In re Roman Catholic Diocese of Harrisburg

• Decision Date: 17 February 2022
• Docket Number: CASE NO. 1:20-bk-00599 (HWV)
• Parties: IN RE: ROMAN CATHOLIC DIOCESE OF HARRISBURG, Debtor.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Middle District of Pennsylvania

640 B.R. 59

IN RE: ROMAN CATHOLIC DIOCESE OF HARRISBURG, Debtor.

CASE NO. 1:20-bk-00599 (HWV)

United States Bankruptcy Court, M.D. Pennsylvania.

Signed February 17, 2022

Evan Atkinson, Waller Lansden Dortch & Davis LLP, Austin, TX, Tyler Nathaniel Layne, Blake D. Roth, Andrew Hunter Thornton, Waller Lansden Dortch & Davis, LLP, Nashville, TN, Paul G. Gagne, Matthew Hermann Haverstick, Kleinbard LLC, Philadelphia, PA, Joshua J. Voss, Kleinbard LLC, Philadelphia, PA, for Debtor.

OPINION

Henry W. Van Eck, Chief Bankruptcy Judge

This matter came before the Court for hearing on February 3, 2022 (the "Hearing") regarding the Motion of the Official Committee of Tort Claimants (the "Committee") for Standing and Authority to Commence, Prosecute, and Settle Causes of Action on Behalf of the Debtor's Bankruptcy Estate (the "Motion for Derivative Standing" or "Mot") (Doc. No. 841), the Objection filed thereto (the "Objection" or "Obj.") (Doc. No. 913) by the Roman Catholic Diocese of Harrisburg (the "Debtor"), and the Committee's Reply in Support its Motion for Derivative Standing (the "Reply") (Doc. No. 1059).

I. Jurisdiction

This Court has subject matter jurisdiction over this case pursuant to 28 U.S.C. § 1334(b). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). Venue is proper pursuant to 28 U.S.C. § 1409.

II. Factual Background and Procedural History

The Debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code on February 19, 2020. The statute of limitations for pursuing avoidance claims such as preferences and fraudulent transfers will therefore expire on February 19, 2022. See 11 U.S.C. § 546(a). On May 25, 2012, the Committee filed the Derivative Standing Motion seeking an order granting it the exclusive and irrevocable authority to commence, prosecute, and settle two fraudulent transfer complaints against two separate trusts created by the Diocese (individually the "RE Complaint" or "RE Comp." and the "CH Complaint" or "CH Compl."; collectively the "Complaints" or "Compls."). The alleged fraudulent transfers identified by the Committee occurred on November 13, 2009, when the Debtor transferred substantially all its assets, including its real and non-real property, into the Roman Catholic Diocese of Harrisburg Charitable Trust (the "Charitable Trust" or "CH Trust") and the Roman Catholic Diocese of Harrisburg Real Estate Trust (the "Real Estate Trust" or "RE Trust", and together with the Charitable Trust, the "Trusts").

The Committee contends the transfers were made with actual intent to hinder, delay, or defraud creditors because they were made at a time when the Debtor faced increasing threats of litigation due to widely publicized reports of clergy sexual abuse throughout the United States. (Compls., ¶19b). In the Complaints, the Committee seeks to recover the transfers pursuant to 11 U.S.C. §§ 541(a), 542, 544(a), 544(b)(1), 550(a), 12 PA. CONS. STAT. § 5104(a), 20 PA. CONS. STAT. § 7745, and the Pennsylvania common law doctrines of "Self-Settled Trust" and "Alter Ego." The Committee also seeks Declaratory Judgements on some of those same theories and an injunction compelling termination of the Trusts and turnover of its assets to the Debtor. The Debtor has objected to the Motion for Derivative Standing. The parties have fully briefed the issues and the Court conducted a hearing as described above. This Decision sets forth the Court's findings of fact and conclusions of law.

III. Findings of Fact and Conclusions of Law

Section 544¹ vests the bankruptcy trustee with the power to undo or "avoid" certain voluntary or involuntary transfers of the debtor's interests in property. 11 U.S.C. § 544. In a Chapter 11 case, the debtor in possession generally exercises these § 544 avoidance powers. 11 U.S.C. § 1107. If a debtor in possession unjustifiably refuses to bring an avoidance action, the creditors' committee may seek "derivative standing" from the bankruptcy court to do so on behalf of the debtor. See, e.g., Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery , 330 F.3d 548, 553 (3d Cir. 2003) ("We believe that Sections 1109(b), 1103(c)(5), and 503(b)(3)(B) of the Bankruptcy Code evince Congress's approval of derivative avoidance actions by creditors' committees, and that bankruptcy courts' equitable powers enable them to authorize such suits as a remedy in cases where a debtor-in-possession unreasonably refuses to pursue an avoidance claim."). The parties agree that, to obtain derivative standing to pursue these claims, the Committee must establish (1) that the avoidance claims are colorable and (2) that the Debtor unjustifiably refuses to pursue them. Mot. at 10; Obj. at 19. The Court begins its analysis by considering whether the claims advanced by the Committee are colorable.

A. Are the Claims Colorable?

A claim is colorable if it would survive a motion to dismiss brought under Bankruptcy Rule 7012(b), which incorporates Federal Rule 12(b)(6). In re Rosenblum , 545 B.R. 846, 864 (Bankr. E.D. Pa. 2016) (citing In re Racing Servs., Inc., 540 F.3d 892, 900 (8th Cir. 2008) (additional citations omitted)). Rule 12(b)(6) authorizes a defendant to move to dismiss a complaint for "failure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). The legal standards governing pleading practice in federal court require a plaintiff to "plead more than the possibility of relief to survive a motion to dismiss." See Fowler v. UPMC Shadyside , 578 F.3d 203, 210 (3d Cir. 2009).

To avoid dismissal, a claim must set out "sufficient factual matter" to show that it is facially plausible. Id. The plausibility standard requires more than a mere possibility that the defendant is liable for the alleged misconduct. Indeed, "where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged – but it has not show[n] – that the pleader is entitled to relief." Ashcroft v. Iqbal , 556 U.S. 662, 679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citing Fed. R. Civ. P. 8(a)(2) ) (internal quotation marks omitted). "Factual allegations must be enough to raise a right to relief above the speculative level." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).

The Third Circuit has identified the following steps a district court must take when evaluating the sufficiency of a complaint's allegations as tested against a Rule 12(b)(6) motion: (1) identify the elements a plaintiff must plead to state a claim; (2) discard any conclusory allegations contained in the complaint "not entitled" to the assumption of truth; and (3) determine whether any "well-pleaded factual allegations" contained in the complaint "plausibly give rise to an entitlement to relief." See Santiago v. Warminster Twp. , 629 F.3d 121, 130 (3d Cir. 2010) (citation and quotation marks omitted).

In evaluating whether a complaint fails to state a claim upon which relief may be granted, the court must accept as true all factual allegations in the complaint and construe all reasonable inferences to be drawn therefrom in the light most favorable to the plaintiff. See In re Ins. Brokerage Antitrust Litig. , 618 F.3d 300, 314 (3d Cir. 2010). A court "need not credit a complaint's ‘bald assertions’ or ‘legal conclusions’ when deciding a motion to dismiss," Morse v. Lower Merion Sch. Dist. , 132 F.3d 902, 906 (3d Cir. 1997), and must disregard any "formulaic recitation of the elements of a cause of action." Twombly , 550 U.S. at 555, 127 S.Ct. 1955.

In deciding a Rule 12(b)(6) motion, a court may consider, in addition to the facts alleged on the face of the complaint, any exhibits attached to the complaint, "any matters incorporated by reference or integral to the claim, items subject to judicial notice, [and] matters of public record." Buck v. Hampton Twp. Sch. Dist. , 452 F.3d 256, 260 (3d Cir. 2006) (citation and quotation marks omitted). With the foregoing principles in mind, the Court now considers the allegations made by the Committee to determine whether the Committee has stated colorable claims.

1. Section 544(b)(1) Strong Arm Power and § 5104(a) of the Pennsylvania Uniform Voidable Transactions Act

The Committee's opening argument asserts a fraudulent transfer claim under 11 U.S.C. § 544(b)(1) and 12 PA. CONS. STAT. § 5104(a) of the Pennsylvania Uniform Voidable Transactions Act" (hereinafter, "PUVTA"). Section 544(b)(1) of the Bankruptcy Code allows the trustee to "avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim...." 11 U.S.C. § 544(b). The language of § 544(b)(1) plainly contains four elements: (1) a transfer of an interest of the debtor in property; (2) that is voidable under applicable [state] law; (3) by a creditor; (4) holding an allowable unsecured claim. See In re Forbes , 372 B.R. 321, 330 (B.A.P. 6th Cir. 2007) (citation omitted). As the party seeking to avoid the transfer, the Committee in this case bears the burden of proving all elements of a fraudulent transfer claim by a preponderance of the evidence.

Shubert v. Stranahan (In re Pennsylvania Gear Corp.), 2008 WL 2370169, at *9 (Bankr. E.D. Pa. Apr. 22, 2008) ; Burtch v. Harris (In re Harris), 2003 WL 23096966, at *2 (Bankr. D. Del. Dec. 30, 2003).

The Debtor contends that the Committee has failed to demonstrate colorable claims pursuant to § 544(b)(1) of the Bankruptcy Code and § 5104(a) of PUVTA because: (1) no transfer of an interest of the Debtor in property occurred; (2) the Committee did not adequately plead a cause of action under PUVTA; (3) no creditor holding an allowed unsecured claim was identified; and (4) any claim under PUVTA is barred by the statute of limitations. The Committee disagrees with each of the Debtor's contentions.

a. Was there a "Transfer of an Interest of the Debtor in Property?"

The Debtor declares that the Committee has...