Legal experts say an agreement the bond trustee struck with The Roman Catholic Church of the Archdiocese of New Orleans and the federal judge presiding over its Chapter 11 case to pay bondholders post-petition interest is a rare accomplishment in bankruptcy.
The archdiocese, which appears to be solvent based on court documents, filed for reorganization in May saying it was the best path forward to deal with a mounting number of sexual abuse claims and increasing ministry expenses, some related to dealing with the coronavirus that causes COVID-19.
Among the unsecured debts in the case is $38 million of outstanding revenue bonds sold on behalf of the archdiocese by the Louisiana Public Facilities Authority in March 2017.
United States Bankruptcy Judge Meredith S. Grabill approved the settlement agreement between TMI Trust Co., the bond trustee, and the archdiocese on Nov. 2. It does not include principal payments.
This type of settlement is not common, said Greenberg Traurig shareholder Colleen A. Murphy, who represents TMI.
“It’s highly unusual, if not unprecedented, for unsecured bondholders to be paid current interest during the pendency of a bankruptcy case, and we and TMI Trust Company were pleased to have helped the bondholders achieve this result,” Murphy told The Bond Buyer.
Noel Boeke, a partner at Holland & Knight LLP, whose practice includes bankruptcy, restructuring and creditors’ rights, said he’s been involved in hundreds of bankruptcy cases and none had interest paid while the case was pending.
“It is unusual for post-petition interest to be paid to unsecured creditors,” Boeke said in an interview. “This was a well-presented motion by the debtor and TMI. To me, it was a win-win.
“I think this was good work by TMI, and good work by the debtor to solve a problem of the church.”
The settlement benefits the archdiocese because it allows for the payment of bonds on the pre-bankruptcy maturity schedule after a plan of reorganization is approved, according to court filings.
“If the archdiocese was not able to reach an agreement with the bond trustee concerning outstanding defaults on the bond debt at the time of confirmation of a reorganization plan, it could be required to pay off the bond debt at confirmation,” the archdiocese said in a motion to approve the settlement.
“Reaching agreement with the trustee concerning existing and anticipated defaults to allow the bond debt to be reinstated at the time of confirmation of the plan allows the debtor to pay the bond debt on its original terms through 2037,” the motion said. “The archdiocese believes that the bond debt was issued on terms that are very favorable to the archdiocese, and that it could not currently obtain such favorable terms if it were required to pay the bond debt early.”
The bonds first defaulted when the bankruptcy case was filed in May. Another default occurred when the debt service wasn’t paid on July 1.
Under the agreement, the $930,206.25 missed interest payment due July 1 is to be paid on Nov. 20, but the missed principal payment of $1.385 million will remain unpaid.
In exchange for the interest payments, the trustee, at the direction of the holders of a majority in aggregate principal amount of the bonds, agreed not to object to a plan of reorganization that provides for the reinstatement of the debt on its current terms as long as the missed principal and the trustee’s fees are paid.
The trustee also agreed to waive a number of default provisions, including a failure by the archdiocese to file annual audited financial statements as required by bond documents.
The bankruptcy involves the archdiocesan administrative offices, and not individual parishes, schools, schools run by the various religious orders, or ministries of the church. A debtor doesn’t need to be insolvent to file for Chapter 11.
As of Sept. 30, the archdiocese told the court in a financial report that it had assets totaling $532 million and $400 million in liabilities on its consolidated balance sheets.
Father Patrick Carr, vicar of finance for the archdiocese, said the day the Chapter 11 petition was filed, “We will be allowed to satisfy current financial obligations and to reorganize our operations with a commitment to a future ministry that is stronger financially and strengthened in its mission.”
“Filing for Chapter 11 is a voluntary action that will allow the archdiocese to implement a financial reorganization plan detailing how available assets and insurance coverage will be used to settle claims and negotiate reasonable settlements,” he said. “Current creditors of the archdiocese will be assured payment via a Chapter 11 plan of reorganization that will be approved and controlled by the Court.
“Very importantly, taking this action will allow us to address remaining clergy abuse claims, all of which stem from allegations dating back several decades ago, in a way that will allow funds to go directly to victims, instead of funding costly litigation.”
In a statement of financial affairs filed by the archdiocese in June, the list of pending legal actions includes 33 individual abuse claim cases pending in the Civil District Court for Orleans Parish. Five additional claims are pending in one case filed in the U.S. District Court for Eastern Louisiana.
The unsecured creditors committee is currently represented by six abuse claimants. TMI was the sole commercial business representative, but the trustee was removed from the committee after the settlement agreement was reached.
The creditors committee accused the archdiocese of filing for bankruptcy in bad faith in a motion to dismiss the petition in August.
“Bad faith filing arises in a number of different contexts,” the committee said in a post-hearing brief on its motion to dismiss. “One such scenario is where a debtor files bankruptcy not to respond to a financial crisis, but instead to gain an advantage in pending litigation.”
The unsecured creditors as a whole are delayed and prejudiced by the pendency of the bankruptcy filing, the committee’s brief said.
“Trade and debt creditors, many of which are no doubt small businesses, are not receiving payments in the ordinary course,” said the brief. “Abuse victim survivors are deprived of their day in court, as the debtor seeks to effectively force them into an involuntary collective bargaining process.”
Their motion to dismiss is still pending before the judge.
Boeke said he would be shocked if the judge found the archdiocese’ case was filed in bad faith.
“This is just the kind of issue that bankruptcy is designed to settle, one with a large number of creditors and a large number of claims,” he said, adding that Chapter 11 is a perfect solution for mass tort claims cases.
The Chapter 11 petition filed by Purdue Pharma L.P. on Sept. 15, 2019 is an example, he said. Nearly 18,800 personal-injury claims have been filed against the company over its addictive opioid painkiller OxyContin.
Many states and the Department of Justice also have filed claims in Purdue’s case.
In June, PG&E Corp. and Pacific Gas and Electric Co. in California received court approval of its Chapter 11 plan agreeing to settlements valued at $25.5 billion, and resolving claims by individual victims and others related to the 2015 Butte Fire, 2017 Northern California wildfires, 2017 Tubbs Fire, and the 2018 Camp Fire. The fires killed more than 100 people.
Included in the massive PG&E plan is an $11 billion settlement with insurance companies and other entities that paid claims by individuals and businesses related to the wildfires, and a $1 billion settlement to satisfy the wildfire claims of certain cities, counties, and other public entities.
PG&E is an investor-owned electric utility that continues to make money, Boeke said, but there were so many lawsuits the company went into bankruptcy and got a plan confirmed that channels money into a trust fund for tort victims.
“Chapter 11 is tailor-made to enable a company or even the Archdiocese of New Orleans to emerge with a fresh start,” he said. “You get to restructure your balance sheet, remain in business and keep jobs. There have been hundreds of mass tort bankruptcy cases.”