Insurers in Buffalo Diocese bankruptcy put on notice by Rochester abuse settlement plan [The Buffalo News, N.Y.]

Nov. 16—The Rochester Diocese's novel strategy to exit Chapter 11 bankruptcy by paying childhood sex abuse survivors $55 million and allowing them to sue the diocese's insurers for additional damages may provide a template for other bankrupt dioceses in New York, including Buffalo, according to legal experts.

Across the United States, insurance contributions have been a backbone of most diocese bankruptcy settlement plans over the past decade, with insurance companies paying hundreds of millions of dollars to avoid litigation in sex abuse cases.

But in Rochester, the diocese earlier this month worked out a settlement plan with sex abuse claimants that does not involve a contribution from insurance companies. Instead, the diocese will convey its coverage rights to a settlement trust on behalf of 475 sex abuse claimants, along with $55 million in diocese and parish funds. In exchange, the diocese and its parishes and schools will no longer have to defend against Child Victims Act lawsuits claiming sex abuse involving priests and other employees.

The trust, using the diocese's assigned insurance policies, will be able to sue the insurance companies to collect on those policies in abuse cases where it was clear there was coverage, legal experts said.

The plan comes three years after the Rochester Diocese filed for bankruptcy protection, and must still be approved by U.S. Bankruptcy Judge Paul R. Warren.

If Warren confirms the plan, legal experts said it could become the path to future settlements between sex abuse claimants and other New York dioceses seeking to emerge from bankruptcy proceedings.

"Everybody was waiting for Rochester to resolve," said attorney Leander James, who has represented abuse claimants in numerous diocese and Catholic entity bankruptcies. "For whatever reason, Rochester was at the tip of the spear, and that tip of the spear had to be buried before the rest of the shaft would follow. And I think we're going to see that now. We're going to see these other dioceses work towards resolution."

A Buffalo Diocese spokesman said Tuesday that the circumstances of each diocese Chapter 11 case are unique, and "the most appropriate means for resolving one case may or may not be applicable to the circumstances of a different case."

The diocese remains "committed to exploring reasonable alternatives through negotiation that will permit us to provide a fair and equitable distribution to claimants in our Chapter 11 case and emerge from Chapter 11 and continue the mission of the Catholic Church in Western New York," said Joseph Martone, the spokesman.

With about 900 claims against it — nearly double the number of claims filed in Rochester — the Buffalo Diocese likely will face pressure from claimants to pay more.

Insurance companies may balk

Confirmation of the Rochester plan is still months away, and insurance companies are likely to object to it, as they have done in recent settlements of bankruptcy cases for the Boy Scouts of America and the Diocese of Camden, N.J., where the debtors took a similar tack as in Rochester to forge a deal with abuse claimants.

While some insurers participated in the Boy Scout plan, a large group of insurance firms did not. Last week, they appealed the confirmation, arguing that the plan points "an 82,000-claim bazooka at insurers" and was negotiated in bad faith. Insurance companies in court papers said lawyers sought a "multi-billion-dollar payday for themselves" by drumming up business through a massive advertising campaign and soliciting a "significant portion" of claims that, likely, were fraudulent.

The appealing insurers also argued that the Boy Scouts assigning of insurance rights to a settlement trust violates the insurance contracts and doesn't allow for insurers to conduct a proper defense against abuse claims.

Marie T. Reilly, a bankruptcy expert and law professor at Pennsylvania State University who has studied Catholic diocese bankruptcy cases for years, said a decision on the Boy Scout appeal may help guide how bankruptcy courts view insurance policy assignments going forward.

"Their argument puts pressure on whether a bankruptcy court really has power to confirm a plan that effectively strips insurance companies of their contractual rights without their consent," Reilly said.

The insurers believe their coverage defenses are being compromised because the settlement trust owes no "duty of cooperation" to the insurer, as the diocese would under the terms of the policy, Reilly said.

"It's kind of like, 'Wait a minute. This isn't what we bargained for,' " she said.

Historically, insurance companies and debtor dioceses were aligned on the same side, with both parties looking to come up with a pot of money large enough to get creditor abuse claimants to vote in favor of a reorganization plan that relieves the debtor and the insurance firms from liability, Reilly said.

But insurers have become concerned about the "quality of claims" in the Boy Scouts and in more recent diocese bankruptcy cases, many of which are single-incident claims in which it would be hard, under state laws, to prove supervisory negligence on the part of the organization, she said.

"Insurance companies are trying to settle like they always had in the old days, but plaintiffs' lawyers are now saying, 'No, we think that your coverage obligation is bigger,' " Reilly said.

Rochester Diocese case

In Rochester, for example, the diocese in May brokered a deal with the insurance firms to contribute $108 million, while the diocese coughed up $40 million. The committee that represents abuse claimants in the bankruptcy scoffed at the offer, labeling it insulting when the diocese's insurance coverage was estimated at $2 billion or more.

James, who has represented abuse claimants in diocese bankruptcies dating to the early 2000s, said it was easier to negotiate with insurers in earlier diocese bankruptcy cases because it was "uncharted territory, and they don't like uncertainty."

Since 2004, 26 U.S. dioceses and archdioceses have filed for Chapter 11 bankruptcy protection, according to bishopaccountability.org.

The insurance carriers have learned over time to "sit on the sidelines and say no," James said. "They're not forced to do anything unless you have litigation."

There's another reason insurance companies have been more recalcitrant in New York cases, James added. A state court has held in a sex abuse case that each instance of abuse amounted to an "occurrence," a ruling potentially triggering "unlimited insurance" in cases in which a victim endured multiple instances of abuse, James said.

"I think the stakes are very high in New York for the carriers, and they realize that, and so they've taken a super aggressive position to try to fight these cases off," he said.

The Rochester Diocese said in a statement that the $55 million will come from unrestricted diocese funds, in combination with an undetermined amount from parishes and other Catholic entities.

Attorneys for abuse claimants acknowledged that there was an element of risk involved in having insurance policies assigned to a settlement trust, as in any court process.

"There are no guarantees, which is part of why you settle," said James Marsh, a New York City attorney who represents more than 100 sexual abuse claimants across the state, including some in the Buffalo Diocese.

But after more than two years of mediated negotiation with the Rochester Diocese and its insurers, abuse claimants saw little progress and needed to change the dynamic, Marsh said.

"It is going to have an impact, I think, not only in New York, but across the country, in terms of motivating the insurers to come to the table in a way that provides victims and survivors with appropriate levels of compensation," Marsh said.

Buffalo Diocese case

Facing hundreds of Child Victims Act lawsuits claiming clergy sexual abuse of children, the Buffalo Diocese became the second in the state, after Rochester, to file for bankruptcy protection from creditors in 2020. Syracuse and Rockville Centre dioceses also filed within months.

The Buffalo Diocese still appears to be far away from a settlement deal with abuse claimants. Judge Carl L. Bucki on Nov. 4 appointed a second mediator in the case, after both sides pushed for someone who would bring more expertise on insurance issues.

"Survivors are going to be passing away by the time any of this gets done," said Kevin Koscielniak, who has a claim in bankruptcy court and a Child Victims Act lawsuit against the Buffalo Diocese.

"Just because Rochester happened the way it did, there's no guarantee it happens with us," he said. "Ours is bigger than anybody's, and more complicated than any other diocese, so who knows what's going to transpire."

Many of the same players are involved in both diocese bankruptcy cases. The Bond Schoeneck & King law firm represents both dioceses, while the official committees of unsecured creditors in both cases use the Pachulski Stang Ziehl & Jones firm. The committees that represent Catholic parishes in both cases also use the same law firm.

But there are also major differences between the two bankruptcies, especially when it comes to insurance coverage.

The Rochester Diocese had a wealth of documented diocese-level coverage dating to the 1950s, whereas the Buffalo Diocese's insurance can be tracked only to 1973. Prior to that, coverage was at the parish level, and the policies have been difficult to track.

"Those policies are not centralized, so it changes the landscape and makes Buffalo a more complicated case," said Ilan D. Scharf, lead attorney for the creditors committee in the Buffalo Diocese bankruptcy.

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