11-22820-rdd

Doc 120

Filed 10/18/11 Entered 10/18/11 13:54:42 Pg 1 of 13

Main Document

Hearing Date: October 25, 2011 at 10:00 a.m. PACHULSKI STANG ZIEHL & JONES LLP 10100 Santa Monica, Boulevard, 11th Floor Los Angeles, California 90067 Telephone: (310) 277-6910 Facsimile: (310) 201-0760 James I. Stang, Esq. (admitted pro hac vice) -and780 Third Avenue, 36th Floor New York, New York 10017 Telephone: (212) 561-7700 Facsimile: (212) 561-7777 Ilan D. Scharf, Esq. Counsel for the Official Committee of Unsecured Creditors of The Christian Brothers Institute and Christian Brothers of Ireland, Inc. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK Chapter 11 In re: Case No. 11-22820 (RDD) THE CHRISTIAN BROTHERS INSTITUTE, et al., (jointly administered) Debtors.

LIMITED OBJECTION OF OFFICIAL COMMITTEE OF UNSECURED CREDITORS TO MOTIONS OF THE CATHOLIC ARCHBISHOP OF SEATTLE FOR APPROVAL AND ENFORCEMENT OF SETTLEMENT AGREEMENT BETWEEN PLAINTIFFS AND THE ARCHDIOCESE AND DISMISSAL AS TO ARCHDIOCESE ONLY TO: THE HONORABLE ROBERT D. DRAIN UNITED STATES BANKRUPTCY JUDGE The Official Committee of Unsecured Creditors (the Committee) of The Christian Brothers Institute (CBI) and Christian Brothers of Ireland, Inc. (CBOI and, collectively with CBI, the Debtors), the debtors and debtors in possession in the above-captioned cases (the Cases) under chapter 11 of Title 11 of the United States Code (the Bankruptcy Code), by and through its undersigned counsel, hereby submits its limited objection (the Objection) to the

DOCS_SF:78560.9 14012-00002

11-22820-rdd

Doc 120

Filed 10/18/11 Entered 10/18/11 13:54:42 Pg 2 of 13

Main Document

Motion for Approval and Enforcement of Settlement Agreement Between Plaintiffs and the Archdiocese and Dismissal as to the Archdiocese Only (ODea Settlement Motion) [Docket No. 115] and the Motion for Approval and Enforcement of Settlement Agreement Between Plaintiffs and the Archdiocese and Dismissal as to the Archdiocese Only (the Briscoe Settlement Motion and, collectively with the ODea Settlement Motion, the Settlement Motions) [Docket No. 116] filed by the Corporation of the Archbishop of Seattle (the Archdiocese). In support of its Objection, the Committee respectfully states as follows: Preliminary Statement 1. The Archdiocese and the Debtors, along with various other entities, are

codefendants in a series of lawsuits filed in the Superior Court of Washington, King County (the State Court). These lawsuits arise out of sex abuse by Brothers of the Congregation of Christian Brothers (the Congregation) at ODea High School (ODea) and Briscoe Memorial School (Briscoe). Four of those lawsuits, but not all of the pending lawsuits, have been removed to this Court. The Archdiocese and the Congregation are also each named insureds under at least two insurance policies that cover the abuse at issue in certain of the State Court lawsuits. The Archdiocese, the Congregation of Christian Brothers North American Province (NAP), and the insurers have entered into agreements allocating the proceeds of these insurance policies (as defined below, the Coverage Agreements). CBI, in its schedules, lists an interest in the same insurance policies that are the subject to the Coverage Agreements. CBI is not a party to the Coverage Agreements and the Coverage Agreements do not allocate any proceeds of the insurance policies to Debtors CBI.1

The Committee presents the known relevant facts regarding the insurance policies, the relationship between the Debtors and various Christian Brothers entities, and the Coverage Agreements in the Response of Official Committee of Unsecured Creditors to Motion of the Catholic Archbishop of Seattle to Seek Determination of the Extent of 11 U.S.C. 362 Stay with Regard to Edmund Rice Christian Brothers-North American Province (the Stay Motion Response) filed contemporaneously herewith. In order to avoid repeating the complex facts described in
DOCS_SF:78560.9 14012-00002

11-22820-rdd

Doc 120

Filed 10/18/11 Entered 10/18/11 13:54:42 Pg 3 of 13

Main Document

2.

The Archdiocese has apparently entered into settlement agreements with

five plaintiffs in two removed actions. The Archdiocese entered into these agreements after commencement of the Debtors Cases. The Archdiocese now seeks entry of an order approving the settlement agreements and enforcing the settlement agreements. 3. The Committee does not object to the terms of the settlement agreements

between two non-debtor parties, except to the extent that such any order approving the agreements would have any effect on property of the Debtors (for example, CBIs admitted interest in the proceeds of the insurance policies). Relevant Facts A. The State Court Actions 4. The settlement agreements at issue (collectively, the Settlement

Agreements), relate to plaintiffs in three of the state court actions: a. Plaintiffs H.W. and T.J. are plaintiffs in a case filed in the State Court that was removed to this Court and is currently pending as an adversary proceeding before this Court captioned as L.W., et al. v. Corporation of the Catholic Archbishop of Seattle, et al., Adv. Pro. No. 11-08317 (RDD) (the Briscoe AVP). The plaintiffs in the Briscoe AVP all assert claims against the defendants therein based on abuse by Brothers at Briscoe. b. Plaintiffs K.A., J.S., and W.S. are each plaintiffs in a case filed in the State Court that was removed to this Court and is currently pending as an adversary proceeding before this Court captioned as K.A., et al. v. Corporation of the Catholic Archbishop of Seattle, et al., Adv. Pro. No. 11-08321 (RDD) (the ODea AVP and, collectively with the Briscoe AVP, the Pending Proceedings). The plaintiffs in the ODea AVP assert claims against the defendants therein based on abuse by a Brother at ODea. B. The Coverage Agreements 5. The Archdiocese and the Congregation are each named insureds under

separate insurance policies) (collectively, the Policies) issued by Maryland Casualty Company (Maryland) and Pacific Indemnity Company (Pacific).

the Stay Motion Response, the Committee incorporates such discussion of facts (including all exhibits thereto) herein by reference for all purposes.

DOCS_SF:78560.9 14012-00002

11-22820-rdd

Doc 120

Filed 10/18/11 Entered 10/18/11 13:54:42 Pg 4 of 13

Main Document

6.

On or about April 28, 2011, NAP and the Archdiocese entered into separate

agreements with Pacific and Maryland governing the use of proceeds of the Policies in the Pending Proceedings but only with respect to certain of the plaintiffs therein. 7. The agreement governing the use of proceeds of the Maryland policy (the

Maryland Agreement) provides, in relevant part, as follows: a. b. c. d. The Maryland Agreement applies to the ODea AVP; The Maryland Agreement governs payments to the plaintiffs identified as J.S., W.S., K.A., T.P., and A.S.; Maryland agrees to pay the per occurrence limit of $300,000 for settlement of each plaintiffs claims; and Maryland will pay up to 50% of the per occurrence limit at the direction of (and on account of claims against) each of the Archdiocese and NAP.

8.

The agreement governing the use of proceeds of the Pacific policy (the

Pacific Agreement and, collectively with the Maryland Agreement, the Coverage Agreements) provides, in relevant part, as follows: a. b. c. d. The Pacific Agreement applies to the Briscoe AVP; The Pacific Agreement governs payments to the plaintiffs identified as J.H., L.B., and D.P.; Pacific agrees to pay the per occurrence limit of $250,000 for settlement of each plaintiffs claims; and Pacific will pay up to 50% of the per occurrence limit at the direction of (and on account of claims against) each of the Archdiocese and NAP.

9.

On June 7, 2011, CBI filed its schedules, which stated that CBI had an

interest in the Policies. 10. On June 28, 2011, the Debtors appeared at their 341 meeting, where

counsel for the Archdiocese questioned the Debtors representative about the Policies.

DOCS_SF:78560.9 14012-00002

11-22820-rdd

Doc 120

Filed 10/18/11 Entered 10/18/11 13:54:42 Pg 5 of 13

Main Document

C.

The Settlement Agreements 11. Between June 30, 2011 and July 8, 2011, the Archdiocese entered into

settlement agreements (collectively, the Settlement Agreements) with T.J., H.W., J.S., W.S., and K.A. These Settlement Agreements are each attached as exhibits to the Archdiocese Settlement Motions. 12. Insurance coverage for settlements between the Archdiocese and J.S., W.S.,

and K.A. appear to fall under the terms of the Maryland Agreement. 13. Insurance coverage for settlements between the Archdiocese and T.J. and

H.W. apparently do not fall under the terms of either of the Policies.2 Relief Requested 14. The precise scope of relief sought by the Archdiocese in its Settlement

Motions is unclear. The Archdiocese states that it requests the Court order the claims, as to the Archdiocese only, in [the Pending Proceedings], be dismissed with prejudice and without costs or attorneys fees to any party by granting the [Settlement Motions]. ODea Settlement Motion at p. 7; Briscoe Settlement Motion at p. 7. However, the Archdiocese did not attach a form of order to the Settlement Motions and the exact terms and scope of relief requested by the Archdiocese are therefore unclear. The Committee is concerned that the Archdiocese may be seeking implied or express approval of the Coverage Agreements by the Court on account of (a) the lack of a proposed order clearly stating the relief requested by the Archdiocese, (b) the Archdioceses references in each of the Settlement Motions to the Coverage Agreements, (c) the Archdioceses attachment of the Maryland Agreement to the ODea Settlement Motion, and (d) the fact that there is no requirement for the Archdiocese to seek the Courts approval of the Settlement Agreements unless it is seeking relief that affects the Debtors interests.
2

The Committee is not aware of any insurance policies that cover the settlements with T.J. and H.W. but the Committee has not had discovery regarding existence of all possible insurance coverage.

DOCS_SF:78560.9 14012-00002

11-22820-rdd

Doc 120

Filed 10/18/11 Entered 10/18/11 13:54:42 Pg 6 of 13

Main Document

Limited Objection 15. The Committee does not object to the terms of the Settlement Agreements,

provided that any order(s) approving them do not affect any rights of any party with respect to any assets (including insurance policies) in which the Debtors estates may have an interest. Basis for Limited Objection A. Granting The Relief Sought In The Motion Should Not Be A Sub Rosa Approval of The Coverage Agreements 16. The Motion, without expressly addressing the two Coverage Agreements,

is one of three pleadings filed by the Archdiocese that integrally involves the Coverage Agreements. Each of the Settlement Motions states: During the mediation in this case, the Archdiocese and Christian Brothers agreed that they would split indemnity proceeds in the event that the Archdiocese settled individually with the Plaintiffs where joint settlement was unsuccessful.3 As discussed in detail in the Committees Stay Motion Response, the Coverage Agreements, which were either executed postpetition or on the same day the bankruptcy petitions were filed, are extremely controversial. The Coverage Agreements were executed by Brother Griffith, purportedly on behalf of NAP, which is not even a named insured under the policies at issue. Brother Griffith is a member of CBIs board of directors and its Vice-President. He is the same individual that executed, under penalty of perjury, CBIs schedules, which listed CBIs interests in the Policies as assets of CBIs estate.4 The policies which are the subject of the Coverage Agreements and the Coverage Agreements are the subject of a declaratory relief action filed in this Court by the Archdiocese. Although the Coverage Agreements are referenced in the

See Briscoe Settlement Motion at 9; ODea Settlement Motion at 5. The Committee is perplexed as to why this statement is relevant to the Settlement Agreements with T.J. and H.W. described in the Briscoe Settlement Agreement because it appears that neither of the Coverage Agreements pertains to claims asserted by those plaintiffs.
4

The Committee does not know why Brother Griffith did not schedule interests in the Policies in the CBOI schedules.

DOCS_SF:78560.9 14012-00002

11-22820-rdd

Doc 120

Filed 10/18/11 Entered 10/18/11 13:54:42 Pg 7 of 13

Main Document

Settlement Motions, the Archdiocese does not expressly seek approval of the Coverage Agreements or of the use of the proceeds of any insurance policies to fund the Settlement Agreements. 17. The Committee acknowledges that each of the Settlement Agreements

recites at paragraph 2 thereof that it is not intended to impact the Christian Brothers insurance coverage. However, since the Settlement Agreements were executed after the Coverage Agreements, the Committee is concerned that the recital of intent may refer to the Christian Brothers purported one-half interest in the per occurrence limits rather than the whole amount of the per occurrence limits. 18. The Committee has no objection to the terms of the Settlement Agreements

as long as the Court makes clear in any ruling concerning the Settlement Agreements that the rights and obligations of parties under any insurance policies in which the Debtors may have an interest are not affected by the ruling. 19. Notwithstanding the Committees conditional non-opposition to the

Settlement Motions, the Committee believes that the relief sought by the Archdiocese is both unnecessary and improper, that the Archdiocese lacks standing to seek approval of the Settlement Agreements under Rule 9019 of the Federal Rules of Bankruptcy Procedure, and that this Court lacks subject matter jurisdiction to enforce agreements between non-debtor parties that do not implicate property or interests of the estates. B. The Archdiocese Lacks Standing to Seek Approval of the Settlement Agreements 20. Rule 9019 of the Federal Rules of Bankruptcy Procedure provides that

[o]n motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement (emphasis added). Since a trustee is not normally appointed in a chapter 11 case, the Bankruptcy Code vests authority to settle or compromise in the hands of the debtor in
DOCS_SF:78560.9 14012-00002

11-22820-rdd

Doc 120

Filed 10/18/11 Entered 10/18/11 13:54:42 Pg 8 of 13

Main Document

possession. See 11 U.S.C. 1101 and 1107. The issue before the Court in the Settlement Motions is whether the Archdiocese, as a non-debtor, has standing to seek approval of a settlement with other non-debtors not involving property of the estate. 21. In In re Smart World Technologies, 423 F.3d 166, 174 (2d Cir. 2005), the

Court of Appeals for the Second Circuit held that only the debtor in possession has standing under Rule 9019 to move the bankruptcy court for approval of a settlement. There, the creditors of the debtor sought approval of a settlement pursuant to Rule 9019 over the debtors objections to settle an adversary initiated by the debtor. The bankruptcy court approved the settlement. On appeal, the district court upheld this ruling finding that Section 105 of the Bankruptcy Code and the Courts derivative standing doctrine enabled the bankruptcy court to exercise its equitable powers to allow the creditors to settle Smart Worlds claims over Smart World's objection. 22. The Second Circuit vacated the judgment of the district court. The Court

of Appeals found that the creditors lacked standing to bring a Rule 9019 motion. In its decision, the Court noted that Bankruptcy Rule 9019 vests authority to settle or compromise solely in the debtor-in-possession. In re Smart World Technologies, 423 F.3d at 174. The principle, the Court explained, is hardly surprising in light of the numerous provisions in the Bankruptcy Code establishing the debtor's authority to manage the estate and its legal claims. Id. C. The Relief Requested by the Archdiocese is Not Necessary Because There Is No Requirement in the Bankruptcy Code for Judicial Approval of the Settlement Agreements 23. The Bankruptcy Code contains no requirement for judicial approval of

settlements. In re Telesphere Communications, Inc., 179 B.R. 544, 551 (Bankr. N.D. Ill. 1994). Although Rule 9019(a) provides a procedure for the trustee or debtor in possession to move for approval of settlement, it does not and cannot create a substantive requirement for court approval that does not exist in the Bankruptcy Code itself. Title 28 U.S.C. 2075, which accords the

DOCS_SF:78560.9 14012-00002

11-22820-rdd

Doc 120

Filed 10/18/11 Entered 10/18/11 13:54:42 Pg 9 of 13

Main Document

power to adopt bankruptcy rules, specifies that they shall not abridge, enlarge, or modify any substantive right. See In re Barneys, Inc., 197 B.R. 431, 438 (Bankr. S.D.N.Y 1996) (The bankruptcy rules do not and cannot create substantive rights that do not already exist elsewhere); In re Telesphere Communications, Inc., 179 B.R. 544, 551 (Bankr. N.D. Ill. 1994) (Rule 9019 cannot and does not create requirement for court approval of settlements); In re Phillips, 966 F.2d 926, 933 (5th Cir.1992) (bankruptcy rules may not change authority to file bankruptcy on behalf of partnerships); In re Allegheny International, Inc., 107 B.R. 518, 524 (W.D. Pa. 1989) (bankruptcy rules may not limit right to intervene granted by Section 1109(b) of the Bankruptcy Code).5 24. The Settlement Agreements are not subject to court review or approval,

since the Archdiocese is not seeking to liquidate assets or otherwise impact assets of the estates. In the usual situation where a trustee or debtor in possession files a motion that seeks approval to settle the estates claims against a third party or buy a release of claims against the estate, a hearing is required under Section 363(b) of the Code. Section 363(b) requires judicial approval for any use or sale of estate assets out of the ordinary course of business. The settlement of a cause of action held by the estate is plainly the equivalent of a sale of that claim. There is no difference in the effect on the estate between the sale of a claim (by way of assignment) to a third party and a settlement of the claim with the adverse party. The Archdiocese is not seeking to settle claims by or against the estates or to uses assets of the estates to obtain a release of claims. Therefore, section 363(b) clearly does not require this Courts approval of the settlements at issue. The Archdiocese has not identified any other Code section that would require judicial approval of the Settlement Agreements.
5

It appears that the Settlement Agreements have been fully performed by the Archdiocese and the settling plaintiffs. As such, the Archdiocese (or the settling plaintiffs) should only need to seek dismissal of the Pending Proceedings as to the Archdiocese pursuant to Fed.R.Bankr.P. 7041.

DOCS_SF:78560.9 14012-00002

11-22820-rdd

Doc 120

Filed 10/18/11 Entered 10/18/11 13:54:42 Pg 10 of 13

Main Document

25.

In addition, the Settlement Agreements are not contingent on Court

approval. In fact, the Committee understands that the Settlement Agreements were fully consummated as of the filing of the Settlement Motions. 26. are unnecessary. D. The Court Lacks Subject Matter Jurisdiction to Enforce Agreements Between Non-Debtor Parties That Do Not Implicate Property or Interests of the Estates 27. The Courts approval of the Settlement Agreements is unnecessary as the Therefore, this Courts review and approval of the Settlement Agreements

Debtors are not parties to the Settlement Agreements nor are any interests or property of the estates implicated by them. The Settlement Agreements do not seek payment from the Debtors or offer releases to them, nor are they conditioned upon the approval of this Court. It is hornbook law that the party invoking federal jurisdiction bears the burden of proving facts to establish that jurisdiction. In re WorldCom, Inc. Securities Litigation, Case No. 02. Y&S Civ. 3288 (DLC), 2003 WL 716243, at *5 (S.D.N.Y. March 3, 2003). 28. This Court lacks subject matter jurisdiction to enforce an agreement

between two non-debtor parties that does not implicate any interests or property of the estate. A bankruptcy courts subject matter jurisdiction is limited to proceedings arising under title 11, or arising in or related to cases under title 11. See 28 U.S.C. 1334(b). The enforcement of the Settlement Agreements does not arise under Title 11 or in a case under Title 11 nor has the Archdiocese articulated how it is it related to these Cases. Therefore, neither core nor related to jurisdiction exists. 1. 29. The Settlement Motions are Not Core Proceedings Core claims are those proceedings arising under title 11 and proceedings

that arise in cases under title 11. 28 U.S.C. 157(a)-(b); In re Ames Dep't Stores Inc., No. 06

DOCS_SF:78560.9 14012-00002

10

11-22820-rdd

Doc 120

Filed 10/18/11 Entered 10/18/11 13:54:42 Pg 11 of 13

Main Document

Civ. 5394, 2008 WL 7542200, at *4 (S.D.N.Y. June 4, 2008). Cases arise under title 11 when the cause of action or substantive right claimed is created by the Bankruptcy Code. MBNA Am. Bank, N.A. v. Hill, 436 F.3d 104, 10809 (2d Cir.2006); see In re Housecraft Indus. USA, Inc., 310 F.3d 64, 70 (2d Cir.2002). Cases arise in a title 11 proceeding if they are not based on any right expressly created by title 11, but nevertheless, would have no existence outside of the bankruptcy. Baker v. Simpson, 613 F.3d 346, 351 (2d Cir.2010) (per curiam) (quoting In re Wood, 825 F.2d 90, 97 (5th Cir.1987)) (internal quotation marks and alteration omitted). Thus, a claim that is an essential part of administering the estate implicates the Bankruptcy Court's core jurisdiction. In re Ben Cooper, Inc., 896 F.2d 1394, 1400 (2d Cir.1990). 30. Although the Archdiocese alleges that Settlement Motions are core

proceedings under 28 U.S.C. 157(b)(2) (Motions at paragraph 1), there can be no legitimate dispute that the enforcement of an agreement that does not affect property of the estate, between two non-debtor parties to settle state law claims is not core. The Settlement Motions do not arise under title 11 because no substantive rights created under the Bankruptcy Code are at issue in the Pending Proceedings or the Settlement Agreements. The enforcement of the Settlement Agreements does not arise in the Debtors bankruptcy cases because the rights under the Settlement Agreements exist outside of bankruptcy. Moreover, the Archdiocese fails to inform the Court which subdivision of section 157(b)(2) the Settlements Motions fall within and clearly the enforcement of a settlement agreement between non-debtors does not fit within any of the core proceedings identified in section 157(b)(2)(A)-(P). 2. 31. The Settlement Motions are Not Related To Proceedings Non-core claims may nevertheless be related to a bankruptcy case. See

28 U.S.C. 157(c)(1). [A] civil proceeding is related to a title 11 case if the action's outcome

DOCS_SF:78560.9 14012-00002

11

11-22820-rdd

Doc 120

Filed 10/18/11 Entered 10/18/11 13:54:42 Pg 12 of 13

Main Document

might have any conceivable effect on the bankrupt estate. Parmalat Capital Fin. Ltd. v. Bank of Am. Corp., 639 F.3d 572, 579 (2d Cir. 2011) (internal quotation marks omitted). 32. The Archdiocese does not even contend that the Settlement Motions are

related to proceedings. The Archdiocese has not alleged, let alone offered evidence of, facts showing that that the Settlement Agreements will have any conceivable effect on the Debtors estates. E. The Archdiocese Did Not Provide Sufficient Notice of the Settlement Motions 33. Fed.R.Bankr.P. 2002(a)(3) provides that twenty-one days notice is

required for the hearing on approval of a compromise or settlement of a controversyunless the court for cause shown directs that the order not be sent. The Archdiocese first filed the Archdiocese Settlement Motions on October 11, 2011, fourteen days before the hearing scheduled on these motions. As such, the Archdiocese did not provide sufficient notice of the Settlement Motions.

DOCS_SF:78560.9 14012-00002

12

11-22820-rdd

Doc 120

Filed 10/18/11 Entered 10/18/11 13:54:42 Pg 13 of 13

Main Document

WHEREFORE if the Court determines that the Settlement Agreements are properly before it and that it has jurisdiction to enforce the settlements, the Committee requests that any order approving the Settlement Agreements expressly state that nothing in the order shall affect the rights and obligation of any parties under any insurance policy in which the Debtors estates have an interest and that such order does not constitute approval of the Coverage Agreements. Dated: New York, New York October 18, 2011 PACHULSKI STANG ZIEHL & JONES LLP

/s/ Ilan D. Scharf Ilan D. Scharf, Esq. 780 Third Avenue, 36th Floor New York, NY 10017-2024 Telephone: (212) 561-7700 Facsimile: (212) 561-7777 -andJames I. Stang, Esq. (admitted pro hac vice) 10100 Santa Monica Blvd., Suite 1100 Los Angeles, California 90067-4100 Telephone: (310) 277-6910 Facsimile: (310) 201-0760 Counsel for the Official Committee of Unsecured Creditors of The Christian Brothers Institute and The Christian Brothers of Ireland, Inc.

DOCS_SF:78560.9 14012-00002

13