The Supreme Court’s 2024 Purdue decision1 held that the Bankruptcy Code does not authorize a release and injunction under a Chapter 11 plan of claims against a non-debtor, even if they relate to claims against or by the debtor, unless the affected claimants consent. However, debtors and their creditors, including tort plaintiffs, continue to see the merits of a collective resolution of such issues, because non-debtor third parties may have an incentive, and will therefore pay more, or at least will pay more quickly, for a comprehensive resolution of overlapping claims against them by the debtor and third parties than they would in a piecemeal process.
The recent Chapter 11 case of the Roman Catholic Diocese of Rockville Centre illustrates how sophisticated parties may maximize the benefits of a collective resolution of claims when, post-Purdue, a completely collective approach to claims against non-debtors cannot be forced on holdouts. It involved increased focus on, among other things, the distinction between the debtor’s claims against such third partes, which can be settled in the bankruptcy case over holdouts’ objections, and true non-debtor claims against such parties.
Background of the Rockville Case
On December 4, 2024, Chief Bankruptcy Judge Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York confirmed the Roman Catholic Diocese of Rockville Centre, New York’s (Diocese) innovative Chapter 11 plan (Plan).2 The Plan broadly resolves and discharges all childhood sexual abuse claims against the Diocese and its affiliate parishes, which filed separate Chapter 11 cases shortly before confirmation of the Plan, as well as resolves competing claims to insurance, by channeling those claims to a trust that will make approximately $323 million available to abuse claimants.
The Diocese, which is the eighth largest in the United States and affiliated with 136 parishes in Suffolk and Nassau counties on Long Island, New York, filed its Chapter 11 case in October 2020, seeking to achieve a comprehensive settlement with hundreds of abuse survivors, insurers and other related parties, including, importantly, its affiliated parishes. The parishes, it was argued, were responsible for abuse claims along with the Diocese and also claimed coverage under the Diocese’s insurance policies.
Unlike the Diocese, the parishes did not originally file for bankruptcy relief, but they were prepared to negotiate and contribute to the settlement in exchange for obtaining a release through a Chapter 11 plan, as well as to release their claims to insurance in return for a settlement payment by the insurers to the tort claimants. Although the insurers raised defenses under their policies, they also were open to a collective resolution of coverage issues under a plan, but were reluctant to agree to a non-comprehensive settlement.
Negotiation of such a plan was difficult, protracted and further delayed pending the Purdue appellate process, so much so that the Diocese eventually raised the prospect of dismissing its case. Judge Glenn pushed back, however, directing the parties to a “last chance” mediation while noting the very personal effects of further delay on the survivors. That mediation resulted in an economic settlement among the Diocese, the parishes, insurers and the claimants. As importantly, it did so with two post-Purdue concepts that fostered a collective resolution.
Structure of the Settlement
First, the settlement proposed to use the amended procedural guidelines adopted by the Southern District of New York for “rapid” prepackaged Chapter 11 cases (Amended Guidelines)3 for the parishes, jointly covered by the Plan, to obtain their own bankruptcy discharge of the claims against them in return for their settlement contribution. Thus, having negotiated the comprehensive settlement with the abuse plaintiffs, the parishes filed for bankruptcy on December 2, 2024, joining the Diocese as debtors under the Plan and with the Plan already having been voted on.4 Within a little more than a day, the Diocese’s and parishes’ joint Plan was confirmed, on December 4, 2024, after being accepted by nearly 99% of the approximately 75% of abuse claimants who voted.5 Thus, following confirmation of the Plan, not only the Diocese but also the parishes received a Chapter 11 discharge of the abuse claims.
Second, again as part of the mediated comprehensive settlement, the Diocese, parishes and abuse claimants negotiated and implemented the following resolution of their claims against the insurers under which the insurers bought back their insurance policies for approximately $88 million, with that amount to be contributed to the abuse claimant trust under the Plan. In summary, the settlement provided:
- The buyback of the policies under Section 363(b) of the Bankruptcy Code was free and clear of any rights, claims or interests against the policies under Section 363(f) of the Bankruptcy Code (with a related release by the parishes of their claimed rights under the policies), thus largely addressing the insurers’ desire for a comprehensive resolution.
- Under the sale and settlement as originally proposed, abuse claimants were required to release any potential direct claims they might have against the insurers or the policies as a condition to receiving payments of the insurance settlement sale proceeds from the claimant trust under the Plan. After pushback from the U.S. Trustee on the basis that such condition was not sufficiently voluntary, this Plan provision was amended, however, to:
- clearly define third-party “direct” claims to make it clear that they did not include claims through, or derivative of, the debtors, which were separately sold and released by the debtors; and
- to set aside in a reserve $32 million of the insurance settlement/sale proceeds against any direct claims, with cash being released from the reserve into the trust as certain threshold numbers of claimants executed consensual releases, including releases of their direct claims (if any). All the reserve funds will be released to the trust when 616 claimants execute such releases.6
As a result, the U.S. Trustee no longer pursued its objection. The Plan at that point was confirmed without objection.
A Possible Post-Purdue Roadmap
The combination of the insurance buyback and “abbreviated Chapter 11” bankruptcy process for the affiliate parishes achieved in Rockville Centre, as noted by Judge Glenn, provides a possible framework for resolving other mass tort cases after Purdue.
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1 Harrington v. Purdue Pharma L.P., 144 S. Ct. 2071 (2024).
2 In re The Roman Catholic Diocese of Rockville Centre, New York (In re Rockville Centre), No. 20-12345 (MG) (Bankr. S.D.N.Y. Dec. 4, 2024), ECF No. 3465.
3 These “rapid prepacks” are defined as cases where the debtor seeks confirmation of a plan in less than 14 days. See General Order M-634 (Bankr. S.D.N.Y. May 31, 2024).
4 See Mot. of Additional Debtors for Entry of an Order Directing Joint Administration of Related Chapter 11 Cases and Granting Related Relief, Rockville Centre, No. 20-12345 (MG), ECF No. 3462. The Guidelines, consistent with section 1126(b) of the Bankruptcy Code, contemplate conditional approval of a disclosure statement and voting on a prepackaged Chapter 11 plan before the bankruptcy filing date, and thus the parishes filed for Chapter 11 relief knowing the outcome of the balloting on the joint Plan, which had taken place within the time contemplated by the Bankruptcy Rules for voting.
5 Mem. of Law in Supp. of Confirmation ¶¶ 4, 12, Rockville Centre, No. 20-12345 (MG), ECF No. 3446.
6 The revised trust agreement provides for a graduated release of funds from the reserve depending on the number of claimants that execute the consensual release. Under that schedule, $18 million of the reserve funds will be released for distribution to claimants once a threshold amount of 450 abuse claimants execute the consensual release, and additional amounts will be released at 500 and 550 claimants executing, up to the full amount once 616 claimants have executed the consensual release.
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