IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF WISCONSIN

Transcription

1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF WISCONSIN In re: ARCHDIOCESE OF MILWAUKEE, Debtor. Case No svk Chapter 11 Hon. Susan V. Kelley SUPPLEMENTAL BRIEF IN SUPPORT OF MOTION FOR ORDER APPROVING SETTLEMENT AGREEMENTS AND POLICY BUY-BACK AGREEMENTS The Archdiocese of Milwaukee, the debtor and debtor-in-possession (the Debtor or Archdiocese ), respectfully submits this supplemental Brief in support of its Motion for Order Approving Settlement Agreements and Policy Buy-Back Agreements (Dkt. No. 2908) (the Motion ) and in response to certain questions raised by the Court in the February 10, 2015 Hearing on the Motion (Appearances and Summary of Hearing, February 10, 2015, ECF Dkt. No ). I. The Coverage Uncertainty Underscores Why the Settlements Are Appropriate and Easily Above the Lowest Point In the Range of Reasonableness. The Court directed the parties to address whether cases that the Court s independent research yielded (the Coverage Cases ) affect the parties positions as to whether the definition of occurrence applies to the conduct alleged. The Coverage Cases can be summarized as follows: First, they are from foreign jurisdictions and do not interpret Wisconsin law. As such, none of them are binding or precedential authority. Second, many of them are factually Daryl L. Diesing Bruce G. Arnold Francis H. LoCoco Lindsey M. Greenawald Whyte Hirschboeck Dudek S.C. 555 East Wells Street, Suite 1900 Milwaukee, Wisconsin Telephone: (414) Facsimile: (414) flococo@whdlaw.com Case svk Doc 3021 Filed 03/09/15 Page 1 of 10

2 distinguishable because of the specific endorsements contained in those policies or because the case involved a duty to defend instead of a duty to indemnify. Third, none of these cases holds that negligent misrepresentation is, as a matter of law, covered by insurance, let alone that such a finding would comport with Wisconsin s public policy regarding permissible insurance coverage. Fourth, regardless of the legal analysis contained in those cases, whether negligent misrepresentation is a covered claim is, from the Claimants perspective, at best, a fact-issue -- meaning individual case-by-case determinations for all 575+ claims. 1 In short, these cases underscore why the Settlements should be approved under the Seventh Circuit s above the lowest point in the range of reasonableness standard. The Coverage Cases do not hold there is coverage for the claims. They only highlight what the Settling Insurers have vigorously reminded the Archdiocese all along -- the prospects that there will be coverage for any of these claims is remote at best. II. There is No Duty to Disclose. There is no claim for negligent misrepresentation for non-disclosure. Even assuming, arguendo, that the alleged negligent misrepresentation was a viable, non-time barred claim for relief, it is factually impossible to sustain a negligent misrepresentation claim based on nondisclosure. The crux of a negligent misrepresentation claim is that the Archdiocese did not 1 During the hearing on February 10, 2015, the Committee acknowledged that determining whether negligent misrepresentation is covered would require individual jury trials: [Richler]: The A.O. Smith case is the only case that says -- the overall rule is that you don t it s not a matter of law that you can determine negligent misrepresentation. What it said doesn t deal with negligent misrepresentation specifically, but it says there s an overall rule that says that [it s] subjective and [it s] an issue for a jury. I understand that could mean lots of trials, but I agree with Mr. Finnegan this could be sequenced in a way that could not require -- this issue doesn t have to be determined 300 times. Transcript of Oral Arg., 17:12-20 (Bankr. E.D. Wis. Feb. 10, 2015). WHD/ Case svk Doc 3021 Filed 03/09/15 Page 2 of 10

3 know, but should have known, that the perpetrator was an abuser. If the Archdiocese did not know the perpetrator had previously abused someone, it is impossible to disclose what the Archdiocese did not know. See John Doe 67C v. Archdiocese of Milwaukee, 700 N.W.2d 180, (Wis. 2005). Accordingly, most courts to address the issue have soundly rejected a negligentmisrepresentation by non-disclosure claim. See Eberts v. Goderstad, 569 F.3d 757, 765 (7th Cir. 2009) ( Negligent misrepresentation by nondisclosure is a claim of questionable heritage and has been soundly rejected in some jurisdictions. ) (citing Martin v. Ohio State Univ. Found., 742 N.E.2d 1198, 1209 (Ohio Ct. App. 2000) ( A negligent misrepresentation claim does not lie for omissions: there must be an affirmative false statement. ); Johnson v. Bankers Life & Cas. Co., No. 13-cv-144-wmc, 2014 WL at *4 n.5 (W.D. Wis. Sep. 12, 2014) ( Wisconsin does not recognize a claim for... negligent misrepresentation based on a failure to disclose. ); Kaloti Enters., Inc. v. Kellogg Sales Co., 699 N.W. 2d 205, 212 n.3 (Wis. 2005); Binette v. Dyer Library Ass n, 688 A.2d 898, 903 (Me. 1996); Richey v. Patrick, 904 P.2d 798, 802 (Wyo. 1995); Matthews v. Kincaid, 746 P.2d 470, 471 (Alaska 1987)). A person may have a duty to disclose based on a contractual or statutory obligation, or because of the factual situation surrounding the transactions and relationship of the parties. Matter of Lecic s Estate, 312 N.W.2d 773, (Wis. 1981); Prod. Credit Ass n of Lancaster v. Croft, 423 N.W.2d 544 (Wis. Ct. App. 1988); Grube v. Daun, 496 N.W.2d 106 (Wis. Ct. App. 1992). There is no contractual or statutory obligation imposing a duty to disclose in this case. Accordingly, the only potential basis for imposing a duty to disclose, assuming it is possible for the Archdiocese to disclose what it did not even know, is based on the particular facts and circumstances surrounding the situation and the relationship between the parties. But WHD/ Case svk Doc 3021 Filed 03/09/15 Page 3 of 10

4 Wisconsin courts -- recognizing the havoc that would ensue if a legally binding, fiduciary relationship arose for every relationship that involved trust -- have repeatedly declined to find that a fiduciary relationship arises simply because the plaintiff placed trust and confidence in the other party. See Johnson v. Bankers Life & Cas. Co., 973 F. Supp. 950, 957 (W.D. Wis. 2013) (citing Croft, 423 N.W.2d at 458); Jackson v. McKay-Davis Funeral Home, Inc., 830 F. Supp. 2d 635, (E.D. Wis. 2011). Further, the mere fact of reliance on representations... does not... create a relationship of trust and confidence leading to a fiduciary duty. Jackson, 830 F. Supp. 2d at 648 (quoting Merrill Lynch, Pierce, Fenner & Smith v. Boeck Inc., 377 N.W.2d 605 (Wis. 1985)) (citations omitted). Moreover, the vast majority of courts to have considered this question have held that, notwithstanding any religious and/or moral obligation that there may be between a parishioner and a priest, there is no legally binding fiduciary relationship simply because of a parishioner s relationship with a priest or the church s relationship with its flock. See, e.g., Casey v. Reidy,, 906 N.E.2d 1139, (Ohio Ct. App. 2009) (despite the broad definition of the term fiduciary in Ohio, refusing to find a de facto fiduciary relationship, because there was not complete dependence by the inferior party, and noting that [o]ther states that have considered the issue have rejected a per se fiduciary relationship between the clergy and their congregants.... ); Gaines v. Krawczyk, 354 F. Supp. 2d 573, 584 (W.D. Pa. 2004) ( [I]t has consistently been recognized that the mere existence of a pastor-parishioner relationship does not in itself give rise to a fiduciary duty. ); Doe v. Holy See (State of Vatican City), 793 N.Y.S.2d 565, 568 (App. Div. 2005) ( [T]he plaintiff may not merely rely on the church s status in general in order to show the existence of a fiduciary relationship with an institutional church defendant.... ). This is important, because -- mindful of the Motion before the Court -- this only goes to highlight the WHD/ Case svk Doc 3021 Filed 03/09/15 Page 4 of 10

5 expense that would likely be involved in litigating these claims. The Claimants would each have to make an individual showing that a special relationship substantially beyond the clergy/congregant relationship arose between the parties. The fact that certain Claimants are not even willing to concede the absence of a viable claim for relief perfectly illustrates why the Settlements should be approved, because for every dollar spent on litigation resolving legally infirm claims, there is one less dollar available to pay claims. In the few cases that have recognized a fiduciary relationship, the courts have relied not on the parishioner/student and diocese relationship, but on particular facts about the relationship and interactions between the diocese and the plaintiff. See, e.g., Martinelli v. Bridgeport Roman Catholic Diocesan Corp., 196 F.3d 409 (2d Cir. 1999) (recognizing a fiduciary relationship based on factual circumstances of the relationship between the plaintiff and the defendantdiocese). III. The Bankruptcy Court Has Jurisdiction to Approve the Settlement. District courts, and, by referral from district courts, bankruptcy courts have original but not exclusive jurisdiction of all civil proceedings rising under title 11, or arising in or related to cases under title U.S.C. 1334(b); 28 U.S.C This includes exclusive jurisdiction over all property of the estate. 28 U.S.C. 1334(e). The bankruptcy jurisdiction is designed to provide a single forum for dealing with all claims to the bankrupt s assets. Elscint, Inc. v. First Wis. Fin. Corp. (In re Xonics, Inc.), 813 F.2d 127, 131 (7th Cir. 1987). The Court either has exclusive jurisdiction to approve the Settlements because they involve property of the estate or the Court has related to jurisdiction because the Settlements affect the administration of the estate. Either way the bankruptcy court has jurisdiction to approve the Settlements. It cannot be questioned that the bankruptcy court has the exclusive jurisdiction to determine claims against the Debtor s assets. 28 U.S.C. 1334(e) ( The district court in which a WHD/ Case svk Doc 3021 Filed 03/09/15 Page 5 of 10

6 case under title 11 is commenced or is pending shall have exclusive jurisdiction of all the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate. ); Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440, (2004) ( A bankruptcy court s in rem jurisdiction permits it to determin[e] all claims that anyone, whether named in the action or not, has to the property or thing in question. The proceeding is one against the world. ) (citation omitted); In re Energy Co-op, Inc., 886 F.2d 921, 929 (7th Cir. 1989) ( With respect to the jurisdictional issue, it is well established that a bankruptcy court has jurisdiction over all of the property of the debtor s estate, wherever located. ); In re Xonics, Inc., 813 F.2d at ( [R]esolving competing claims to property that belonged to the debtor when it filed a petition in bankruptcy is one of the central functions of bankruptcy law. ). At their core, the Settlements are a resolution of all claims against certain assets of the Debtor -- the Debtor s insurance policies. Any abuse claim that was brought in this chapter 11 proceeding or that could be brought necessarily implicates the Debtor s insurance policies -- assets of the estate. Resolution of claims against a debtor s assets is within the exclusive jurisdiction of the bankruptcy court. Further, a bankruptcy court has related to jurisdiction over any matter that affects the amount of property available for distribution or the allocation of property among creditors. Id. at 131. Any Abuse Claim that could be brought would affect the property available for distribution, because the Abuse Claims involve claims against the Debtor s insurance policies. Further, litigation of Abuse Claims will likely entail discovery and litigation aimed at the Debtor. The Settling Insurer s insistence that the Settlements include separate consideration for both the sale and buy-back of the Archdiocese s insurance policies, and a section 105 release to implement the sale, forms the basis for this Court s approval of this global settlement. Absent WHD/ Case svk Doc 3021 Filed 03/09/15 Page 6 of 10

7 the parishes consent to relinquish their insurance coverage, State Court Counsel will continue to sue each of the Settling Insurers directly, which means that the Settlements will never occur. Claimants contend that they have direct-action rights. The Debtor vigorously disputes the existence of any direct action rights. The Claimants suggestion that the Wisconsin Supreme Court would re-write the direct action statute to find that negligent misrepresentation, which is -- according to Claimants pleading -- concededly a fraud claim, is a negligence claim for purposes of the direct action statute only (while remaining a fraud claim for purposes of the statute of limitations and the discovery rule) borders on the absurd. There is simply no prospect for the Settlements without the Releases precisely because State Court Counsel will sue the Settling Insurers directly 2 based on these invented direct action claims. The Settling Insurers are not willing to make the substantial payment to the estate without the protections against the prospect of incurring significant legal expenses defending these actions. State Court Counsel s legal position on claims previously settled or dismissed with prejudice underscores the Settling Insurers justifiable concern that State Court Counsel will simply invent a new legal theory. The history of the litigation between the parties is replete with examples of new legal theories -- e.g., negligent supervision, fiduciary fraud, and negligent misrepresentation by nondisclosure. 3 2 The Settling Insurers insisted on the Releases contained in the Settlements to address the threats made by State Court Counsel to sue the Settling Insurers directly either a lawsuit based on the alleged conduct of the Archdiocese or a lawsuit based on the alleged conduct of an Additional Insured. To give effect to the Settlements, all potential lawsuits against the Settling Insurers and the Insurance Policies must be enjoined. If the Settlements terminated the Additional Insureds ability to seek coverage for certain claims, but they remained subject to lawsuits for those very same claims, there is no way the Additional Insureds would agree to give up their rights under the Insurance Policies. 3 The fact that State Court Counsel previously recognized that, absent evidence of fraud, a claim against the debtor was not enforceable, see Claimant A-75 and A-367 s Request for Withdrawal of Claims Without Prejudice (ECF Dkt No. 893), but now maintain that these are somehow viable claims -- notwithstanding the fact that (footnote continued) WHD/ Case svk Doc 3021 Filed 03/09/15 Page 7 of 10

8 The end result is that property of the estate remains subject to claims and that no party would ever agree to enter into such a settlement. IV. Approval of the Settlement is Not Prohibited by Law v. Siegel. In Law v. Siegel, the bankruptcy court ordered -- notwithstanding 522 of the Bankruptcy Code, which provides that, except in particular situations, exempt property is not liable for the payment of any prepetition debt or the payment of any administrative expense -- that certain of a debtor s exempt assets be used to pay administrative expenses, 134 S.Ct 1188, 1195 (2014). The Supreme Court addressed whether a bankruptcy court could override this express provision in the Bankruptcy Code either by using its inherent powers to sanction or the statutory authority under 105 of the Bankruptcy Code to issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of the Bankruptcy Code. Id. at 1194 The Supreme Court held that a bankruptcy court did not have authority -- whether inherent or from to override express provisions of the Bankruptcy Code. Id. ( But in exercising those statutory and inherent powers, a bankruptcy court may not contravene specific statutory provisions. ). In this respect, Siegel, simply recognized and reinforced, the long-recognized axiom that a statute s general permission to take actions of a certain type must yield to a specific prohibition found elsewhere. Id. at It is not accidental that Siegel was unanimously decided. Siegel is not a groundbreaking decision. Siegel merely confirmed what has always been the law. Id. ( It is hornbook law that 105(a) does not allow the bankruptcy court to override explicit mandates of other sections of the there was no change in the underlying substantive law -- further underscores the point that, without the releases, State Court Counsel will continue to bring claims of dubious merit until each and every claim is disallowed by a final order from a court. See also Transcript of Hearing, January 24, 2013, pp The circumstances are exactly the same, the law has not changed, and State Court Counsel refuses to withdraw these claims. WHD/ Case svk Doc 3021 Filed 03/09/15 Page 8 of 10

9 Bankruptcy Code. ) (quoting 2 Collier on Bankruptcy [2], at (16th ed. 2013); Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988) ( [W]hatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code. ); In re Kmart Corp., 359 F.3d 866, 871 (7th Cir. 2004) ( Section 105(a) allows a bankruptcy court to issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of the Code. This does not create discretion to set aside the Code s rules about property and distribution; the power conferred by 105(a) is one to implement rather than override. ); In re Fesco Plastics Corp., 996 F.2d 152, 154 (7th Cir. 1993) ( By the same token, when a specific Code section addresses an issue, a court may not employ its equitable powers to achieve a result not contemplated by the Code. ). Nothing in Siegel affects this Court s authority to grant the Releases because nothing in the Bankruptcy Code prohibits the Releases and because the Releases are necessary to give effect to the approval of the Settlements pursuant to Federal Rule of Bankruptcy Procedure 9019 and 363 of the Bankruptcy Code. In both Specialty Equipment and Airadigm, the Seventh Circuit recognized that nothing in the Bankruptcy Code prohibits the granting of third-party releases. In re Specialty Equip. Cos., Inc., 3 F.3d 1043, (7th Cir. 1993); In re Airadigm Commc ns., Inc., 519 F.3d 640, 656 (7th Cir. 2008); see also In re Ingersoll, Inc., 562 F.3d 856 (7th Cir. 2009) (recognizing that 11 U.S.C. 1123(b)(6) allows a court to include in a plan any other appropriate provision not inconsistent with the applicable provisions of [the bankruptcy code]. ) (quoting In re Airadigm, 519 F.3d at 657) (emphasis added). Thus, the issue in Siegel - - the use of a general provision of the Bankruptcy Code to override a more specific provision of the Bankruptcy Code -- does not arise in the context of the Releases. Unlike Siegel, where 105 was used to override a provision of the Bankruptcy Code, here the Releases are necessary to WHD/ Case svk Doc 3021 Filed 03/09/15 Page 9 of 10

10 give effect to the Settlements and sale of the Insurance Policies pursuant to Federal Rule of Bankruptcy Procedure 9019 and 363 of the Bankruptcy Code. Dated this 9th day of March, Respectfully submitted, ARCHDIOCESE OF MILWAUKEE Debtor and Debtor in Possession By its counsel, Whyte Hirschboeck Dudek S.C. P.O ADDRESS: 555 East Wells Street, Suite 1900 Milwaukee, Wisconsin Telephone: (414) Facsimile: (414) By: /s/ Francis H. LoCoco Daryl L. Diesing Bruce G. Arnold Francis H. LoCoco Lindsey M. Greenawald WHD/ Case svk Doc 3021 Filed 03/09/15 Page 10 of 10