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Court Denies Confirmation of Competing Plans Proposed by Debtor and Creditors’ Committee

By Karl Johnson posted 06-28-2018 08:54 PM

  
BANKRUPTCY BULLETIN
Editors-in-Chief
Karl Johnson, Hellmuth & Johnson, PLLC
Jeffrey Klobucar, Bassford Remele, P.A.

 Contributing Editor: Karl Johnson, Hellmuth & Johnson, PLLC
Judge_Kressel___In_re_The_Archdiocese_of_Saint_Paul_and_Minneapolis___Joint_Memo.pdf
Judge_Kressel___In_re_The_Archdioces_of_Saint_Paul_and_Minneapolis____UCC_plan.pdf

Judge_Kressel___In_re_The_Archdiocese_of_St__Paul_and_Minneapolis___debtors_plan.pdf

            In two orders and a joint memorandum, the bankruptcy court denied confirmation of competing plans proposed by the committee of unsecured creditors and the debtor in In re The Archdiocese of Saint Paul and Minneapolis, Case No. 15-30125 (Bankr. D. Minn. Dec. 28, 2017). In the process, the court directed the parties to return to mediation, decided whether liability insurance proceeds and parish contributions belong to the bankruptcy estate, decided whether indemnity claims can be disallowed or discharged, and established criteria for confirming a plan that provides for discharge of claims against non-debtor third parties, among other issues.

            In the joint memorandum, the court took notice of the intense impact of this case on people in light of hundreds of proofs of claim describing sexual abuse by priests and costs that will fall on current employees, students at Catholic schools, parishioners, and other innocent persons. The court also questioned whether a one third contingency fee is appropriate for completing proofs of claim. Most significantly, the court reminded the parties that a resolution would require agreement among all constituencies.

The Committee’s Proposed Plan

            The court sustained objections based on failure to provide for all claims in the committee’s proposed plan, including mortgages secured by real estate owned by the debtor for loans taken out by two Catholic high schools. The court held that a security interest qualifies as a claim that must be provided for by the plan even if the debtor is not personally liable. Also, the proposed plan failed to provide for contingent indemnification and contribution claims by the parishes. The proposed plan provided that contingent contribution claims would be disallowed pursuant to 11 U.S.C. § 502(e)(1)(B), but the committee did not formally object to the claims. Because § 502(a) states that a claim is deemed allowed unless an interested party objects, the contingent contribution claims were allowed and must be provided for in a confirmable plan.

            For similar reasons, the court sustained objections that the proposed plan improperly designated various claims, including claims for support and maintenance of credibly accused priests, as unimpaired based on a proposal to disclaim the liability under civil law.

            The court sustained the parishes’ objections that the plan cannot transfer insurance proceeds to a trust without the consent of the parishes because Minnesota law restricts an insurer’s ability to transfer or release a policy if there are known claims against the insured that would remain unsatisfied due to the insured’s financial condition. For similar reasons, the court sustained objections that the proposed plan violated Minnesota law because it would transfer interests in worker’s comp and medical insurance proceeds to the trust.

            The court also held that the insurance proceeds could not be transferred without the consent of other constituents with interests in the proceeds. For example, the proceeds may belong to officers and directors if the policies are meant to protect the officers and directors from claims made against them personally. Even if the policies and proceeds belong to the estate, anti-assignment clauses may prevent assigning insurance proceeds to a trust absent the insurer’s consent. And, the debtor may hold bare legal title for the benefit of a non-debtor, including possible tort claimants.

            The court also sustained feasibility objections without an evidentiary hearing even though feasibility is typically a fact issue. Because the committee’s proposed plan would require the debtor to obtain financing to fund the plan, but failed to demonstrate that obtaining financing was likely, the plan was unfeasible on its face. In addition, the plan was unfeasible because it depended on proceeds from future litigation, which is speculative and uncertain. Finally, the plan was unfeasible because it relied on fundraising, which is speculative and may be hampered by the unwillingness of charitable donors to pay off judgment or tort creditors.

            The court sustained objections to the committee’s proposal to fund the plan partly from increased parish assessments because the debtor cannot be legally compelled to levy assessments against the parishes and the parishes cannot be legally compelled to pay assessments.

            The court sustained objections of unfair discrimination between pending and future tort claimants, but overruled objections of unfair discrimination between holders of guaranties and between holders of claims for contribution and indemnification. Because the plan did not provide a basis for discriminating between pending and future tort claimants, the court held that the proposed plan failed to satisfy the four-part test: (1) whether the discrimination is supported by a reasonable basis; (2) whether the debtor can confirm and consummate a plan without the discrimination; (3) whether the discrimination is proposed in good faith; and (4) the treatment of the classes discriminated against. On the other hand, because contingent indemnification claims may be disallowed under § 502(e), disparate treatment between holders of indemnification claims and holders of guaranty claims is not unfair discrimination.

            The court overruled objections that the proposed plan called for advisory opinions regarding the legality of using insurance proceeds to fund the plan, among other issues. To the contrary, the court held that an objection to plan confirmation is a case or controversy that requires resolution of the issues as part of the plan confirmation process.

            Because the proposed plan would likely result in extended litigation about more than a dozen issues, the court held that it would unnecessarily prolong the bankruptcy case and waste estate resources.

            Finally, the court held that the committee’s proposed plan failed to provide adequate means for its implementation, as required by § 1123(a)(5), because of the speculative sources of funding and reliance on proceeds from future litigation.

The Debtor’s Proposed Plan

            The court sustained an objection that the debtor’s proposed plan failed to provide for claims for medical expenses, lost wages, or other damage claims that may be asserted by trustees for deceased tort claimants. The court next repeated its analysis of issues that overlapped with the committee’s proposed plan.

            Significantly, the court considered what appears to be an issue of first impression in the Eighth Circuit: whether the proposed plan improperly purported to release claims against non-debtor third parties. The court surveyed the case law nationally, including divergent views among ten different Circuit Courts of Appeals. Based on the law in other jurisdictions, the court formulated four criteria: (1) large or numerous liabilities against the debtor and the co-liable parties to be released, (2) a substantial contribution from the non-debtor co-liable parties, (3) the importance of the third party releases to the reorganization process, and (4) significant acceptance of the plan by the group of creditors who are being asked to give up their claims against the non-debtor co-liable parties. The court sustained the objection based on the number of tort-claimants who had rejected the plan.

            Finally, the court over-ruled objections that the plan was proposed in bad faith because mere disagreements between the debtor and the committee do not equate bad faith.

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