In re Roman Catholic Church of the Archdiocese of Santa Fe

• Decision Date: 09 October 2020
• Docket Number: Case no. 18-13027-t11
• Citation: 621 B.R. 502
• Parties: IN RE: ROMAN CATHOLIC CHURCH OF the ARCHDIOCESE OF SANTA FE, Debtor.
• Court: U.S. Bankruptcy Court — District of New Mexico

621 B.R. 502

IN RE: ROMAN CATHOLIC CHURCH OF the ARCHDIOCESE OF SANTA FE, Debtor.

Case no. 18-13027-t11

United States Bankruptcy Court, D. New Mexico.

Signed October 9, 2020

Bruce Anderson, Ford Elsaesser, Elsaesser Anderson, Chtd., Coeur d'Alene, ID, Chris W. Pierce, Samuel I. Roybal, Thomas D. Walker, Walker & Associates, P.C., Stephanie Schaeffer, Business Law Southwest, LLC, Albuquerque, NM, for Debtor.

Kenneth Harris Brown, Pachulski Stang Ziehl & Jones LLP, San Francisco, CA, James I. Stang, Pachulski Stang Ziehl & Jones, Los Angeles, CA, for Creditor Committee Official Committee of Unsecured Creditors.

Charles S. Glidewell, Leonard K. Martinez-Metzgar, Alice Nystel Page, Christopher Pattock, Jaime A. Pena, Office of U.S. Trustee, Albuquerque, NM, for U.S. Trustee.

Daniel A. White, Askew & White, LLC, Albuquerque, NM, for Trustee Philip J. Montoya.

OPINION

David T. Thuma, United States Bankruptcy Judge

Before the Court is the Unsecured Creditors' Committee's (UCC's) motion for authority to bring fraudulent transfer and turnover claims against certain trusts and parishes. The motion has been extensively briefed and argued. Being sufficiently advised, the Court concludes that the motion is well taken and should be granted.

A. Facts.

For the sole purpose of ruling on the motion, the Court finds:¹

Debtor was formally recognized by Pope Pius IX as an archdiocese in 1875. It was incorporated under the laws of the state of New Mexico in 1951. Today the archdiocese includes more than 90 parishes in the northern and northeastern portions of New Mexico. Several of the parishes predate the archdiocese by many decades or even centuries. Since 2015, Debtor has been led by Archbishop John C. Wester, 12th archbishop of the archdiocese.

Each parish operates under the supervision of a pastor appointed by the archbishop. Parishes support themselves with donations from parishioners and others. Each parish hires and pays employees, provides (through joint archdiocese programs) employee benefits and worker compensation insurance, insures (through joint archdiocese policies) and maintains its properties, pays its bills, has its own bank accounts, and maintains a separate tax identification number. Parishes have also kept accounts with the Archdiocese Deposit and Loan Fund ("DLF"), which loans funds to parishes for large construction projects. Parishes have appeared as litigants in New Mexico courts. Each parish contributes a share of its collections to the archdiocese.

In late 2007, Debtor and the parishes began to consider a restructuring that involved incorporating the parishes, forming a real estate trust and a financial assets trust, and transferring real estate and financial assets to the trusts. According to Debtor, one of the purposes of the restructuring was to align Debtor's organization under canon law with civil law.

The restructuring began in late 2012, when Debtor created the Archdiocese of Santa Fe Real Estate Corporation ("RE Corp."), a New Mexico nonprofit corporation. Effective January 1, 2013, Debtor created the real estate trust. RE Corp. is the sole trustee of the real estate trust.

The archbishop is the sole member of RE Corp. The archbishop appoints and removes RE Corp.'s directors and controls the actions of RE Corp. as trustee, including the purchase, sale, lease, or improvement of any real estate held or used by the real estate trust.

Debtor is a beneficiary of the real estate trust, which is revocable by Debtor. The stated purpose of the real estate trust is to "support the religious, charitable and educational purposes" of Debtor, the parishes, and other affiliated entities.

More than two years prepetition,² Debtor transferred parcels of real property to the real estate trust valued at more than $34.2 million. The transfers typically were made by special warranty deed from Debtor to RE Corp. as trustee for the benefit of a named parish.

Also effective January 1, 2013, Debtor created a financial assets trust for the purpose of receiving financial assets. Under the financial assets trust bylaws, the archbishop appoints trustees of the trust. Debtor is a "Participant" of the financial assets trust, which is revocable by Debtor. The stated purpose of the financial assets trust is to "support the religious, charitable and educational purposes" of Debtor, the parishes, and other affiliated entities.

On the effective date, Debtor transferred financial assets worth about $25.5 million to the trust, including the res of the DLF. Debtor reported the transferred assets as held for the parishes and other church-related organizations.

Parishes have made additional contributions of cash and assets to the financial assets trust. The trust held about $36.7 million on the petition date.

Debtor still holds legal title to real estate worth about $57.4 million. Debtor and the parishes contend that much of this real estate is held for the benefit of the parishes.

Debtor filed this case on December 3, 2018, and operates as a debtor in possession.

The UCC proposes to file three complaints: one to avoid transfers to the real estate trust, one to avoid transfers to the financial assets trust, and one to avoid the parishes' claimed interests in the property titled in Debtor's name. The challenged transfers total more than $150,000,000.

B. Derivative Standing.

In chapter 11 cases, there is no question that avoidance claims typically are controlled and brought by the debtor in possession. See §§ 544(b), 548, and 1107(a).³ If a debtor in possession declines to assert a claim, can a bankruptcy court confer derivative standing on a committee to assert it?⁴ Relying primarily on two cases, Debtor says no. Debtor's main authority is Hartford Underwriters Ins. Co. v. Union Planters Bank , 530 U.S. 1, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000). In Hartford , the Supreme Court addressed whether a creditor had standing to surcharge collateral under § 506(c), which provides:

The trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim, including the payment of all ad valorem property taxes with respect to the property.

The Supreme Court held:

The question thus becomes whether it is a proper inference that the trustee is the only party empowered to invoke the provisions. [fn 3: Debtors-in-possession may also use the section, as they are expressly given the rights and powers of a trustee by 11 U.S.C. § 1107 ] We have little difficulty answering yes.

530 U.S. at 6, 120 S.Ct. 1942. While the Supreme Court ruled that a creditor lacks independent standing to assert a § 506(c) surcharge claim, it noted:

We do not address whether a bankruptcy court can allow other interested parties to act in the trustee's stead in pursuing recovery under § 506(c). Amici American Insurance Association and National Union Fire Insurance Co. draw our attention to the practice of some courts of allowing creditors or creditors' committees a derivative right to bring avoidance actions when the trustee refuses to do so, even though the applicable Code provisions, see 11 U.S.C. §§ 544, 545, 547(b), 548(a), 549(a), mention only the trustee. See, e.g., In re Gibson Group, Inc., 66 F.3d 1436, 1438 (C.A.6 1995). Whatever the validity of that practice, it has no analogous application here, since petitioner did not ask the trustee to pursue payment under § 506(c) and did not seek permission from the Bankruptcy Court to take such action in the trustee's stead. Petitioner asserted an independent right to use § 506(c), which is what we reject today. Cf. In re Xonics Photochemical, Inc., 841 F.2d 198, 202–203 (C.A.7 1988) (holding that creditor had no right to bring avoidance action independently, but noting that it might have been able to seek to bring derivative suit).

530 U.S. at 13 n.5, 120 S.Ct. 1942.

The second case Debtor relies on is In re Fox, 305 B.R. 912 (10th Cir. BAP 2004). Addressing the issue left unresolved by Hartford , the Tenth Circuit Bankruptcy Appellate Panel (BAP) ruled in Fox that a bankruptcy court cannot confer standing on a creditor to pursue a § 548 fraudulent transfer claim ( § 548 has the same "the trustee may" language as § 506(c)). Reasoning that "the statute is absolute and allows us no discretion to vary from what it says," the BAP ruled that under Hartford and the plain language of § 548(a), only the trustee can bring avoidance claims; derivative actions are prohibited. Id. at 916. The BAP also held: "The language used by the Court in Hartford is so clear and compelling, however, that we are convinced it would apply the same reasoning to this case and reach the same conclusion." Id. at 915.⁵

Fox is in a tiny minority. Every circuit court that has ruled on the question of derivative standing after Hartford has allowed it. See In re Smart World Techs., LLC , 423 F.3d 166, 176 (2d Cir. 2005) ; In re Cybergenics Corp. , 330 F.3d 548, 553 (3d Cir. 2003) ; In re SI Restructuring Inc. , 714 F.3d 860, 863 (5th Cir. 2013) ; In re Trailer Source, Inc. , 555 F.3d 231, 242-43 (6th Cir. 2009) ; In re Consolidated Industries Corp. , 360 F.3d 712, 716-17 (7th Cir. 2004) ; In re Racing Servs., Inc. , 540 F.3d 892, 898 (8th Cir. 2008) ; and In re Jones , 178 Fed. App'x 662, 664 (9th Cir. 2006). Almost all bankruptcy courts, BAPs, and district courts have ruled the same way.⁶ In In re Adelphia Comm. Corp. , 330 B.R. 364, 373 (Bankr. S.D.N.Y. 2005), the bankruptcy court (Judge Gerber) described the practice of conferring derivative standing as "longstanding, and nearly universally recognized."⁷ For a good discussion of this majority view, see Cybergenics and Lepene and Gordon, The Case for Derivative Standing in Chapter 11: "It's the Plain Meaning, Stupid ," 11 A.B.I. L. Rev. 313 (2003).

Courts recognize derivative standing for a variety of textual, historical, and practical reasons.

--Section 503(b)(3)(B): "After notice and a...