Rochester diocese bankruptcy: Judge threatens 'unfavorable outcome' if sides can't agree

Sean Lahman
Rochester Democrat and Chronicle

On the day that the Roman Catholic Diocese of Rochester filed for bankruptcy protection in September 2019, Bishop Salvatore Matano renewed his apology to those who had suffered sexual abuse by priests or other church personnel.

The volume of sexual abuse claims and the diocese's bankruptcy case are inextricably linked. Its Chapter 11 filing came just a month after New York state opened a one-year legal window to file civil lawsuits for past instances of sexual abuse. 

It quickly became clear that the volume of abuse cases and the potential payouts were going to create an existential crisis for the diocese. In his initial letter to parishioners, Matano acknowledged that “litigation cost and settlements or jury awards will exceed our resources.”

Nearly two years have now passed since the Rochester diocese filed its petition for Chapter 11 reorganization.

The deadline to file claims against the Diocese of Rochester came and went last August, but there have been few signs of any progress towards a resolution.

Instead, the two main parties in the case have become deadlocked, filing a series of competing legal motions last month asking U.S. Bankruptcy Judge Paul Warren to intervene and complaining that the other side was being unreasonable in the court-ordered mediation process.

Last week, Judge Warren made it clear that he’d had enough. 

At the outset of a hearing conducted by telephone July 9, Warren noted that he’d read every word of the more than 1,000 pages of legal filings, urging the parties to keep their oral arguments brief. 

“I don’t need lengthy presentations,” Warren said. “This has been papered to death.”

The Roman Catholic Diocese of Rochester filed for bankruptcy on Sept. 12, 2019.

Parties deadlocked

What followed was each side explaining in great detail why the other side was responsible for the lack of progress in mediation. A lawyer representing abuse survivors accused the diocese of trying to make “backroom deals” with insurance companies to limit the amount of money available to pay survivors. Another lawyer, representing the diocese, countered that the amount of money being sought was “out of the stratosphere” and “completely unrealistic.”

Eventually, Warren appeared to tire of the back and forth and interjected.

“We’ve been at this for over an hour and we are going in circles,” Warren said. Then he issued his ruling, denying the motions and ordering the sides to return to mediation, and this time with a sense of urgency.

“This brinkmanship is an affront to this court and its order to participate in mediation,” Warren said. ”You are not to return to mediation with your former positions in hand and seek to rehash those positions. Wipe the slate clean, participate with fresh eyes and fresh views. You all need to be willing to compromise.”

Warren made clear that he expected to see some significant progress in the short term, and that if he were called upon again to resolve a stalemate, it was likely that everyone would walk away unhappy.

“The court wishes to remind the parties that if the path to non-consensual resolution persists, all parties are at risk for an unfavorable outcome,” Warren said.

Competing legal arguments

Office of Roman Catholic Diocese of Rochester in Gates, NY.

Attorneys for the diocese had asked the court to approve a $35 million settlement agreement they’d reached with Lloyd's of London and Interstate Fire and Casualty, a pair of companies who together represent about one-third of the Diocese’s total insurance coverage.

Stephen Donato, representing the diocese, argued that the money represented a significant contribution to a “survivors fund,” which would be supplemented by money provided by other insurance policies, by parishes and schools, and by the diocese itself. 

That fund would likely total over $100 million, Donato told the court, which, after accounting for low or no-value claims would result in an average settlement of $220,000 per survivor.

Donato argued that the “risk of continuing litigation is eating up most of the available money.”

Richard Morrissey, the U.S. trustee appointed to the case, argued that the motion should not be approved because it “would lock in parts of a bankruptcy settlement before a plan has even been submitted.”

A claimants committee, representing the roughly 475 survivors who filed claims against the diocese, objected to the deal, arguing that the amount of the proposed settlement was too low.

But more than that, attorneys argued that the attempt to set a fixed amount for the insurance payout was premature and ignored all of the central unresolved issues in the case, primarily the value of each abuse claim and who is liable for paying those amounts.

Allegations of 'backroom deals'

Ilan Scharf, an attorney for the claimants' committee, said that details of the proposed settlement left many questions unanswered and that approving it “would allow more backroom deals like this one with other insurance companies.”

In rejecting the diocese’s request to approve the settlement, Judge Warren noted that it would release insurers from further liability, as well as some other entities like parishes. He also issued a word of caution, suggesting to some observers that he might have been inclined to agree with Scharf’s characterization of a “backroom deal.”

“If this path is persisted on by the diocese and its insurers, at some point the issue of whether a settlement comprises a sub-rosa agreement will be addressed by the court,” Warren said. A sub-rosa agreement is an arrangement between parties that was arrived at secretly or in confidence.

A group of 20 abuse survivors had asked for their claims to be removed from the bankruptcy process so that their cases could move forward, allowing a state judge to make rulings on a number of the issues the parties found themselves deadlocked over.

But Warren also rejected this idea, explaining that it would simply force each of those cases to start over from scratch after investing almost two years into the bankruptcy process.

Warren discussed a similar stalemate in the bankruptcy case of the Archdiocese of St. Paul and Minneapolis. A judge there observed that some of the survivors who filed proofs of claim had died during the years that lawyers were engaging in a drawn-out, back-and-forth legal process. Warren urged the lawyers in this case to choose a different path and made clear he was willing to act if they did not.

“I hope that all of the factions will set aside their desire to win and focus on a resolution that is fair and agreeable to all parties in this case,” Warren said.

Next steps

Judge Warren ordered the parties to resume their work with the court-ordered mediator, U.S. Bankruptcy Judge Gregg Zive, as soon as possible. Zive is based in Reno, Nevada.

Warren told the attorneys in the case to cancel any vacation plans and rearrange their court calendars so they could travel to Reno for face-to-face meetings as soon as Judge Zive was available.

"There are no excuses for failing to participate," Warren told them.

Warren also cleared the way for outside experts to help make some progress on evaluating the merits and value of individual abuse claims.

The Claro Group, based in Chicago, will be employed as a valuation expert and help the creditor's committee evaluate each individual sexual abuse allegation based on court documents that have been filed under seal.

The judge also issued an order that would allow experts retained by the insurance companies to access those files so they could analyze the merits of each one and determine the value of each claim.

Role of parishes in settlement

The issues of liability and claim valuation are complex and nuanced, but this bankruptcy case is not exploring virgin territory.

There are currently 10 American dioceses involved in bankruptcy proceedings, including three others in New York state: Buffalo, Syracuse and Rockville Centre. Fifteen other dioceses have emerged from the bankruptcy process.

Marie Reilly, a law professor at Pennsylvania State University, studied bankruptcy cases involving dioceses and religious orders, and published her findings in an extensive 2019 law journal article.

The details in each case are different, but the broad issues are largely the same. Among them is the nature of the relationships among entities within a Catholic diocese. In other words, the extent to which a parish or school bears liability for abuse that occurred on its watch, and thus, how much money they would be expected to contribute toward settling those abuse claims.

Reilly's analysis addresses one concern often expressed by parishioners: that bankruptcy proceedings could result in the forced sale of a church building or other property to raise money for a settlement fund.

"No doubt all parties in the Catholic bankruptcy cases understood that a bankruptcy court order approving a trustee’s sale of a Catholic parish church or school would likely set off an explosion of self-immolating litigation," Reilly wrote. But that doesn't mean parishes should not expect to contribute.

Although a property liquidation seems unlikely for individual parishes, Reilly writes that it "should not obscure the importance of future contributions of Catholic faithful as a plan-funding source. Canon law obligates Catholics to support the Church. It gives the bishop authority to tax parishes for ordinary support of the diocese."

How did other diocesan bankruptcies turn out?

Reilly's study found that in the 13 diocesan bankruptcy cases that had then concluded, the average settlement per survivor was roughly $318,000. The value of each claim is based on its own individual merits, so there was significant variation from one case to another. 

The Diocese of Fairbanks, which emerged from bankruptcy in 2010, paid an average of just $33,790 per survivor. At the other end of the spectrum, the Diocese of San Diego paid $1,375,690 per survivor in 2007.

Two dioceses have emerged from bankruptcy since Reilly's study was published. The Diocese of Duluth paid out an average of $313,000 to 125 survivors in October 2019. The Diocese of New Ulm (Minnesota) paid 93 survivors an average settlement of $365,000 when they settled in March 2020.

Reilly's study also looked at how long each case took to work through the legal process. On average, the diocesan bankruptcy cases were resolved in roughly 25 months. In San Diego, a settlement with survivors was reached in eight-and-a-half months, helped in part by a fundraising drive that asked parishioners to help pay for the financial settlement. 

In Milwaukee, the archdiocese's bankruptcy process lasted almost five years.

In the 13 diocesan bankruptcies included in the Reilly study, insurance companies ended up paying just 54% of the total settlements, leaving parishes and parishioners to shoulder much of the burden.

The number of survivors in each diocese bankruptcy varied significantly, and in fairness so does the size of each Diocese. Stockton's bankruptcy involved just 30 claims, and the Archdiocese of St. Paul and Minneapolis addressed 450.

With 475 survivors filing claims, Rochester has more than any of them.

Sean Lahman is a watchdog reporter for the Democrat & Chronicle, part of the USA Today Network.  Contact him at slahman@gannett.com and follow him on Twitter @seanlahman.