In re Archdiocese of Milwaukee (Official Committee of Unsecured Creditors v. Archdiocese of St. Paul and Minneapolis), ___BR___, 2016 WL7115977 (US DC ED Wisconsin 2016)
In re Archdiocese of Milwaukee (Official Committee of Unsecured Creditors v. Archdiocese of St. Paul and Minneapolis), ___BR___, 2016 WL7115977 (US DC ED Wisconsin 2016): US District Court affirmed, on appeal, the bankruptcy court’s denial of substantive consolidation. The Bankruptcy Court decision is 483 BR 693, 2012 WL 6093494 (Bky Ct. ED Wisconsin 2012). The Bankruptcy Judge had denied motion of creditors committee to substantively consolidate non-bankrupt catholic schools and parishes into the bankruptcy case of the Catholic Archdiocese in which those non-bankrupt catholic schools and parishes were nocated. On appeal, the US District Court, ED Wis 2016, agreed that non-bankrupt parishes and schools cannot be drawn involuntarily into the bankruptcy of a Catholic archdiocese, via a Motion to substantively consolidate the nonbankruptcy parishes and schools into the bankruptcy case of the bankrupt archdiocese those parishes and schools are located in.
The case stands for the proposition that a motion for substantive consolidation is equivalent to an involuntary bankruptcy petition that cannot be filed against non-bankrupt schools, churches and charitable organizations as a consequence of Section 303(a) of the Bankruptcy Code, which prohibits filing an involuntary bankruptcy petition against a charitable entity (aka “eliomosinary institution”).
The creditors’ committee for the Archdiocese of St. Paul and Minneapolis attempted to increase the pool of assets for sexual abuse claimants by filing a motion for substantive consolidation with about 200 non-bankrupt parishes, schools and other non-bankrupt Catholic entities under control of the archbishop. Without even reaching the First Amendment or the Religious Freedom Restoration Act, Bankruptcy Judge Kressel dismissed the consolidation motion in July, noting that the Eighth Circuit has not decided whether Section 105(a) allows substantive consolidation of debtors with non-debtors. He was upheld on Dec. 6 by District Judge Ann D. Montgomery.
Judge Montgomery began from the proposition that equitable relief under Section 105, such as substantive consolidation, “is limited to actions which are consistent with the Bankruptcy Code.” Dismissing the substantive consolidation motion was proper, she said, because “substantive consolidation is effectively involuntary bankruptcy” that is impermissible under Section 303(a), which bars involuntary bankruptcy proceedings against eleemosynary institutions.
Judge Montgomery upheld Judge Kressel’s alternative ruling that the motion did not make a case for substantive consolidation, largely because the finances of the archdiocese and the other Catholic institutions were “distinct and not tangled or intertwined.”