In 2005, as the Archdiocese of Milwaukee (the “Archdiocese” or “Debtor”) faced numerous lawsuits by alleged abuse survivors, it trans - ferred in excess of $35 million from its “Parish Deposit Fund” to its parishes and a newly created Southeastern Wisconsin Catholic Parishes Invest - ment Management Trust (the “Trust”).
After the Archdiocese filed for bank - ruptcy protection on January 4, 2011 following its failure to settle more than twenty-three abuse lawsuits, the official Committee of Unsecured Creditors (the “Committee”) of the Archdiocese, which five-member com mit tee was comprised of four personal injury plaintiffs and alleged abuse survivors, investigated those transfers and alleged that they were recoverable as fraudulent conveyances.
Notwithstanding, on December 10, 2012, the United States Bankruptcy Court for the Eastern District of Wisconsin (the “Court”) held that the Committee did not have the derivative standing necessary to commence litigation seeking the avoidance and recovery of the $35 million. See In re Archdiocese of Milwaukee, 483 B.r. 855 (Bankr. E.D. Wis. 2012).
According to the Debtor, the Parish Deposit Fund was formed by the Archdiocese in 1969 to allow local Catholic entities (primarily parishes) the option of investing into one pooled fund that provided favorable interest rates and permitted investments to be redeemed upon request.
The Committee alleged that in March 2003, in the face of mounting abuse litigation, the Archdiocese’s Finance Council met and discussed paying claims of “legitimate victims” of abuse from insurance and/or borrowed funds and setting up the Trust to shelter the Parish Deposit Fund from further abuse claims. Two years later, on June 30, 2005, the Archdiocese closed the Parish Deposit Fund and investors were given the option of having their investments returned to them or transferred to the new Trust. Accordingly, the Committee asserted that the Archdiocese trans - ferred in excess of $35 million from the Parish Deposit Fund to the Trust and/or directly to parishes and other affiliates of the Debtor (collectively, the “Parishes”) with actual intent to hinder, delay, or defraud creditors in 2005.
In light of the Debtor’s refusal of the Committee’s demand that it attempt to recover the $35 million for the benefit of the estate, on May 25, 2012, the Committee filed a motion for authority to file adversary complaints to avoid and recover the alleged fraudulent transfers pursuant to Wisconsin state law and the Bankruptcy Code’s fraud - ulent transfer provisions.
The Court’s Decision
Before getting to the merits of the Committee’s motion, the Court held that despite the fact that four years had passed since the transfers were made, the Committee’s claims may satisfy the relevant statute of limitations because it was plausible that a creditor could not have reasonably discovered the trans - fers before January 5, 2010 (within one year of the Debtor’s petition), even though the Archdiocese’s financial state ments were published each year online and disclosed the existence of the Parish Deposit Fund and its “fishy” closing in 2005 when the alleged abuse survivors were involved in a mediation program with the Debtor. Id. at 865-66.
Nevertheless, the Court denied the Committee’s motion as failing to satisfy the relevant standard for derivative standing because (i) the Committee's claims were not “colorable” and (ii) the Debtor did not “unjustifiably” refuse to bring those claims. “Colorable” claims, as the Court explained, are claims that would survive a motion to dismiss, are plausible on their face, contain “more than a sheer possibility” of unlawfulness, and are not subject to affirmative defenses. Id. at 858-59. (citations omitted).
First, the Court held that the Parishes likely had a defense to the litigation because they received funds "in good faith." Id. at 866-67. on this point, the Court held that, despite being an officer and board member of each parish corporation, the Archbishop's knowledge of the allegedly fraudulent transfers could not be imputed to the Parishes because the Archbishop did not exercise his authority or control over the Parishes with respect to the transfers. Instead, the Archbishop gave each of the Parishes the opportunity to either withdraw their funds or invest in the new Trust. Id.
Second, the Court held that the Committee had not stated a plausible claim that the transfers were made with the Debtor’s property. Id. at 869. Instead, the Court held that the Parish Deposit Fund belonged to the Parishes because, unlike similar funds present in some of the seven other diocesan cases prompted by the ongoing abuse crisis, (i) the Archdiocese did not hold title to the Parishes’ property because Parishes are considered separate corporations under Wisconsin law, (ii) the Parishes’ funds were not com - mingled in the Archdiocese’s operating account, but were deposited into one segregated bank account and easily traceable, (iii) participation in the Parish Deposit Fund was voluntary, and (iv) the Parishes could withdraw their funds on request. Id. at 867-69.
Finally, despite its conclusion that the claims were not colorable, the Court went on to state that the Archdiocese justifiably refused to attempt to recover the funds given (i) the significant cost and delay associated with pursuing such claims, (ii) the dubious merit of the claims, (iii) the likely difficulty in collecting any judgment, and (iv) the adverse effects on the reorganization effort of the Debtor, which relies upon its Parishes for support. Id. at 869-71.
In sum, the Court held that the Committee’s claims were not colorable, and even assuming that they were, the Debtor did not unjustifiably refuse to bring such claims given that the cost outweighed any apparent benefit.
Dioceses and parishes facing financial distress or potential catastrophic liability events should take note. Although the Archdiocese was suc - cess ful in opposing the Committee’s actions in this instance, pooled invest - ment vehicles are subject to scrutiny during a bankruptcy case. The opera - tion and structure of such funds, the level of disclosure of any related transfers, and governing state law will likely dictate the outcome of future similar cases.