In In re Roman Catholic Church of the Archdiocese of Santa Fe, (NM Bankr., Oct. 9, 2020), a New Mexico federal bankruptcy court granted an unsecured creditors committee-- apparently representing primarily clergy sex abuse victims-- derivative standing to pursue claims that some $150 million in assets actually belong to the Archdiocese, not to individual parishes. The Archdiocese serves as creditor in possession during its Chapter 11 reorganization, and it has refused to pursue the assets. Responding to the Archdiocese's First Amendment defenses, the court said in part:
The Bankruptcy Code’s fraudulent transfer sections are neutral and of general applicability, so it may be difficult to challenge them as violating the Free Exercise Clause of the First Amendment....
It rejected a RFRA defense, holding that RFRA applies only when the government is a party to the litigation. Rejecting a religious autonomy defense, the court said in part:
A claim to recover an alleged fraudulent transfer does not appear to be the kind of intrachurch dispute that the religious autonomy doctrine typically protects from court interference.
The court concluded its opinion with a plea for settlement negotiations:
If one or more of Debtor’s and/or the parishes defenses has merit, the UCC’s claims will fail. If none has merit, the UCC will recover many millions of dollars for the estate. Either way, the proposed litigation will be very expensive and time-consuming. Unless settled, the proceedings may have to be completed by successors to the party representatives, the judge, and counsel, after years of motion practice, discovery, discovery disputes, trials, appeals, remands, and retrials. Millions of dollars would have been spent on attorney fees and costs that could have paid valid abuse claims.
More clarity about the rights of the parties and what is estate property could help the ongoing efforts to reach a global settlement in this case. For that reason, some litigation of the UCC’s proposed claims may be needed. There will be a point, however, that the cost of continued litigation likely will outweigh the benefit. If the proceedings are not settled before then, Debtor, the parishes, and the abuse victims will be the poorer for it.
