In re Roman Catholic Church of the Archdiocese of New Orleans

632 B.R. 593

IN RE: The ROMAN CATHOLIC CHURCH OF the ARCHDIOCESE OF NEW ORLEANS, Debtor.

Case No. 20-10846

United States Bankruptcy Court, E.D. Louisiana.

Signed August 4, 2021

Laura F. Ashley, Mark Mintz, Samantha Oppenheim, Lucas Hodgkins Self, Edward Dirk Wegmann, Jones Walker, et al, Elizabeth J. Futrell, R. Patrick Vance, New Orleans, LA, for Debtor.

A. Brooke Watford Altazan, Brandon A. Brown, Jamie Dodds Cangelosi, Nicholas Smeltz, William Shandler Robbins, Paul Douglas Stewart, Jr., Stewart Robbins Brown & Altazan, LLC, Baton Rouge, LA, C. Davin Boldissar, Bradley C. Knapp, Omer F. Kuebel, III, Locke Lord LLP, New Orleans, LA, Andrew William Caine, Linda F. Cantor, Pachulski Stang Ziehl & Jones, Los Angeles, CA, for Creditor Committee.

Amanda Burnette George, Mary S. Langston, Office of the U.S. Trustee, New Orleans, LA, for U.S. Trustee Office of the U.S. Trustee.

Section "A"

MEMORANDUM OPINION AND ORDER

MEREDITH S. GRABILL, UNITED STATES BANKRUPTCY JUDGE

This Court held a video evidentiary hearing on August 20, 2020 (the "Hearing") to resolve the Motion of the Official Committee of Unsecured Creditors To Dismiss Chapter 11 Case (the "Motion To Dismiss"), [ECF Doc. 203], the Abuse Claimant Ed Roe's Joinder , [ECF Doc. 336], and the oppositions to the Motion To Dismiss filed by the Roman Catholic Church of the Archdiocese of New Orleans (the "Archdiocese" or the "Debtor"), [ECF Doc. 345], prepetition secured lender Hancock Whitney Bank, [ECF Doc. 338], and a group of affiliated church parishes, schools, nursing homes, senior living facilities, and other community service agencies and facilities (the "Apostolates"), [ECF Doc. 341].

The parties conducted extensive discovery prior to the Hearing and informed the Court at the Hearing of their joint stipulation to the submission of all evidence in the form of 145 joint exhibits comprised of approximately 6,350 pages of material, including written transcripts and video recordings of five depositions submitted in lieu of live testimony, all of which this Court admitted into evidence.¹ The Court heard oral argument from counsel for the Official Committee of Unsecured Creditors (the "Committee"), the Debtor, and the Apostolates during the Hearing. After the completion of the Hearing, this Court took the matter under advisement and allowed post-Hearing briefing from the parties. Abuse claimant Ed Roe, the Debtor, and the Committee submitted post-Hearing briefs. [ECF Docs. 365, 366 & 367].

For the following reasons, based on the pleadings, the record,² the arguments of counsel, the Court's review of all of the evidence submitted at the Hearing, and applicable law, this Court DENIES the Committee's Motion To Dismiss.³

JURISDICTION AND VENUE

This Court has jurisdiction to consider this matter pursuant to 28 U.S.C. § 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A). Venue is proper in this District under 28 U.S.C. §§ 1408 and 1409.

RELEVANT BACKGROUND

Created as a diocese in 1793 and established as an archdiocese in 1850, [ECF Doc. 14, ¶ 6], the Archdiocese filed for chapter 11 bankruptcy relief on May 1, 2020, joining 29 other diocesan bankruptcies that have filed for bankruptcy protection across the country between July 2004 and June 2020, see Ex. 66. The Archdiocese covers eight civil parishes, consists of 112 church parishes, and educates approximately 33,000 students per year in both independent and archdiocesan-owned Catholic schools. [ECF Doc. 14, ¶ 7]. According to Fr. Patrick Carr, the Vicar of Finance for the Archdiocese, "Archdiosesan and other Catholic charities and social service programs provide assistance to the homeless, hungry, elderly and developmentally challenged, as well as to at-risk youth, pregnant women, and many others," affecting "the lives of nearly 500,000 residents of southeast Louisiana on a daily basis." [ECF Doc. 14, ¶ 8].

Although affiliated with various independent schools, parishes, and charitable organizations for which it provides administrative services, the Archdiocese as a corporate entity is comprised of administrative offices, nine schools, and two parishes. See Ex. 62. With its Petition, the Archdiocese attached a unanimous corporate resolution authorizing the filing and a List of Creditors Who Have the 20 Largest Unsecured Claims and Are Not Insiders (the "Top 20 List"). [ECF Doc. 1]. The creditors on the Top 20 List included bondholders, employee health claimants, professional and consulting services claimants, trade claimants, and an insurance claimant. Id . The Archdiocese noticed this case as a "complex" case pursuant to this Court's Complex Chapter 11 Case Procedures , identifying the case as one in which (i) the Archdiocese has total debt of more than $10 million, (ii) more than fifty parties in interest are expected to participate, and (iii) significant media attention may be attracted. [ECF Doc. 2].

In his Declaration filed in support of the Archdiocese's first-day motions, Fr. Carr submits that "[o]perational challenges have strained the Archdiocese's financial position, have impacted its ability to sustain its ministries and charities, and have necessitated the commencement of this proceeding." Ex. 6, ¶ 9. Specifically, Fr. Carr asserts that "[t]he financial and operational difficulties burdening the Archdiocese range from claims and lawsuits alleging sexual abuse by clergy that occurred more than fifty years ago to losses of revenue from offerings and collections at Masses which are no longer publically [sic ] celebrated due to the COVID-19 pandemic." Id . The purpose of the Archdiocese's bankruptcy filing, in the words of Fr. Carr,

is to develop a plan of reorganization, under the supervision of the Court, which will facilitate the equitable distribution of assets to creditors in accordance with law, sustain the financial viability of the Archdiocese, and allow the Catholic Church to continue the religious and charitable ministries and programs it has fostered throughout New Orleans and surrounding areas for more than three hundred years.

Ex. 6, ¶ 10.

As of the Petition Date, the Archdiocese was defending 34 lawsuits filed between 2018 and 2020 in a Louisiana state court by claimants alleging sexual abuse by clergy (the "Abuse Cases") and had been working to resolve a similar number of claims for which lawsuits had yet to be filed. [ECF Doc. 345, ¶ 16]. Upon filing for bankruptcy relief, the Archdiocese removed the Abuse Cases to the U.S. District Court for the Eastern District of Louisiana. See Motion To Dismiss, ¶ 32; [ECF Doc. 345, ¶ 16 & Ex. B]. A few of the plaintiffs in the Abuse Cases mobilized quickly and participated through their state court counsel and newly retained bankruptcy counsel in the Debtor's first-day hearings on May 4 & 5, 2020. [ECF Docs. 107 & 108]. Their participation resulted in heavily negotiated first-day Orders, including those regarding payment of prepetition and post-petition wages and benefits, use of cash collateral, and requirements to file under seal certain portions of the Debtor's schedules and statement of financial affairs. [ECF Docs. 100, 173 & 177].

On May 20, 2020, the Acting United States Trustee for Region 5 ("UST") appointed the seven-member Committee, comprised of the trustee for bondholders and six individuals whose claims against the Debtor are premised on allegations of abuse.⁴ On July 1, 2020, the Debtor filed an ex parte motion to set the bar date for filing proofs of claim and to approve noticing procedures (the "Bar Date Motion"). [ECF Doc. 200]. On July 3, 2020, among its other objections, the Committee objected to the Bar Date Motion as premature in light of the Committee's contemporaneously filed Motion To Dismiss. The Committee's motion seeks to dismiss the Debtor's bankruptcy case entirely for "cause" pursuant to § 1112(b) of the Bankruptcy Code, alleging that the Debtor filed its case in bad faith, as it remains solvent, and that it only pursued bankruptcy protection to gain a tactical advantage in the 34 Abuse Cases. See Motion To Dismiss, ¶¶ 21–46.

DISCUSSION

A. Dismissal of Bad-Faith Filings Under § 1112(b) and the Standard of Review

Section 1112(b) requires a bankruptcy court to convert a chapter 11 case to one under chapter 7 or dismiss the case entirely, whichever is in the best interests of creditors and the estate, for "cause," unless the court determines that appointment of a trustee or examiner under § 1104(a) is in the best interests of creditors and the estate. 11 U.S.C. § 1112(b)(1). The Bankruptcy Code provides a non-exclusive list of examples that constitute "cause" in § 1112(b)(4).

"Lack of good faith is not one of the enumerated examples in section 1112(b), but many courts have held that lack of good faith is appropriate cause for dismissal under that section." In re Mirant Corp ., No. 03-46590, 2005 WL 2148362, at *6 (Bankr. N.D. Tex. Jan. 26, 2005) (collecting cases). Indeed, "[e]very bankruptcy statute since 1898 has incorporated literally, or by judicial interpretation, a standard of good faith for the commencement, prosecution, and confirmation of bankruptcy proceedings." Little Creek Dev. Co. v. Commonwealth Mortg. Corp. (In re Little Creek Dev. Co.) , 779 F.2d 1068, 1071 (5th Cir. 1986) (citations omitted).

This Court is instructed to consider the good faith of the Debtor's filing based on the totality of the circumstances, requiring an "on-the-spot evaluation of the debtor's financial condition, motives, and the local financial realities." In re Little Creek Dev. Co ., 779 F.2d at 1072. This Court agrees with the court in In re Mirant Corp . that the typical benchmarks showing a lack of good faith identified in Little Creek —a fully encumbered, single asset in foreclosure at the time of filing, lack of employees, little or no cash flow, few unsecured creditors, and no available sources of income to fund a plan—are "antithetical" to the facts here as well. 2005 WL 2148362, at *7. Therefore, "[m]ore useful to the court are cases...