A plan confirmation order was modified to remove an injunction that would bar priests who allegedly committed sexual abuse against minors from receiving certain benefits Dec. 18 by the U.S. District Court for the District of Delaware (Martin v. Catholic Diocese of Wilmington Inc., D. Del., No. 1:11-cv-00814 (SLR), 12/18/12).
Judge Sue L. Robinson found that the bankruptcy court had failed to meet the requirements for issuing the injunction and furthermore that the bankruptcy court had admitted a letter as evidence that certain priests had committed sexual abuse in error.
The Catholic Diocese of Wilmington Inc. (CDOW) filed for Chapter 11 protection on Oct. 18, 2009, in the wake of costly litigation involving the alleged sexual abuse of minors committed by the CDOW's priests and other clerics. In July 2007, the Delaware Child Victim's Act was enacted which created a two-year statutory window during which victims of child sexual abuse whose claims had been barred by statute of limitations could bring a civil action in the Delaware Superior Court. According to court documents, during this two-year window, 131 sexual abuse actions involving 142 plaintiffs were filed against the CDOW.
According to the debtor, it had insufficient insurance coverage for the lawsuits pending against it. In addition to these expenses, the debtor was facing an impending default on approximately $11 million of unsecured bond indebtedness and had approximately $72 million in unfunded pension liability. The debtor stated in court documents that in filing for bankruptcy relief, it did not intend to “dodge responsibility for past criminal misconduct by clergy” or “ deny victims their day in court.”
On Oct. 18, 2009, the CDOW filed a “sustenance motion” which sought an order to authorize the debtor “to continue providing pensions, sustenance and/or medical coverage in the ordinary course to certain retired or removed priests accused of sexual abuse” and “to use certain restricted funds to pay prepetition priest pension obligations.” The motion was opposed by the unsecured creditors committee as well as the Unofficial Committee of State Court Abuse Survivors (Abuse Survivors' Committee). The motion was eventually dismissed.
In the CDOW's second amended plan or reorganization, the clergy pension plans were unimpaired. The Abuse Survivors' Committee objected to the proposed plan and the unsecured creditor's committee said that it was “deeply offended by the [p]lan's treatment of the [c]lergy [p]ension [c]laims or [o]ther [u]nsecured [c]laims asserted by anyone who is responsible for [a]buse.”
At a July 8, 2011, hearing on the plan, the CDOW called Bishop W. Francis Malooly as a witness and Malooly testified that he “had no intention of giving money or benefits in the ordinary course to certain individuals named by counsel for the [Abuse Survivors' Committee].” In a bench memo filed on July 13, 2011, the Abuse Survivors' Committee requested that the court issue an injunction that would forever bar the debtor from providing certain named former priests with any money, pension, or benefits of any kind.
The bankruptcy court entertained argument on the injunction on July 14, 2011, despite the fact that the record had been closed and opposing counsel had not been given notice. The bankruptcy court also admitted a letter from deceased Bishop Michael A. Saltarelli that included the names of 18 priests about whom there had been “admitted, corroborated or otherwise substantiated allegations of sexual abuse of minors.”
Kenneth Martin, who had filed of proof of claim in the case in April 2010, was one of the names listed in the letter. The letter was admitted over Martin's objection. Martin also objected to the injunction, arguing that he was “entitled to notice and an opportunity to be heard before his opportunity to receive sustenance under any circumstance should be denied [the bankruptcy court.]” The bankruptcy court's ruling from the bench was that it would not confirm any plan that would impair the claims of the abuse survivors while reserving the right to make payments to the abuser priests because such a plan could not be proposed in good faith pursuant to Section 1129(a)(3) of the Bankruptcy Code.
The plan was confirmed on Aug. 8, 2011, containing a modified form of the requested injunction. The plan enjoined “Removed Priests” from receiving specified benefits, including Martin. Martin appealed the confirmation of the plan, arguing that the bankruptcy court erred in admitting the Saltarelli letter, modifying the clergy pensions, classifying the claims of the “Removed Priests” in a separate classification, including Martin in the class of “Removed Priests, and in issuing the injunction.
The district court said that, based on the record, Martin was included among the subjects of the injunction based solely on the Saltarelli letter. The CDOW argued that the admission of the letter could only constitute reversible error if Martin's inclusions in the list of “Removed Priests” depended on his status as an actual abuser. The CDOW argued that the “Removed Priests” provision was included to remedy the bankruptcy court's bad faith finding and the letter was admitted “for the sole purpose of demonstrating the state of mind of the [CDOW].”
“The Saltarelli letter is not a legal document; there is no indication that it was intended to confer or eliminate legal rights,” the court said. “The court is hard pressed to understand how the [CDOW] can argue, in good faith, that the [o]rder does not have very real consequences for [Martin] based on the truth of the allegations contained in the Saltarelli letter, that is, that [Martin] and the others identified therein should be deprived prospectively not only of all civil benefits provided by the [CDOW] and other non-debtor entities, but also of all redress for said deprivation, based on their status as alleged abusers.”
Therefore, the court concluded that admission of the letter was legal error.
Next, the court considered whether or not the injunction could survive if the letter was improperly admitted. Section 105 of the Bankruptcy Code gives bankruptcy courts broad authority to issue injunctions as long as they are necessary to carry out the provisions of the Bankruptcy Code. In this case, the court said the injunction was intended to carry out Section 1129(a)(3) concerning the debtor's good faith.
The court said it could find no cases with similar facts, specifically a case involving a permanent prospective injunction on non-debtors that would have “no impact whatsoever on the estate of the debtor.” The court held that the injunction would have no impact on the debtor's estate because the CDOW had represented under oath through its agent Malooly that it had no intention of providing any prospective benefits to Martin or the other named priests.
Furthermore, the court said that Section 105(a) can only be the basis of extending relief to non-debtors if the court considers the following:
The district court found that the bankruptcy court failed to consider any of these requirements before issuing the injunction. The district court further held that because the injunction would not impact the estate, there was no danger of imminent or irreparable harm. With regard to the public interest, the court said that it did not “question the motivations behind the imposition of the [i]njunction.”
“However,” the court said, “good intentions cannot trump the rule of law and the fundamental requirement that there be a nexus established between the wrongs alleged and the remedy imposed.” The court said the record failed to demonstrate any such nexus, as Martin was not the subject of any of the survivor claims in the CDOW's Chapter 11 proceedings.
The court therefore concluded that the bankruptcy court had “exceeded the scope of its equitable powers under [Section 105(a)] and accordingly modified the bankruptcy court's confirmation order to remove the injunction.
To view additional stories from Bloomberg Law® request a demo now