chapter 11 like? Let me share the plaintiff's point of view. Now that it's a national phenom and it has the same players on the plaintiff's side across the country, both outside Chapter 11 and in. Initially, the plaintiff has tremendous [inaudible 38:29] outcry about the horror of filing a bankruptcy to escape their liability.

 

But one of the things about Chapter 11 is the focus on recovery rather than tragic history tends to take over. There is no more race at the courthouse. There is clearly, by virtue of the bankruptcy filing, a limited fund is created, which is defined as unrestricted property of the diocese in existence on the petition date. It includes its insurance policies, but it also includes whatever causes of action the diocese, were it to act like a bankruptcy trustee, might bring.        

 

      The other thing the plaintiffs love about Chapter 11 is the sea shifting. The plaintiffs dominate what's called the creditors' committee appointed in a case. They select the attorneys for the creditors' committee as well as financial professionals. And the dioceses would pay the expenses of what is really a plaintiff counsel committee, as they investigate and search for assets and negotiate with the diocese over this plan and settlement fund.

 

      Plaintiffs don’t have to work anymore. Complaints aren't required They don't have to take discovery. Instead, their clients have to file a two-page proof of claim. And in exchange, at the end of the day, the plaintiff's counsel get one-third cut of this settlement fund upfront.

 

      So their objective is to maximize recovery and, indeed, to maximize the current recovery, and they're always looking for more clients. You might have noticed all the television ads, most recently in the Boy Scout case. The ones that are very experienced are careful in what they say to not jeopardize insurance coverage. Those that are newer to this situation are those that are confined by what's happened in Pennsylvania, have been pleading cost of action that may or may not be insured, and are giving the insurers grounds for defense.

 

      We also, Todd glossed over it, but anonymity is an issue in sexual abuse. And in bankruptcy, we can extend the same kind of confidentiality and confidential treatment to these abuse victims who may not want their names known, as they have received in the various state courts under anonymity.

 

      The starting point for the plaintiff is always that there's not enough dollars in the world to compensate their clients for this horrific experience. So everything should go to the plaintiffs except what is critical for the diocese continuing its mission with its affiliates. So we start with a very aggressive group whose themes are nothing the diocese says are credible. There is a history, typically allegations, a history of coverup, a history of opaque financial disclosure and not being forthcoming with the plaintiff's counsel.

 

      So what do we start with? We start with all future revenues belong to the diocese. Bankruptcy respects donor restriction, so all restricted property will remain with the dioceses. And then we have a negotiation which will largely focus on three things: insurance policies with the insurers, causes of action, which I would shorthand as claw back, particularly causes of action for transfers made among affiliates.

 

And with that there is a story that you may recall from the popular press where then Archbishop Dolan, now Cardinal, the Archdiocese in New York, then the Archbishop of St. Louis, wrote a letter. Well, of course we put the cemetery in a separate entity because we had to protect it from creditors. So this claw back action of trying to recover assets that a diocese has transferred to affiliates is another focus.

 

      And the third focus is on what I will call excess assets or assets not really in use. Is there real estate? Are there things that aren't critical to the mission, which raises the very interesting question because as you think about a diocese' point of view, well, the good news, it's put in a position where it's mission, which includes reconciliation, care, and compensation of abuse victims can be met, but it can still get to the end of this dark legacy and return to enhancing its mission.

 

      There are burdens. Operating in Chapter 11, the diocese operates under court supervision. It has periodic reports. It cannot pay any pre-petition claims without court permission. It cannot take any extraordinary actions without court permission, and it has to submit periodic reports and file them in court on a monthly basis.

 

      On another bright news, it can sue all of its insurers in one forum. And it can sue them for cost of defense as well as indemnity. It also can deal with this tension that I referred to with insurers that seems to characterize these cases immediately before bankruptcy filing, which is insurers denying cost of defense, also looking for merits discovery, pressing as hard as the plaintiffs, if not harder, when it seems at least to a restructuring lawyer that all they're looking for is grounds to deny coverage.

 

      Once you're in 11, the focus really does seem to change. But for the diocese and its leader, they do face issues. They face issues on how they look at themselves and how they're organized, and that can present complications. When you think about it, even if their affiliates are separate entities, as we hope they would be in most instances, parishes, Catholic charities, schools, their financial dealings among their affiliates and related parties will be subject to scrutiny.

 

      And you think about it, the bishop, Cardinal Archbishop, as the case may be, if I had both sides of those transactions, in all likelihood, so there is a potential, at least for a legal conflict. The bankruptcy has its own concept of derivative standing. And generally, in these cases, derivative standing to investigate affiliated transfers, and if appropriate bring actions, has been sought by the plaintiff's committee and has often been granted, putting the plaintiff's committee in charge of the negotiation with the affiliates.

 

      Affiliates have the benefit of not being subject to the bankruptcy. Their assets aren't part of it. They're not vulnerable to an involuntary bankruptcy. They're not vulnerable to consolidation with the bankrupt under bankruptcy doctrines of subset consolidation. But state law causes action, like alter ego, veil piercing, fraudulent conveyance, are all there. So as I said, keeping its credibility issue front and center, addressing what really is an ecclesiastical conflict in some way and finding a way to deal with it has to happen.

 

      Discovery, we're no longer in the expense of discovery individual merits of discovering activity spanning some 60 years, but we are in discovery about recovery and assets. Bankruptcy has a rule, Rule 2004, which essentially authorizes a fishing expedition into -- depositions included, documents included, but it should be oriented not to merits discovery but in bankruptcy, it's to recovery.

 

      Meanwhile, while the bishop and his associates are trying to continue their mission, Chapter 11 will allow their operations to continue, and properly prosecuted, should minimize the disruption. They still have a day job, which is delivering important services to the faithful. One of the things that's a difficult issue that's come up, and I believe will come up more and more, is when you're delivering a mission to the faithful, there's value there. There is a value exchange. But how does one measure it in the bankruptcy world?

 

      We have a disagreement between the Seventh and Eighth Circuit. And we have an unreported decision from a very well-respected bankruptcy judge, Judge Drain, in New York, suggesting that the mission can have value. And plaintiffs cannot simply close schools because the dioceses were delivering value to a school to keep its doors open.

 

      So I think that debate will continue. I think Judge Drain has teed up the issue of religious freedom and the Restoration Act as part of that. I think we will see more of that. But in any event, I at least wanted to share with you what the objectives are.

 

And the last point, which I probably didn't mean, in Chapter 11, to ignore, is Chapter 11 is expensive. But there are months of Chapter 11 expense versus perhaps years of merits discovery and defense. There is an end in sight, and that’s probably the major cost differential.

 

Nick Marr:  Okay. We've got our first question here.

 

Shmuel Kline:  Thank you. My name is Shmuel Kline, and this is directed at the Chapter 11 presentation. What extent are claims objected to when they are filed? And what percentage can claimants expect to receive?

 

Corinne Ball:  I'm so glad you asked that question because part of the objective of a Chapter 11 is to relieve the diocese. This whole chapter, including the allowance of claims, I mentioned that there would be two trusts. Generally, there's one trust which is setup to be administered by the plaintiff's committee selected administrator, who will allocate the settlement fund among the claims and do the various claims administration.

 

      Constitutionally, those that wish to have an absolute trial are entitled to have it. So the second trust is usually for those that want to go to a jury trial. But their claims are all allocated against the resources in that trust.

 

      There is one article that has suggested what recoveries are. I think it's a little out of date. We have the St. Paul case, which said a minimum of 10,000 claimants. So I think it does vary. It is not necessarily public because the majority of claims are dealt with in this administrative claims allowance procedure which is controlled by persons selected by the plaintiff's counsel committee. And that has been the dominant model so far.

 

      So we do know there was 220-some odd million available in St. Paul to be allocated against its claims. I hope that answers your question.

 

Shmuel Kline:  Just kind of a follow up, will adversaries be filed, or will you allow state courts to deal with the defenses and claims?

 

Corinne Ball:  The state courts are displaced. This is now a federal problem. That is one thing that bankruptcy affects. It becomes a federal issue, a federal problem. And you may have heard of it, but in bankruptcy, we also have the ability, if necessary, beyond the proof of claim process, to remove all state court litigation to the federal court.

 

      So far, the federal courts have totally retained it. And the plaintiffs' committee counsel have really taken over the claims allowance process in the bulk of the cases that have come true with a confirmed plan, which is most of them.

 

Shmuel Kline:  Thank you.

 

Nick Marr:  Great, thanks. So we don’t have any questions in the queue, and we're getting close to 2:00. So I'll go ahead and offer a chance for any closing remarks from our speakers, and if a question pops up, we can go to it.

 

John Goetz:  Todd, do you have any remarks, closing remarks?

 

Todd Geremia:  No, I don't think I do. I defer to you, John, since we may have cut your time a bit short too.

 

John Goetz:  Closing remarks, or from my standpoint, judicial window legislation does not work, and the judiciary is just not equipped to decide cases that are decades, many decades, old. And courts struggle with those issues. The dioceses and religious organizations struggle with those issues as well.

 

      Wanting to allow such claims to proceed should be decided by the legislature, if at all, and the electorate. And I'm still hopeful that in Pennsylvania, religious organizations and other ones as well, like Boy Scouts and other groups, won't have to go to bankruptcy as their last refuge but can find a rule of law vindicated in the courts.

 

      That's my remarks. Thank you.

 

Todd Geremia:  Thank you all for attending today, and thank you, Nick, for having us.

 

Nick Marr:  Great, thank you. And on behalf of The Federalist society, I want to thank you all for joining us today and to our experts for the benefit of their valuable time and expertise today. To the audience, thank you for dialing in today. We welcome your feedback by email at [email protected]. And be checking our website and your emails if you're signed up as a member for announcements about upcoming Teleforum programs. And with that, thank you all for joining us today. We are adjourned.

 

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Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.