Judge Denies Diocese of Rockville Centre's Motion To Stay Litigation

NEW YORK, June 2, 2023 /PRNewswire/ -- Today, in an important victory for victims of sex abuse ("Survivors"), New York Bankruptcy Court Judge Martin Glenn issued an order denying The Roman Catholic Diocese of Rockville Centre, New York's ("Diocese") attempt to stay litigation against parishes and other affiliates ("parishes") in state court actions that do not name the Diocese. The Creditors' Committee ("Committee"), which opposed the stay sought by the Diocese, is represented by Pachulski Stang Ziehl & Jones LLP ("PSZJ").

"We applaud Judge Glenn's ruling and his recognition of the plight of the real victims in this case, the Survivors. Committee Counsel, and others representing the Survivors in this case, will do whatever it takes to expediently achieve justice," said James Stang, Partner at PSZJ.

After a two-day evidentiary hearing, the Court acknowledged the harm to Survivors caused by delaying their rights to pursue their claims against the parishes, which are separate corporations that have not filed for bankruptcy and held the Diocese could no longer shield the parishes from the Survivors' claims. This is the second time a New York Diocese has failed to stay litigation against its parishes over the Committee's objection.

The Diocese unsuccessfully argued the automatic stay applied to the parishes, and sought a preliminary injunction under Bankruptcy Rule 7065 (which applies Federal Rule 65 to bankruptcies) and the Bankruptcy Court's broad equitable powers under Section 105(a) of the Bankruptcy Code.

The Court found that while actions taken by the parishes to access the proceeds of shared insurance could violate the stay, the Survivors' actions against the parishes do not violate the automatic stay because they are not actions to obtain insurance proceeds that are property of the estate. The Court suggested that the parishes may wish to file a motion for relief from stay to access insurance to defend against the Survivors' lawsuits. 

In declining the Diocese's request for a preliminary injunction, the Court expressed skepticism regarding the Diocese's likelihood of confirming a plan and ultimately concluded that this factor was "neutral at best for the Debtor." The Court rejected the Diocese's arguments that (i) an injunction should be issued because the parishes shared insurance policies with the Diocese because it had already determined that the proceeds of these shared insurance policies were protected by the automatic stay; and (ii) the litigation against the parishes put it at risk of claims for indemnity and contribution, piecemeal litigation, inconsistent judgments, and collateral estoppel and res judicata. The Court found that the only possible harm to the Diocese from allowing the parish litigation to proceed was a distraction to some of the Diocese's personnel, though the Court did not believe the distraction would be as severe as the Diocese claimed.

"The Committee has effectively established that potential depletion of shared insurance does not necessarily implicate the automatic stay or lead to injunctive relief protecting non-debtor third parties. This precedent is a game changer and will make it more difficult for a Diocese to shield its parishes from Survivor claims in future bankruptcy cases" added Kenneth Brown of PSZJ.

Finally, Judge Glenn found that the balance of harm weighed in favor of Survivors: 

"On the other side of the scale is the harm to the Survivors. For every day the injunction lasts, they are not only prevented from pursuing recovery on their claims, but their ability to prove their underlying case is weakened. For many Survivors, allowing time to pass means that they simply may not be able to recover either because the evidence for their case is lost, or because they themselves do not live long enough to press their claims. Importantly, these are claims they would be entitled to bring, if not for the stay in this case. It is clear that these harms to the Survivors become more significant with each passing day in this case, and in the past thirty months have eclipsed what is now a much more incidental—and certainly less consequential— harm for the Debtor, in having a limited role in participating in litigation against non-debtors."

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SOURCE Pachulski Stang Ziehl & Jones