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.
The 8th Circuit’s Decision
As the Court recognized, “[s]ubstantive consolidation allows the court, in appropriate situations, to expand the definition of the debtor’s bankruptcy estate to include assets also within debtor’s possession and control.”[3] Section 105 (a) of the Bankruptcy Code forms the basis for substantive consolidation; it provides the option in equity to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions.”[4]
What could be a more valid equitable consideration than providing relief to victims of sexual abuse? After all, Minnesota certainly wanted to provide relief when it passed legislation to overturn its own statute of limitations. Why would a bankruptcy court stand in the way of the victims’ recovery?
The answer, as stated by the 8th Circuit Panel, is simple. The Bankruptcy Code will not allow substantive consolidation permissible only under the general powers of Section 105 given the more specific mandate of Section 303(a). In the words of the Panel, “the broad, catch-all equitable powers conferred under 11 U.S.C. § 105(a) do not allow a bankruptcy court to override explicit mandates of other sections of the Bankruptcy Code.” Section 303(a) details the parties who may (and may not) be subject to an involuntary bankruptcy petition. It states:
An involuntary case may be commenced only under chapter 7 or 11 of this title, and only against a person, except a farmer, family farmer, or a corporation that is not a moneyed, business, or commercial corporation, that may be a debtor under the chapter under which such case is commenced. (emphasis added).[5]
Per the Panel’s determination, “not a moneyed...
