Plaintiffs Fail in Effort to Substantively Consolidate Archdiocese With Various Parishes and Other Organizations

Plaintiffs Fail in Effort to Substantively Consolidate Archdiocese With Various Parishes and Other Organizations

      In a decision rendered yesterday by the United States Bankruptcy Court for Minnesota, it denied an effort by those representing alleged victims of clerical sexual abuse to substantively consolidate the Archdiocese of St. Paul and Minneapolis with over 200 other Catholic, nonprofit (and not debtors in bankruptcy) entities. In Re: The Archdiocese of St. Paul and Minneapolis, Case No. 15-30125 (Bankr. D. Minn. July 28, 2016).

      In connection with allegations of clerical sexual abuse, on July 16, 2015, the Archdiocese of St. Paul and Minneapolis filed for Chapter 11 bankruptcy. On May 23, 2016, the unsecured creditors committee filed a petition to substantively consolidate with the Archdiocese in excess of 200 Catholic entities, none of themselves parties to the bankruptcy. Those entities included individual parishes, a foundation, various cemeteries and various high schools. Numerous of those entities filed objections to the consolidation. Ultimately, the effort to achieve substantive consolidation would be rejected.

      After determining that the unsecured creditors committee did have standing to bring the substantive consolidation motion, the bankruptcy court first found that it lacks the capacity to effect the substantive consolidation of these numerous nonprofit corporations. The bankruptcy Code at § 303(a) bars the involuntary bankruptcy of “a corporation that is not a moneyed business, or commercial corporation.” In connection therewith, the Court cited the legislative history, it stating that “Eleemosynary institutions, such as churches, schools, and charitable organizations and foundations, likewise are exempt from the involuntary bankruptcy.” Finding that all of the other entities that would be swept into the substantive consolidation are religious, nonprofit organizations exempt from involuntary bankruptcy consequent to § 303(a), the court wrote that “I conclude that I lack authority to substantively consolidate the debtor with the targeted entities.”

      The court continued its analysis from the legal bar to a granting substantive consolidation to a factual basis, namely that the plaintiffs had failed to allege facts sufficient to justify consolidation. Rather, notwithstanding generalized allegations of interrelationship, “The committee failed to sufficiently establish that the interrelationship warrants consolidation.” The court went on to observe:

Those allegations concerning generic actors are insufficient because they failed to identify and show how each non-debtor’s characteristics or actions make them individually subject to substantive consolidation. It is also unreasonable to infer all the non-debtors are liable for the actions or characteristics of a few named non-debtors because the plausibility standard generally does not allow holding hundreds of non-debtors liable for the conduct of one. Facts demonstrating grounds for substantive consolidation should have been alleged as to each and every non-debtor individually, but the committee did not do so here.

      From there the court would expand on its determination that there been no showing that the finances of the various debtors and non-debtors had been inextricably intertwined, and as well found that the committee had failed to demonstrate the benefits of consolidation would outweigh the harm to creditors of the to be consolidated entities.