Another Article III Judge Won’t Let Bankruptcy Stop Suits Against Nondebtors
The same day the Supreme Court decided to hear Purdue, a district judge on Long Island, N.Y., sent dozens of long-stayed sexual abuse cases back to state court where the debtor is not a named defendant.
Last week, the U.S. Supreme Court announced it would review confirmation of the Purdue Pharma LP chapter 11 plan and decide:
Whether the Bankruptcy Code authorizes a court to approve, as part of a plan of reorganization under Chapter 11 of the Bankruptcy Code, a release that extinguishes claims held by nondebtors against nondebtor third parties, without the claimants’ consent.
The very same day, August 10, a district judge on Long Island, N.Y., handed down an opinion reflecting the growing antipathy some Article III judges have toward using bankruptcy to release mass tort claims against people or entities who don’t file bankruptcy themselves.
The case on Long Island involved the ongoing chapter 11 reorganization of the Roman Catholic Diocese of Rockville Centre, N.Y. Although the diocese is headquartered in the Eastern District of New York, the church elected to reorganize in Manhattan, the Southern District of New York.
To give the bottom line first, District Judge Gary R. Brown, in the Eastern District of New York, remanded 42 sexual abuse suits back to New York state courts, thwarting an effort by the church to undo a recent, unfavorable decision by the bankruptcy judge in Manhattan, the Southern District. The bankruptcy judge in Manhattan had himself demonstrated annoyance at delays in bankruptcy proceedings that were thwarting efforts by sexual abuse victims to have their days in court.
Toward the church, Judge Brown used uncomplimentary language in his August 10 opinion, such as “unconscionable,” “unimaginable delays,” “undaunted,” “flouted,” “charade,” “staggering” and “lack of moral standing.”
Summarizing the June 1 opinion by Bankruptcy Judge Martin Glenn, In re Roman Cath. Diocese of Rockville Ctr., New York, 651 B.R. 622 (Bankr. S.D.N.Y. 2023), Judge Brown recited some of the “labyrinthian” history of the diocese’s chapter 11 case.
The church’s troubles began in 2019 when the New York legislature opened a one-year window for sexual abuse claims that otherwise would have been barred by the statute of limitations. The result was a flood of suits in state courts against the diocese and other entities such as parishes and schools.
The diocese responded by filing a chapter 11 petition in October 2020 in Manhattan. At the outset, the debtor and representatives of the abuse claimants agreed to a preliminary injunction stopping suits in state court where the diocese itself was not named as a defendant.
“Eventually,” Judge Brown said, agreement on the stay “evaporated,” and the claimants withdrew their consent to continuation of the injunction in January 2023. The church then moved on its own for a preliminary injunction to stop suits against nondebtor Catholic entities.
In his 73-page opinion on June 1, Bankruptcy Judge Glenn refused to continue the injunction, allowing suits to proceed in state court, where the diocese was not a named defendant.
After the injunction evaporated, the diocese withdrew 224 suits from state court to district courts in the Eastern District of New York, where they were assigned to 17 judges. In addition, the diocese filed a petition in district court in the Southern District of New York under 28 U.S.C. § 157(b)(5) to consolidate all 224 suits in the Southern District.
The claimants reacted to the removals and the Section 157 petition by filing a motion of their own that was heard by Judge Brown to remand suits to state court.
Central to his own decision, Judge Brown recounted some of Judge Glenn’s telling of the case. For example, he quoted Judge Glenn as saying there “had been little discernable progress in reaching a consensual plan of reorganization” to cover more than 500 sexual abuse claims. Judge Glenn went on to say that the “sex abuse survivors have essentially been stymied in their efforts to obtain compensation since this chapter 11 case was filed” almost three years ago.
According to Judge Brown, Judge Glenn said it was “time to permit plaintiffs to move forward” in state court to cast off “unfair burdens thrust” upon them. Judge Glenn said that the diocese “completely fail[ed] to show that an injunction is warranted beyond the completion of mediation.”
“Undaunted” after the demise of the preliminary injunction, Judge Brown said that the diocese removed the 224 cases from state to district court. “In so doing,” he said, “the defendants flouted previous decisions by slinging arguments considered and rejected by the Bankruptcy Court” and “again deploying procedural devices to scuttle plaintiffs’ opportunity to have their cases heard.”
The Motion to Remand
Judge Brown said that the issues before him on the motion to remand were “remarkably narrow.” The party seeking removal has the burden of showing that federal jurisdiction is “proper.” Analyzing abstention as the reason jurisdiction would be improper, Judge Brown said there are six factors to consider. On abstention, the parties agreed that the only issue in dispute was whether the suits in state court could be “timely adjudicated.”
Judge Brown explained that the New York courts had designated specific courts and had adopted special procedures for expediting claims arising from the 2019 legislation. He said that the “serious” efforts by the state courts to move cases forward “stand in stark contrast to the years wasted by the Diocese during the pendency of the bankruptcy proceedings.”
The abuse victims, Judge Brown said, “made a persuasive showing that the state courts can timely resolve the subject actions.” As a result, he said that “abstention is mandated by the statute and remand is required.”
No Deference to the Section 157(b)(5) Application
Judge Brown ended his decision by dealing with the petition the diocese had filed in the Southern District of New York to “fix” the venue of the 224 cases in Manhattan, not in the Eastern District of New York. The diocese had asked Judge Brown to defer ruling on the remand motion until the Southern District rules on the motion to move the 224 state court cases to federal district court in Manhattan.
In a footnote, Judge Brown said that removing the cases first to the Eastern District was “a kind of a charade,” because removal was “simply . . . a pass-through to implement a plan to transfer the cases to the Southern District. Such cavalier treatment of removal powers further supports remand.”
“Somehow,” Judge Brown said, “the parties responsible for the wholesale removal of hundreds of cases from state court to this district while simultaneously seeking their transfer to the Southern District seem to lack the moral standing to raise concerns about ‘whipsawing the parties and the state court about the location of this action.’”
Judge Brown declined to await a ruling from Manhattan on the Section 157(b)(5) petition. He remanded the 42 cases before him to the state courts, saying that the diocese “provide[d] no persuasive authority suggesting this Court should withhold decision on proper, meritorious motions for remand.”