Mediation-In-Bankruptcy: An Effective, But Difficult, Tool For Resolving Mass Tort Disputes

By: Donald L Swanson

Mediation-in-bankruptcy has been an effective tool for resolving mass tort cases. 

That effectiveness has been for the benefit of all parties involved, such as:

• helping to maximize recoveries for tort claimants;
• helping to allocate scarce funds among competing tort claimants and other creditors; and
• helping to keep an otherwise-valuable enterprise alive for all those who benefit from its existence, including employees and their families, suppliers, others who gain from value the enterprise provides, etc.

But mediation-in-bankruptcy does not pretend to provide an easy solution.  No.  The reality is this: it’s hard.  And positive results, when they occur, are the result of an intense and difficult struggle among competing interests—all pursuing the goal of maximizing their own interests.

Illustrating this difficulty are the following three news reports appearing within a few-days span, involving New York disputes.

Illustration 1: Albany Diocese

On June 29, 2022, The Daily Gazette runs an article titled, “Albany Diocese proposes mediation for clergy sex abuse victims suing it.”  The article reports as follows.

The Roman Catholic Diocese of Albany on Wednesday proposed out-of-bankruptcy mediation to pursue financial settlements for survivors of clergy sex abuse, as an alternative to court battles or the diocese declaring bankruptcy. 

The diocese is facing a potentially huge cost from the more than 400 claims pending against it in court, both in legal bills and judgments. In an open letter, it said out-of-bankruptcy mediation would result in a more equitable distribution of the finite pot of funds it has available for the purpose.

But a law firm representing two dozen people who claim to have been molested by Albany Diocese clergy decades ago called it a bogus and cynical maneuver to avoid transparency and accountability.

Three years ago in New York, the long-running clergy pedophilia scandal took a sharp turn from a shocking revelation about one of society’s most respected institutions to a major financial threat: The state Child Victims Act briefly allowed civil lawsuits for decades-old incidents that had been — and once again are — far beyond the normal statute of limitations for a civil lawsuit.

Four of New York State’s eight Catholic dioceses — Buffalo, Rochester, Rockville Center and Syracuse — subsequently filed for bankruptcy under the financial weight of potential legal settlements or trial verdicts.

The letter to abuse survivors released Wednesday by the Albany Bishop acknowledged the prospect of a Chapter 11 bankruptcy filing by the Albany Diocese as well.

Illustration 2: Madison Square Boys & Girls Club

On July 1, 2022, Reuters runs an article titled, “New York youth club seeks to mediate 140 sex-abuse claims in bankruptcy.”  The article reports as follows.

Madison Square Boys & Girls Club, which operates six youth centers in New York City, told a bankruptcy judge on Friday that it intends to use its Chapter 11 case to mediate more than a hundred sexual abuse claims involving a doctor who volunteered at the centers decades ago.

Madison Square, which filed for Chapter 11 protection in New York on Thursday, told a U.S. Bankruptcy Judge at a Friday hearing that bankruptcy mediation is the only way to bring sexual abuse claimants and insurers to the negotiating table before the nonprofit runs out of funds.

Debtor’s attorney says:

• “We’re here to fairly and equitably compensate survivors of what they describe as hideous sexual abuse that took place many years ago at Madison’s former premises”; and
• Without bankruptcy protections, the 138-year-old youth organization would likely run out of money in 60 days and be forced to liquidate.

Nearly all of the abuse claims stem from the conduct of a single doctor who volunteered at Madison Square from the 1940s to the 1980s. That doctor, who died in 2007, also worked as a pediatric endocrinologist at Rockefeller University Hospital, which revealed his history of sexual misconduct in a 2018 investigation.

Madison Square reached settlements with nine abuse claimants, spending $3.9 million on the deals and litigation costs. It could not survive a piecemeal approach to resolving the remaining 140 claims.

Madison Square will ask the Bankruptcy Court to:

• approve a relatively rapid mediation procedure with abuse claimants and insurers; and
• suspend the case during mediation, stopping nearly all non-mediation activity in an effort to minimize costs and litigation.

Rockefeller University Hospital will oppose both requests, arguing that its exclusion from the proposed mediation and being blocked from litigating against Madison Square would harm its ability to defend itself against the abuse claims.

Abuse victims also expressed skepticism of the proposed suspension of the case. Madison Square’s approach could limit abuse victims’ ability to investigate assets that Madison Square or the broader Boys and Girls Club of America could contribute to a bankruptcy settlement.

Illustration 3: Rochester Diocese & Buffalo Diocese

On July 3, 2022, The Buffalo News runs an article titled, “Rochester Diocese bankruptcy mediation stalls as Buffalo Diocese negotiations begin in earnest.”  The article reports as follows.

A controversial $148 million settlement offer in the Diocese of Rochester, along with recent deals of $87.5 million and $121.5 million, respectively, in bankruptcy cases in the Diocese of Camden, N.J., and Archdiocese of Santa Fe, N.M., give glimpses into where mediated negotiations might be heading for the Buffalo Diocese, its parishes and schools and more than 900 people who have filed sex abuse claims with a federal court.

Nearly 2½ years after a flood of Child Victims Act lawsuits prompted Buffalo Diocese to file for Chapter 11 bankruptcy protection, attorneys indicated this week that they are still at least several months from being able to reach a deal compensating abuse victims. 

Any optimism might be dashed, if the Rochester Diocese case is any guide.  Rochester was the first diocese in New York State to file for bankruptcy, five months ahead of the Buffalo Diocese.

The Rochester Diocese is represented in its bankruptcy by the same lawyers the Buffalo Diocese hired.  The official committees of unsecured creditors in both cases also use the same attorneys, as do the committees in both cases that represent Catholic parishes.

The Rochester Diocese headed into mediated settlement talks in March 2020.  More than two years later, the parties remain at odds.

In May, the Rochester Diocese proposed a $148 million settlement for 475 sex abuse claimants and asked the court to extend the stay on litigation against parishes and other entities.

Lawyers for sex abuse plaintiffs blasted the offer, saying it was a tiny fraction of the worth of the diocese’s insurance coverage, estimated at $2 billion or more, and was made with no input from the creditors committee.

Conclusion

While mediation-in-bankruptcy has been an effective tool for resolving mass tort disputes, it’s not an easy process.  Instead, it’s a highly-competitive situation in which varying interests work hard to maximize their own interests in the circumstances at hand.

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