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The Norwich Roman Catholic Diocesan Corporation – Despite Sharing Creditors’ Committee’s “Trepidation” as to “Impossible” Fees, Court Overrules Objection to Exclusivity Extensions and Urges Parties to Push Ahead with “Good Faith Negotiations”

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November 10, 2021 – The Court hearing the Norwich Roman Catholic Diocesan Corporation case has extended the periods during which the Debtor has an exclusive right to file a Chapter 11 Plan, and solicit acceptances thereof, through and including February 4, 2022 and April 5, 2022, respectively [Docket No. 362]. Absent the requested relief, the Plan filing and solicitation periods were scheduled to expire on November 12, 2021 and January 11, 2022 respectively.

On July 15, 2021, the Debtor filed for Chapter 11 protection arguing that it "could not continue to carry out its spiritual, charitable and educational missions while also bearing the potential costs of litigation associated with these cases…" The litigation is comprised of almost 60 lawsuits alleging sexual abuse filed by former students at a now closed ministry of the Diocese and residential school.  

Clearly sharing concerns raised by the Debtor's official committtee of unsecured creditors (the "Committee") as to the scale of fees incurred by the Debtor, the Court nonetheless over-ruled the Committee's objection to the Debtor's exclusivity extension motion, arguing that there are more appropriate tools for the job of managing legal fees than ending a Debtor's exclusivity periods. "Other less drastic bankruptcy controls exist to manage legal fees," the Court argues; and that is before one considers the risk that termination might result in "fueling of hostilities between major constituents" and would "likely afford the survivors the least solace and timely recoveries on their claims."

In a summary of his opinion, Judge James Tancredi concluded by urging the parties "guided by the proven paths of comparable Chapter 11 cases, to meet, confer and constructively engage in good faith plan negotiations during this Extension."

The Court's order reads in part: "The Objection filed by the Committee of Unsecured Creditors (ECF No. 344) which asserts that the amount of the Debtor’s fees incurred to date in this case is “impossible” and evidences mismanagement by the Debtor fiduciaries in control and supervision of the Chapter 11 estate is OVERRULED.

While the Court shares the Committee’s trepidation about the magnitude of all legal fees that may be incurred herein,

  1. an undue focus on legal fees early in this case does not provide the context or opportunity for this Court to fairly assess their reasonableness, proportionality and benefits to this estate;
  2.  concerns about legal fees are optimally addressed by the Court upon interim or final hearings for fee applications;
  3. other less drastic bankruptcy controls exist to manage legal fees, including, but not limited to: final fee hearings, disgorgement, the appointment of a fee examiner, the imposition of fee caps, budgets, workplans, and Debtor-managed delegations of responsibilities to lower cost professionals in the case;
  4.  the termination of the Debtor’s exclusivity, at this juncture, will not likely achieve a reduction of legal fees, but more likely would assure enhanced and contentious litigation and the filing of contested competing Chapter 11 plans;
  5. at this early juncture, the truncation of the Chapter 11 process of orderly issue resolution and consensus building around an approach to a Chapter 11 plan would not afford the Debtor a reasonable opportunity to build upon collaborative efforts or narrow material disputes;
  6. in this Court’s opinion and experience, a favorable timeline to an orderly and efficient reorganization affording claims reconciliation, plan allocations of monies and third-party contributions, can most likely be achieved by the Debtor in collaboration and negotiations with the Committee, and;
  7. the fueling of hostilities between major constituents, the initiation of broader litigation and the balkanization of interests occasioned by a premature termination of exclusivity will likely afford the survivors the least solace and timely recoveries on their claims.

The Debtor, the major constituents, and the Committee are urged by this Court, guided by the proven paths of comparable Chapter 11 cases, to meet, confer and constructively engage in good faith plan negotiations during this Extension."

The Exclusivity Motion

The Debtor's extension motion [Docket No. 330] notes “Since the commencement of this case, the Debtor has worked diligently to effectuate a smooth and expedient transition into chapter 11. Progress made by the Debtor to date includes, among other things: (i) obtaining vital first- and second-day relief to provide for a smooth transition into chapter 11 and establish procedures for the efficient administration of this chapter 11 case; (ii) completing and filing the Debtor’s schedules of assets and liabilities and statement of financial affairs, (iii) participating in the meeting of creditors under section 341 of the Bankruptcy Code; (iv) completing and filing monthly operating and reconciliation reports and complying with UST and Committee requests for documents and information, including complying with ongoing Rule 2004 discovery propounded by the Committee; and (v) extensively negotiating the form, content and timing of a complex proof of claim bar date procedure. The Debtor accomplished a great deal in the first few months of this case and is well-positioned for the next phase of these proceedings. This next phase will focus on a number of important milestones in this chapter 11 case, including setting a bar date and providing broad notice thereof, resolving coverage disputes with the Debtor’s insurers and coverage providers in preparation for negotiating a global settlement, and formulating the Debtor’s plan of reorganization.

The Committee has advised it intends to compete its investigation, including obtaining and analyzing the discovery it seeks from the Debtor under Rule 2004 of the Federal Rules of Bankruptcy Procedure (‘Bankruptcy Rules’), before discussing the parameters of a consensual plan of reorganization. Although the Debtor intends produce the discovery sought by the Committee within the timeframes demanded by the Committee, the Debtor does not believe that the Committee will have completed its investigation or be prepared to negotiate a plan by the expiration of the Debtor’s current Exclusive Period, which expires on November 12, 2021….Understanding the universe of claims against the Debtor is a critical condition precedent to identifying the universe of claims asserted against the Debtor. In particular, the amount of such claims—and other details, such as when such claims allege that abuse occurred—will be critical in advancing discussions with the Debtor’s coverage providers and insurers towards a global resolution of this Chapter 11 Case. Until the claims bar date is reached, the potential claims outstanding against the Debtor remain a significant unresolved contingency.”

The Committee Objection 

On November 5, 2021, the Committee objected to the Debtor’s request for exclusivity extensions [Docket No. 344].

Worried that, given the amount of professional fees already incurred in the case, the Debtor was emptying coffers of funds that might otherwise be distributed to unsecured creditors (namely sexual abuse claimants), the Committee asked the Court to allow it to file a Plan that would turn the Debtor's assets to a trust for administration.

The Committee’s objection reads: “The Exclusivity Motion should be denied because the Norwich Roman Catholic Diocesan Corporation (the ‘Debtor’) has grossly mismanaged, or simply failed to manage, its bankruptcy estate and this bankruptcy case, and such failure will be a major obstacle to a successful reorganization in this case.

As further detailed below, the Debtor’s professionals incurred almost $1.2 million in fees and expenses in the first eleven weeks of this bankruptcy case, an average of approximately $110,000 per week. Given the tasks accomplished through September 30 in the case, this seems impossible. In the First Monthly Statements (as defined below) filed on November 1 for certain of the Debtor’s professionals, the Debtor indicates that it has no objection to the fees incurred by its professionals. Considering the amount of fees, the tasks accomplished and the period of time involved, this too seems impossible.

Given the lack of objection by the Debtor, there is no reason to believe that the Debtor intends to take action to curb the rate at which it’s professionals are incurring fees. This is notwithstanding that (1) the Debtor has stated publicly and to this Court that it filed this case so that it could treat survivors of sexual abuse fairly, (2) the Debtor has stated to this Court and to the Committee that this is a ‘thin’ case and (3) the Debtor’s annual gross revenue and expenses are approximately $14.5 million, i.e., this case will be paid for from assets that would otherwise be available to pay the claims of creditors.

The Committee does not believe that the Debtor’s professionals can or will change the way that they are staffing and working this case and assumes that the Debtor’s professionals have incurred at least an additional $400,000 to $500,000 in fees since September 30. At the rate the Debtor’s professionals are incurring fees, any potential distribution to creditors in this case — creditors who are almost exclusively survivors of sexual abuse when minors by agents of the Debtor — will be rapidly and massively diminished. This case needs to take a drastic turn to prevent that from happening. The Debtor’s exclusivity should terminate on November 12, 2021, so that the Committee may quickly file and seek confirmation of a plan that will get this case and what assets remain out of the control of the Debtor.”

The objection continues, “Under no conceivable standard of reasonableness can $1,154,321 in fees incurred over the course of eleven weeks be justified in a case of this size and complexity given what has been accomplished to date. This is not a large case—as noted above, the Debtor’s gross revenue and expenses are approximately $14.5 million.

The Committee agrees with some of what the Debtor claims in the Exclusivity Motion has been accomplished in the case to date. The Debtor was able to get five first day motions — wages, cash management, noticing procedures, insurance and utilities — granted, several pro hac vice motions granted, four retention applications granted and the motion to approve the Monthly Fee Order filed. The problem is that the Debtor’s professionals incurred $281,417.00 in fees to accomplish these tasks. The Debtor was able to complete and file the Debtor’s schedules of assets and liabilities and statement of financial affairs, participate in the meeting of creditors under section 341 of the Bankruptcy Code and comply with US Trustee requests for documents and information. The problem is that the Debtor’s professionals incurred more than $200,000.00 in fees to accomplish that.

This is not a case where a debtor’s professionals were retained shortly before filing and needed to expend substantial time getting up to speed on the debtor’s affairs after filing. Ice Miller was retained by the Debtor approximately one year prior to the Petition Date and, as noted above, the Debtor’s attorneys incurred approximately $388,000 in fees prior to the Petition Date specifically in contemplation of and to prepare for the filing. In the undersigned’s experience, in a case of this size, to get to the point that this case is at, Debtor’s professional fees should be at a fraction (one-fifth or less) of what has been incurred here.

That the Debtor does not object to the fees incurred by its professionals through September indicates that (a) the Debtor does not understand what is going on, (b) the Debtor does not understand that it has a fiduciary obligation to minimize the fees incurred in the case, (c) the Debtor does not care what level of professional fees is incurred because it understands that the money being spent would otherwise go to creditors, (d) the Debtor consciously wants its professional fees to be as high as they are in order to pressure creditors to quickly agree to a plan or face the risk that a substantial portion of the assets available to pay claims will be eaten up by professional fees, or (e) a combination of the forgoing. It simply is not possible that the Debtor would support incurring $110,000.00 per week in professional fees unless one or a combination of the foregoing was not true….

Notwithstanding the Debtor’s public statements that it is not trying to evade responsibility for abuse claims and that it wants to treat survivors of abuse fairly, the Debtor is rapidly spending for its own benefit and purposes money that should be available to sexual abuse survivors. The Committee submits that the Debtor is seeking to improperly use exclusivity to pressure creditors to agree to less than what is fair in the facts and circumstances. Essentially, if creditors do not quickly reach a deal, they face the risk that the Debtor’s professionals will rapidly consume a very large portion of what is available to pay them.

Given the rate at which the Debtor’s professionals are consuming assets, this case and the Debtor’s assets must be taken out of the hands of the Debtor as soon as possible. The case is at a critical point. Based on the Debtor’s massive failure to properly manage this case and the Debtor’s assets, the Committee may consider seeking the appointment of a trustee, but is concerned that, inter alia, at the rate that the Debtor’s professionals incur fees, litigation on a motion to appoint a trustee could cost hundreds of thousands of dollars. Thus, the Committee is objecting to an extension of exclusivity so that it may quickly and efficiently seek confirmation of a plan that will place the Debtor’s available assets in a trust-type entity and lodge with that entity the responsibility to efficiently resolve claims and pursue and liquidate assets, including insurance coverage. Given the rate at which the Debtor’s professionals are consuming assets, this cannot wait until a proof of claim bar date has passed.”

Background

In a statement on the Diocese's website announcing its Chapter 11 filing, the Debtor advised that: “The Diocese has been named in numerous sexual abuse lawsuits pending against Mount St. John, an historic but now closed, Catholic residential school for boys in need of care, seeking damages in amounts greater than the Diocese has the capacity to pay. Litigation costs and settlements will exceed many millions of dollars. The Diocese does not have the resources or available insurance or other coverage to address these claims fairly and equitably on a one-by-one basis.

By filing for relief under chapter 11, the Diocese will be able to more fairly and proportionately address the claims asserted by all asserted survivors of abuse. If the Diocese did not file for bankruptcy relief, the first survivor to obtain a judgment against the Diocese could possibly receive all available funds, leaving little to no assets available for payment to or otherwise care for other survivors. Survivors who obtain later judgments against the Diocese would likely receive nothing, and the Diocese would be left with insufficient resources to address the claims of the remaining survivors. Moreover, the lengthy state court process will inevitably delay justice for and any payment to survivors, effectively and unnecessarily prolonging their pain and suffering.

An important aspect of Chapter 11 is that the filing 'automatically stays (puts a hold)' on all civil actions, judgments, collection activities and related actions by claimants. The automatic stay provides the Diocese with the time needed to negotiate reasonable settlements with abuse survivors, as well as key creditors and to prepare a disclosure statement and reorganization plan."

The Diocese further stated, "The Diocese believes its current and future liquidity should be sufficient to fund normal operations and services during the restructuring process. Vendors should be paid for all goods and services after the filing and transactions that occur in the ordinary course of business should continue as before. Employees will be paid their normal wages, and health and benefits programs will continue uninterrupted."

Michael R. Cote, the Bishop of the Norwich Diocese commented further in a separate statement: “With nearly 60 lawsuits filed against the Diocese relating to abuse alleged to have occurred at the Mount Saint John School – a former ministry of the Diocese and residential school in Deep River to which students were sent, tuitions paid, and annual audits performed by the State of Connecticut – it became clear that the Diocese could not continue to carry out its spiritual, charitable and educational missions while also bearing the potential costs of litigation associated with these cases….

For the Diocese, fair and equitable treatment for survivors of sexual abuse has always been a  priority. That is why we created the Office for Safe Environments, instituted mandatory Abuse Prevention Training programs, published the identities of clergy against whom there are allegations of substance and continue to provide victim assistance. The Diocese has also settled other abuse claims over the years which has greatly depleted our financial assets leaving us with fewer resources and coverage to be able to defend or settle abuse cases.

Over the past two years, our financial and legal advisors have studied our situation and concluded that a Chapter 11 filing was the only way to ensure an equitable settlement for abuse survivors, help us manage litigation expenses and carry out our essential mission and ministries."

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The post The Norwich Roman Catholic Diocesan Corporation – Despite Sharing Creditors’ Committee’s “Trepidation” as to “Impossible” Fees, Court Overrules Objection to Exclusivity Extensions and Urges Parties to Push Ahead with “Good Faith Negotiations” appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.


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