In re Diocese of Buffalo, N.Y.

• Decision Date: 23 February 2021
• Docket Number: BK 20-10322 CLB
• Citation: In re Diocese of Buffalo, N.Y., 625 B.R. 567 (Bankr. W.D. N.Y. 2021)
• Parties: IN RE The DIOCESE OF BUFFALO, N.Y., Debtor.
• Court: U.S. Bankruptcy Court — Western District of New York

625 B.R. 567

IN RE The DIOCESE OF BUFFALO, N.Y., Debtor.

BK 20-10322 CLB

United States Bankruptcy Court, W.D. New York.

Signed February 23, 2021

Bond, Schoeneck & King, PLLC, Stephen A. Donato, Esq., Charles J. Sullivan, Esq., Sara C. Temes, Esq., Grayson T. Walter, Esq., of counsel, One Lincoln Center, Syracuse, New York 13202-1355, Attorneys for The Diocese of Buffalo, N.Y.

Office of the U.S. Trustee, Joseph W. Allen, Esq., Assistant U.S. Trustee, Olympic Towers, 300 Pearl Street, Suite 401, Buffalo, New York 14202

Pachulski Stang Ziehl & Jones LLP, Ilan D. Scharf, Esq., Brittany M. Michael, Esq., of counsel, 780 Third Avenue, 34th Floor, New York, New York 10017, Attorneys for Official Committee of Unsecured Creditors

Gleichenhaus, Marchese & Weishaar, PC, Scott Bogucki, Esq., of counsel, 43 Court Street, Suite 930, Buffalo, New York 14202, Co-Counsel for Official Committee of Unsecured Creditors

Lipsitz Green Scime Cambria LLP, Richard Weisbeck, Esq., and Amy Keller, Esq., of counsel, 42 Delaware Avenue, Suite 120, Buffalo, New York 14202, Attorneys for Various Claimants

Lippes Mathias Wexler Friedman LLP, Raymond L. Fink, Esq., Dennis C. Vacco, Esq., of counsel, 50 Fountain Plaza, Suite 1700, Buffalo, New York 14202

Jones Day, John D. Goetz, Esq., of counsel, 500 Grant Street, Suite 4500, Pittsburgh, Pennsylvania 15219

DECISION & ORDER

Hon. Carl L. Bucki, Chief U.S.B.J., W.D.N.Y.

The Diocese of Buffalo has filed motions seeking authorization under 11 U.S.C. § 327(a) to hire two additional law firms.With respect to one of the firms, a central issue involves the deference that this Court must extend to a debtor's exercise of discretion in the selection of counsel.The second motion presents the issue of whether the debtor may retain attorneys to represent two retired bishops who are codefendants with the Diocese in an action commenced by the Attorney General for the State of New York.

On February 14, 2019, New York State enacted the Child Victims Act, which reopened the Statute of Limitations with regard to claims arising from the sexual abuse of children.2019 N.Y. Sess. Laws, c. 11, § 3.More than 250 actions alleging sexual abuse were thereafter initiated against The Diocese of Buffalo, N.Y.Recognizing a need to respond to these and other anticipated claims, the Diocese filed a petition for relief under Chapter 11 of the Bankruptcy Code on February 28, 2020.In due course thereafter, the debtor secured authorization from this Court to retain various professionals, including both its general bankruptcy counsel and special counsel to assist with potential litigation matters.

On November 23, 2020, the New York Attorney General commenced an action against the Diocese of Buffalo and its Apostolic Administrator, and against two retired bishops.Paragraph 4 of the complaint summarizes the purpose of this litigation, as follows:

The Attorney General seeks injunctive relief to accomplish three objectives: provide mechanisms for independent review of the Diocesan Corporation's response to alleged sexual abuse; require reporting to the Attorney General for a period of five years; and mandate external oversight of an appropriate remedial and compliance plan.This action also seeks to hold [retired]Bishop Malone and [retired] Auxiliary Bishop Grosz individually responsible for violating their secular duties as fiduciaries of the Diocesan Corporation by enjoining them from future service in a secular role as a director or officer of any charitable organization subject to New York law and by obtaining damages against and restitution from them for the waste of charitable assets caused by their misconduct.

The Diocese advises that it is attempting to remove the Attorney General's action to Federal District Court.Meanwhile, the Attorney General has consented to an extension of the time to answer or otherwise respond to the complaint.

On December 22, 2020, the debtor filed a motion to authorize the employment of Jones Day to serve as special counsel for the Diocese in defending the Attorney General's action.Then on December 28, the Diocese moved for authority to employ Lippes Mathias Wexler Friedman LLP ("Lippes Mathias") to serve as special counsel for the purpose of representing Bishop Malone and Bishop Grosz in that same litigation.A hearing to consider these applications was originally scheduled for January 21, 2021, but was adjourned at the debtor's request to February 10.

Bishop Michael William Fisher was installed as Bishop of the Diocese of Buffalo on January 15, 2021.In a supplemental declaration supporting the retention of the Jones Day law firm, Bishop Fisher expresses a concern that the Attorney General's lawsuit "seeks to exercise state control over internal Church operations, contrary to the protection afforded by the Establishment Clause of the First Amendment of the United States Constitution."The bishop also states a belief that Jones Day possesses special expertise in litigation regarding the First Amendment, and that the firm's experience "is crucial to implementing the Diocese's legal strategy with respect to the AG Lawsuit."

The Official Committee of Unsecured Creditors and a number of abuse claimants object to the proposed employment of Jones Day on essentially two grounds.Their first contention is that the appointment will generate excessive and unnecessary costs.The objectors argue that the Court has previously authorized the Diocese to retain law firms having attorneys with the experience and expertise needed to respond to the Attorney General's lawsuit; that existing counsel would charge at rates substantially less than those of Jones Day; and that the Diocese has no need to incur the greater expense of a multi-national firm.Secondly, the objectors challenge the decision of the Diocese to oppose the Attorney General's request for injunctive relief.They believe that injunctive relief is appropriate, and that rather than oppose the Attorney General's demands, the Diocese should instead accept the proposed measures to prevent future abuse.

With regard to the appointment of Lippes Mathias, the Diocese contends that Article XI of its by-laws imposes an obligation to indemnify Bishops Malone and Grosz for the cost of defending the Attorney General's complaint.Lippes Mathias had previously represented the bishops during the investigation that preceded the commencement of the Attorney General's litigation.Asserting that the law firm possesses the knowledge and background needed to efficiently represent the retired bishops, the Diocese seeks authorization to retain Lippes Mathias for that purpose.

The United States Trustee joins with the Committee of Unsecured Creditors and various abuse claimants in opposing the retention of Lippes Mathias.Their primary contention is that the retired bishops have at most a right only to seek reimbursement of expenses, and that any such right should be addressed through the claims process and not through the direct retention of special counsel by the Diocese.

Discussion

Retention of Jones Day

As a debtor in possession, The Diocese of Buffalo holds the rights and powers of a trustee serving in a case under Chapter 11.See11 U.S.C. § 1107.In seeking to employ Jones Day, the Diocese relies on the authority of 11 U.S.C. § 327(a), which states in relevant part as follows:

Except as otherwise provided in this section, the trustee, with the court's approval, may employ one or more attorneys ... that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title.

Here, no one has challenged the assertions by Jones Day that it is disinterested and does not hold or represent an interest adverse to the debtor's estate.That the Diocese has already retained general counsel is not per se a disqualification, in that the statute allows the trustee to employ "one or more attorneys."Nonetheless, even when the proposed attorney is otherwise qualified, section 327(a) requires the approval of this Court.

In considering any request to employ counsel, this Court must follow Second Circuit precedents allowing a trustee's broad exercise of discretion.The controlling standard was set in In re Mandell(Palmer v. Kennedy) , 69 F.2d 830(1934), a case decided by Judges Learned Hand, Thomas Swan and Augustus Hand.On behalf of a unanimous bench, Judge Swan wrote that except in unusual circumstances, it was "an abuse of judicial discretion" to deny to a bankruptcy trustee"the privilege of selecting his own counsel."Id. at 831.More recently, the Court of Appeals has applied this principle to the trustee's selection of counsel under the current Bankruptcy Code.In his opinion in In re Smith(Smith v. Geltzer) , 507 F.3d 64, 71(2007), Judge Chester J. Straub provides the following guidance:

Under [ 11 U.S.C. § 327(a) ], a trustee's choice of special counsel is subject to the evaluation and approval of the bankruptcy court.In exercising its approval function, however, the bankruptcy court should

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