Lawyers in diocese bankruptcy case fear abuse settlement could crumble due to 'opt-in' ruling

Lawyers in the Buffalo Diocese’s federal bankruptcy case fear a $325 million settlement plan could fall apart, if the judge in the case doesn’t reconsider his recent decision requiring all sex abuse claimants to check a box on a voting ballot that would release from liability the insurance companies and individual Catholic parishes paying the lion’s share of the settlement.

Stephen A. Donato, lead attorney for the diocese, warned in court papers that not allowing claimants to “opt out” of providing their consent for liability releases “will require months, if not years, of additional efforts” in Chapter 11 proceedings, with no guarantee that insurers and parishes will keep their current commitments to the settlement.

The diocese filed for Chapter 11 protection more than six years ago, which already makes it the most protracted bankruptcy case ever for a U.S. diocese.

Requiring an “opt-in” procedure “jeopardizes the settlement” because the parishes need certainty on the release of abuse claims against them, Ilan D. Scharf, lead attorney for the Official Committee of Unsecured Creditors, said in court papers.

At the very least, it “significantly delays the Diocese’s ability to bring this case to conclusion,” added Scharf.

The committee represents nearly 900 sex abuse claimants as creditors in the bankruptcy case. As part of the Chapter 11 process, the claimants will have an opportunity to vote on whether to approve the plan of reorganization, which includes details of the settlement.

How the voting ballot is constructed has become a major issue in the progress of the bankruptcy case.

Donato and Scharf filed separate motions this week asking Chief Judge Carl L. Bucki of U.S. Bankruptcy Court to reconsider his Feb. 27 decision in which he ruled that the opt-out voting procedure proposed by the diocese and the committee in their joint plan of reorganization does not fulfill the requirements under New York State law for claimants. Under state law, claimants must give "affirmative consent" that they are giving up their rights to sue parishes and insurers, in exchange for a share of the settlement.

Bucki will hear arguments March 26 on separate motions by the diocese and by the committee.

The committee’s motion also asks Bucki, if he refuses to reconsider, to allow an appeal directly to the 2nd Circuit Court of Appeals, which is currently weighing whether opt-out releases are acceptable in a bankruptcy case from the Southern District of New York.

If Bucki declines both the reconsideration and the appeal options, the committee suggested a third possibility for the court to keep the diocese’s reorganization plan from going off the rails: adopting what are known as "rapid prepack procedures" that would make it easy for parishes to quickly and inexpensively file their own Chapter 11 bankruptcies.

Bucki in a court hearing in January had asked if that was the direction the case was heading.

When the U.S. Supreme Court ruled in 2024 in a case involving opioid maker Purdue Pharma that non-debtors in a bankruptcy proceeding cannot receive liability releases without the consent of all creditors, it threw a wrench into the way the Buffalo Diocese had long planned to resolve the abuse claims.

In bankruptcy cases prior to the Purdue Pharma decision, dioceses were able to protect non-debtor parishes and schools from lawsuits through a channeling injunction, even over the objections of some creditors.

Bankruptcy courts across the country have been wrestling with how to stay inside the new rules governing the granting of liability releases for third parties in a Chapter 11 case.

After the Purdue decision, the Diocese of Rockville Centre pivoted toward having its parishes declare their own bankruptcies, as additional debtors in the diocese’s case through a “prepackaged” process that allowed parishes to file and emerge from bankruptcy within days and at limited cost.

The parishes received protection against lawsuits while contributing toward a $323 million settlement with abuse claimants, and no channeling injunction was necessary.

As part of the process, the diocese and parishes sold their insurance policies back to insurers, with the money then going into the settlement trust.

Rockville Centre was able to pursue the additional debtor strategy because of special rules that allowed for it in U.S. Bankruptcy Court for the Southern District of New York. The Archdiocese of New Orleans also used a similar strategy to exit bankruptcy and protect parishes.

Those rules don’t exist in the Western District of New York, but Bucki said in January he was open to a request for them.

Scharf said rapid prepack procedures in Rockville Centre and New Orleans allowed votes by abuse claimants on those reorganization plans, which “included the participation of the parishes and the settling insurers – votes that in both cases resulted in the overwhelming support of the Survivors for those plans.”

“If the Court adopts the Rapid Prepack Procedures, then the Diocese and the parishes will be able to consider a prepackaged bankruptcy option as a way to effectuate the agreed settlement and provide the releases necessary for the parishes to move forward with the global settlement,” Scharf said.

Bucki acknowledged in his decision last month that the case has taken a long time, but he said getting consent from claimants was not an "insurmountable obstacle to settlement."

He also said he intends to take "every reasonable step to expedite the confirmation process."

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