Don’t Let This Happen to You: Milwaukee Archdiocese Bankruptcy – Part One, The Mediations

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“Scorched earth” is bad in buildings — and in bankruptcy litigation

By Donald L. Swanson

Every now and then something happens that becomes the model for how-not-to-do-this and a symbol of don’t-let-this-happen-to-you.  The Archdiocese of Milwaukee bankruptcy is one of those somethings.

It’s the “longest-running and most contentious” of the 14 Catholic Church bankruptcies filed since 2004 to address sex abuse liabilities. So says The Milwaukee Journal Sentinel (on November 13, 2015) about the Archdiocese of Milwaukee bankruptcy.

The Archdiocese of Milwaukee files its voluntary bankruptcy petition on January 4, 2011, in the Eastern District of Wisconsin (Milwaukee) at Case No. 11-20059.

FIRST MEDIATION MOTION

575 people file sex abuse claims in the bankruptcy. Yet, on March 14, 2011, the Archdiocese files a motion (Doc. 166) for authority to mediate the claims of 2 abuse claimants [Editorial note:  Seriously?! –only 2?!].  These 2 had, apparently, not participated in a Mediation Program previously established by the Archdiocese.

SECOND MEDIATION MOTION

Nearly a year later (on April 27, 2012), the Archdiocese files its motion (Doc. 756) for appointment of a mediator for the entire case. The Motion admits in paragraph 5 that: “Since the commencement of the case, the Debtor has not engaged the Committee in any substantive plan negotiations.”  [Editorial note:  Seriously?!  –an entire year and four months without “substantive plan negotiations”?!]

The Order appointing a case mediator and designating the parties who “shall” be included in the mediation is entered nearly three months later (Doc. 917).

FAILED MEDIATION AND RETURN TO “SCORCHED EARTH LEGAL BATTLE”

On October 15, 2012, the Milwaukee Journal Sentinel reports:

–The court-ordered mediation between the Archdiocese of Milwaukee and victims of sexual abuse has failed, sending the parties back to U.S. Bankruptcy Court to resume what one court official has called a scorched earth legal battle.

–The creditors intend to now move forward to force disclosure of thousands of pages of documents under court seal and to scrutinize the transfer of millions of dollars off the church’s books into trusts in recent years.

–An Archdiocese representative says, “We remain hopeful a consensual resolution will ultimately be reached.”

–An advocacy group says, “the Archdiocese of Milwaukee has once again raised false hopes of a settlement with victim/survivors and a resolution to the clergy sex abuse and cover up crisis.”

–A claimants’ attorney says, “This puts us back to where we were,” which is this:

–The Archdiocese is moving to throw out the vast majority of victim claims: those involving, (1) expired statutes of limitations, (2) religious order offenders not considered Debtor’s employees, and (3) victims who received prior settlements.

–The Official Creditors Committee is moving to recover, (1) $57 million from a cemetery trust created in 2007, and (2) an additional $35 million from a parish fund established in 2005. Creditors allege the trusts were created to shield money from victims

— the Church denies such allegations.

–Abuse claimants seek to make public thousands of pages of documents, including depositions of a retired Archbishop and a retired Bishop who handled the archdiocese’s sex abuse cases for three decades.

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James I. Stang — founding partner of the Pachulski, Stang, Zeihl & Jones law firm of Los Angeles

James I. Stang is legal counsel for the Official Creditors Committee in the Archdiocese of Milwaukee case: the Committee represents all unsecured creditors collectively, including sex abuse claimants.  And he serves a similar role in at least a half-dozen other cases like it.  Mr. Stang says the Debtor’s combative posture in the Archdiocese of Milwaukee case is unusual:  “Its the only case” of its kind in which “the Debtor objects to every single claim” filed by the sex abuse claimants.

DEBTOR PROPOSES A PLAN THAT’S UNACCEPTABLE TO CLAIMANTS

The Twin Cities Pioneer Press reports as follows:

–In February of 2014 the Archdiocese proposes a plan of reorganization that would give 128 abuse claimants roughly $4 million from insurance funds. Other abuse claimants would receive nothing.

–Attorneys’ fees incurred by the bankruptcy estate by this time are estimated at $13.7 million, and abuse claimants are outraged by the idea that the plan proposes to pay attorneys more money than abuse claimants.

A MEDIATION THAT SUCCEEDS

In late July of 2014, the Archdiocese again files a request and proposal for mediation (Doc. 2754 & 2757).  The Twin Cities Pioneer Press reports on July 29, 2014, as follows:

–A federal judge orders mediation as the best bet for resolving the Archdiocese case and getting more money to sex abuse victims, rather than lawyers.

–Mediation discussions will likely focus on a $55 million cemetery trust fund:

–Abuse claimants hope to tap into this fund, but the Archdiocese says the money was given for cemetery maintenance and cannot be used for other purpose.

–A District Judge’s decision, which makes the trust fund off-limits in the bankruptcy case, is on appeal to the 7th U.S. Circuit Court of Appeals.

A mediator is appointed on August 6, 2014 (Doc. 2771). And on August 11, 2014, the Court orders parties to appear for mediation (Doc. 2785).

On March 9, 2015, the 7th U.S. Circuit Court of Appeals reverses the District Judge’s trust fund decision, and the Archdiocese begins the process of appealing to the United States Supreme Court

A mediation process does occur, and it is ultimately successful. A Chapter 11 plan is confirmed on November 13, 2015 (Doc. 3322).

Mr. Stang says the 7th Circuit’s reversal of the District Judge’s trust fund ruling is crucial in moving the Archdiocese off its posture of proposing-very-little for sex abuse claimants toward a willingness to pay substantial benefits to such claimants.

The next part in this series of articles will discuss the terms of the confirmed plan in which the Archdiocese ends up paying tens of millions of dollars, about half of which goes to professional fees.

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