In re Catholic Bishop of Spokane

329 B.R. 304

In re THE CATHOLIC BISHOP OF SPOKANE a/k/a The Catholic Diocese of Spokane, a Washington corporation sole, Debtor Committee of Tort Litigants, Plaintiff, v. The Catholic Diocese of Spokane, et al., Defendants.

Bankruptcy No. 04-08822-PCW11.

Adversary No. 05-80038-PCW.

United States Bankruptcy Court, E.D. Washington.

August 26, 2005.

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James R. Murray, Gordon Murray Tilden LLP, Seattle, WA, for Debtor.

Gary W. Dyer, Spokane, WA, for trustee.

MEMORANDUM DECISION RE: 1) PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT; 2) VARIOUS MOTIONS TO DISMISS; AND 3) THE CATHOLIC DIOCESE OF SPOKANE'S CROSS-MOTION FOR SUMMARY JUDGMENT

PATRICIA C. WILLIAMS, Bankruptcy Judge.

INTRODUCTION

This controversy arises under 11 U.S.C. § 541 which is the section of the Bankruptcy Code which defines property of the bankruptcy estate. The Catholic Diocese of Spokane voluntarily commenced a Chapter 11 reorganization listing numerous parcels and items of real and personal property on its schedules as "property held for another" which property is in the possession of other members of the diocesan family. The debtor contends that, with certain exceptions, the individual parishes, schools, cemeteries and other members of the diocesan family own the real and personal property. It argues those assets do not constitute property of the estate and are not available for repayment of creditors. The bankruptcy reorganization was caused by numerous tort claims brought by victims of clergy sex abuse. Those claimants allege that the parishes, schools, cemeteries and other members of the diocesan family have no ownership interest in such property, all of which constitutes property of the estate.

I. FACTS

On December 6, 2004, William S. Skylstad, as Bishop of the Catholic Church of the Spokane Diocese (hereinafter "Diocese") and as successor-in-interest to the incorporator of the "Catholic Bishop of Spokane, Washington," a corporation sole, placed the corporation sole in a Chapter 11 bankruptcy proceeding. (Voluntary Petition, Main Case Docket No. 1).

The Diocese has listed a number of the parishes as unsecured creditors in its Amended Schedule F based on funds previously deposited by each parish with the Diocesan Deposit and Loan Fund (hereinafter "D & L Fund"). Parish real property is listed as property held for another person at Item No. 14 of the Diocese Statement of Financial Affairs which includes the following description:

The Diocese has no equitable beneficial or proprietary interest in this property but, in some cases, holds mere legal title. In addition, certain of the property is subject to a restriction imposed by the donor or grantor.

(Schedules, Main Case Docket Nos. 1 and 130 and Statement of Financial Affairs, Main Case Docket Nos. 1 and 131.) There is no dispute that the value of the "property held by another" far exceeds the value of the undisputed property of the estate.

On February 2, 2005, the Tort Litigants' Committee (hereinafter "Committee") was appointed by the Office of the United States Trustee pursuant to 11 U.S.C. § 1102. (Appointment of Committee of Tort Litigants in a Chapter 11 Reorganization Case, Main Case Docket No. 206). The Committee represents tort claimants who had, pre-bankruptcy, initiated litigation against the debtor. On February 4, 2005, the Committee initiated this adversary proceeding seeking equitable relief in the form of declaratory orders against the debtor and various non-debtor members of the diocesan family such as parishes, schools, retreat centers, etc., each of which was named as a separate defendant. (Complaint, Adversary Docket No. 1). The separate legal nature of the various members of the diocesan family, particularly the parishes, is in dispute.

Another committee, the Tort Claimants' Committee (hereinafter "TCC"), was formed by the U.S. Trustee to represent the interests of claimants who had not filed suit pre-bankruptcy but had made known that they were also victims of sex abuse by clergy and hold claims. (Reconstitution of and Appointment of Committee of Tort Claimants in a Chapter 11 Reorganization Case, Main Case Docket No. 205). A representative has also been appointed to represent the interests of those victims, if any, who have not yet made their claims known (hereinafter "FCR"). (Final Order Appointing a Legal Representative for Unknown Tort Claimants and Minors, Main Case Docket No. 550). Although neither the TCC or FCR are parties to this adversary proceeding, their interests are aligned with the plaintiff.

There are 155 named defendants in this adversary. Relying solely upon the caption, it appears roughly 98 of those defendants are parishes. An informal group of approximately 80 of the defendant parishes was formed and is referred to as the "Association of Parishes." It has been actively involved in this proceeding. The parishes are not debtors in any bankruptcy proceeding nor defendants in any state court lawsuits filed by Committee members. The Association of Parishes argues that the parishes have no legal relationship to the Committee. The Association of Parishes maintains that the Committee, or more accurately, the members of the Committee, have no claim to the property of any parish. (Complaint, Adversary Docket No. 1, and Answer, Adversary Docket No. 88).

The real property in dispute consists of churches, schools, cemeteries and other parcels. The personal property in dispute consists of bank accounts, investments, furniture, vehicles, etc. Both the real and personal property allegedly is "in fact under the Diocese's complete control and domination." The Complaint further alleges that the affairs of the Diocese and the other defendants which are members of the diocesan family are so entangled that no allocation of assets is possible, that collectively they are a single economic unit, and that substantive consolidation of the Diocese and the defendants would benefit all creditors. There are three requests for relief in the Complaint: (1) declaring that all disputed property constitutes property of the estate; (2) substantive consolidation; and (3) ordering the debtor to amend its schedules to list the disputed property.

II. THE MOTIONS TO DISMISS

The Association of Parishes filed a Motion to Dismiss. (Defendant Parishes' Motion to Dismiss, Adversary Docket No. 99). The Diocese joined in the Motion to Dismiss. (Joinder of Defendant The Catholic Diocese of Spokane, Adversary Docket No. 213). The Association of Parishes' Motion to Dismiss and joinder by the Diocese are supported by legal arguments as well as extrinsic evidence filed in support of the debtor's Cross-Motion for Summary Judgment and the Association of Parishes' opposition to the Committee's Motion for Partial Summary Judgment. Named non-parish defendants Catholic Charities, Inc., Morning Star Boys Ranch, Inc., Catholic Cemeteries, Inc. d/b/a Holy Cross Cemetery, St. Joseph Cemetery and Immaculate Heart Retreat House, Inc. joined in the Association of Parishes' Motion to Dismiss but filed no legal argument or extrinsic evidence (hereinafter "joining defendants"). (Joinder of Defendants Catholic Charities, Inc., et. al., Adversary Docket No. 102). Defendant Saint Philip's Villa, Inc. separately joined in the Association of Parishes' Motion to Dismiss and filed extrinsic evidence. (Defendant Saint Philip's Villa, Inc.'s Joinder in Motion to Dismiss, Adversary Docket No. 125). In connection with the Motion to Dismiss, the Association of Parishes, Diocese, joining defendants and Saint Philip's Villa, Inc. will be referred to as the "moving parties."

The moving parties cite to Fed. R. Bank. P. 7012(b), which incorporates Fed.R.Civ.P. 12(b)(1) and (6), as the basis of the motions. The Association of Parishes makes two specific arguments. Pursuant to Fed.R.Civ.P. 12(b)(6), they argue that the case should be dismissed because the Committee does not have standing to seek derivative relief under 11 U.S.C. §§ 521 or 541 and thus they fail to state a claim upon which relief can be granted. The second basis for dismissal is that the Court lacks subject matter jurisdiction because there is no case or controversy between the parishes and the Committee. As a result, the case should be dismissed pursuant to Fed.R.Civ.P. 12(b)(1). These issues are addressed in more detail below.

1. Failure to State a Claim Other than Lack of Standing.

The 12(b)(6) motion, apart from the lack of standing argument, presents in a tangential way the argument that the parishes are not debtors in this proceeding, are not defendants in the state court actions brought by Committee members, and have no legal relationship with the Committee. The conclusion is that the Committee fails to state a claim upon which relief can be granted.

The briefs filed by the debtor and Association of Parishes in response to the plaintiff's Motion for Partial Summary Judgment and in support of debtor's Cross-Motion for Summary Judgment address the merits of the causes of actions in the Complaint, seek substantive relief and are based upon extensive extrinsic evidence rather than just the Complaint and answers. With the exception of the standing issue analyzed below, any analysis of 12(b)(6) as to the debtor's and the Association of Parishes' Motions to Dismiss would be redundant with the various motions seeking judgment as a matter of law and will not be separately addressed.

The joining defendants and Saint Philip's Villa, Inc. have, in addition to standing, raised independent issues relating to Fed.R.Civ.P. 12(b)(6). In essence, they argue that because they are separate legal entities under state law, they have no legal relationship with claimants in the bankruptcy proceeding and the plaintiff has failed to state a claim against them. Only Saint Philip's Villa, Inc. has provided any evidence in addition to the Complaint and Answer....