665 B.R. 71
Bankr. S.D.N.Y.2024Background
- The Roman Catholic Diocese of Rockville Centre filed for Chapter 11 bankruptcy in 2020 due to numerous abuse claims.
- The Diocese held various insurance policies over decades, with insurers including Lloyds/London Market, Interstate, Evanston, and Lexington; Arrowood (formerly Royal) is separately in liquidation.
- The Diocese engaged in mediation and litigation with insurers over coverage for abuse claims, with unsuccessful settlement efforts leading to further mediation and eventual resolution with some insurers.
- The Debtor moved for court approval of four Settlement, Release, and Buyback Agreements, seeking to sell insurance policies to the settling insurers for $85.525 million, benefiting abuse claimants.
- The U.S. Trustee (UST) objected, raising concerns about the timing, scope of releases, authority for injunctions, and whether the proposal constituted a sub rosa plan (an unauthorized plan disguised as a sale).
- The Court was asked to rule on whether these agreements should be approved under sections 105(a), 363, and Rule 9019, after extensive briefing and a hearing.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Approval of Settlement Agreements under § 363 | Settlement is a sound business judgment, provides immediate benefits, and resolves costly, uncertain litigation. | Objection: The sale predetermines plan issues and is a sub rosa plan, improperly limiting creditor rights. | Motion GRANTED; valid business justification found |
| Sale Free and Clear of Third-Party Interests | All entitled parties have consented or could be compelled; Sale is entitled to § 363(f) protection. | Sale improperly includes non-estate property and third-party claims; lacks proper consent and statutory basis. | Sale permitted free and clear under § 363(f) |
| Injunctive Provisions (e.g., contra Purdue) | Injunctions are necessary, have precedent in bankruptcy sales (GM, Chrysler), and don’t extend beyond jurisdiction. | Provisions violate Supreme Court precedent (Purdue), improperly bind non-parties, cannot be granted in a sale order. | Injunctions are permitted in this context |
| Necessity of Adversary Proceeding for Injunction | § 363(f) sales regularly include injunctions; adversary proceeding not required for such relief. | Rule 7001(7) requires adversary proceeding for injunctive relief. | Adversary proceeding not required |
| Whether the Order is a Sub Rosa Plan | Agreements are only part of the plan, do not dictate distributions, and their effectiveness is conditioned on plan confirmation. | Sale order dictates key plan elements, restricts voting and claims, functioning as a de facto plan. | Not a sub rosa plan; UST objection overruled |
Key Cases Cited
- In re Chateaugay Corp., 973 F.2d 141 (2d Cir. 1992) (Bankruptcy court approval of asset sale under § 363 if good business reason exists)
- Comm. of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063 (2d Cir. 1983) (Business judgment standard for § 363 asset sales)
- Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452 (2d Cir. 2007) (Iridium Factors—criteria for settlement approval)
- Licensing by Paola, Inc. v. Sinatra (In re Gucci), 126 F.3d 380 (2d Cir. 1997) (Good faith purchaser protections under § 363(m))
- In re Drexel Burnham Lambert Grp., Inc., 134 B.R. 493 (Bankr. S.D.N.Y. 1991) (Court must find settlements fair and equitable in bankruptcy)