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In re Archdiocese of Saint Paul and Minneapolis

United States Court of Appeals, Eighth Circuit

April 26, 2018

In re: The Archdiocese of Saint Paul and Minneapolis Debtor
The Archdiocese of Saint Paul and Minneapolis; The Catholic Community Foundation of Minnesota; Benilde-St. Margaret's School; DeLaSalle High School; Grace High School, doing business as Totino-Grace High School; The Parish Group; The Church of St. Patrick of Edina, Minnesota; The Official Committee of Parish Creditors; St. Dominic Catholic Church; St. Stephen's Catholic Church and School; Church of St. Thomas the Apostle; St. Ambrose of Woodbury; St. Bartholomew Catholic Faith Community; Church of St. Pius X; Christ The King Church; The Church of the Incarnation of Minneapolis; St. Vincent de Paul Catholic Church; The Church of the Epiphany; Immaculate Heart of Mary; St. Michael Catholic Church; Saint Peter Claver Church; The Church of Our Lady of Grace; The Catholic Cemeteries; The Church of St. Charles Borromeo of Minneapolis, MN; Catholic Finance Corporation; The Church of Saint Anne - Saint Joseph Hien; Faithful Shepherd Catholic School; The Guardian Angels Catholic Church of Oakdale, Minnesota; The Church of St. Joseph of Rosemount, Minnesota; The Church of St. Thomas Becket Appellees The Official Committee of Unsecured Creditors Appellant

          Submitted: December 12, 2017

          Appeal from United States District Court for the District of Minnesota - Minneapolis

          Before WOLLMAN, LOKEN, and MELLOY, Circuit Judges.

          MELLOY, Circuit Judge.

         The Official Committee of Unsecured Creditors (the "Committee") appeals the district court's[1] affirmance of the bankruptcy court's[2] decision to deny the Committee's motion for substantive consolidation of the Archdiocese of Saint Paul and Minneapolis (the "Archdiocese" or "Debtor") and over 200 affiliated non-profit non-debtors (collectively, the "Targeted Entities"). In extraordinary circumstances, the broad equitable powers under 11 U.S.C. § 105(a) grant the bankruptcy court the authority to substantively consolidate certain entities. The court's powers under § 105(a), however, are limited by explicit statutory provisions, such as 11 U.S.C. § 303(a). Section 303(a) protects bona fide non-profit organizations from involuntary bankruptcy. The Committee failed to plausibly allege sufficient facts to negate the non-profit non-debtor status of the Targeted Entities. The Targeted Entities, therefore, are entitled to the protections under § 303(a) and cannot be involuntarily substantively consolidated with Debtor. We affirm.

          I. Factual and Procedural History

         The Archdiocese is a geographically defined entity of the Roman Catholic Church (the "Church") covering the Saint Paul and Minneapolis metropolitan area. Originally established in the mid-to-late 1800s, today there are over 180 parishes in the Archdiocese as well as several schools and related organizations. The ecclesiastical and civil leader of the Archdiocese is the Archbishop, appointed by the Pope. Each parish has a pastor, who is appointed and subject to removal by the Archbishop.

         In May 2013, the state of Minnesota enacted the Minnesota Child Victim's Act, allowing certain individuals with previously time-barred claims to bring civil lawsuits for a period of three years. As a result, hundreds of claims of clergy sexual abuse were filed against the Archdiocese.

         In January 2015, the Archdiocese voluntarily filed a petition for Chapter 11 bankruptcy. In May 2016, the Committee, representing more than 400 clergy sexual abuse claimants, filed a motion in bankruptcy court to substantively consolidate Debtor with over 200 affiliated non-profit entities. These Targeted Entities include 187 parish corporations, several primary and secondary schools, the Catholic Community Foundation of Minnesota, the Francophone African and Gichitwaa Kateri Chaplaincies, Segrado Corizon de Jesus, the Newman Center and Chapel, The Catholic Cemeteries, and the Catholic Finance Corporation.

         The bankruptcy court applied Rule 7012 of the Federal Rules of Bankruptcy Procedure to the Committee's motion, converting the motion to an adversary proceeding and allowing the responding parties to utilize Federal Rule of Civil Procedure 12. In response, Debtor and several of the Targeted Entities filed motions to dismiss under Federal Rule of Civil Procedure 12(b)(6) and motions for judgment on the pleadings under Rule 12(c). The bankruptcy court heard arguments on the motion for substantive consolidation as well as the Rule 12 motions.

          The bankruptcy court granted the motions for dismissal and denied the motion for substantive consolidation, and the district court affirmed the bankruptcy court's order. The Committee filed a timely appeal.

         II. The Complaint

         In their motion for substantive consolidation (the "Complaint"), the Committee alleges the majority of the Archdiocese's assets are held by the Targeted Entities.[3]The Complaint argues the Archdiocese has "direct control and supervision in all material aspects" of the Targeted Entities, and, therefore, the assets of the Targeted Entities should be treated as the assets of the Archdiocese. In support of this position, the Complaint cites the role the Archdiocese plays in terms of (1) the incorporation of the Targeted Entities under state law; (2) the oversight of financial and property-related decision-making; (3) the management of priest employment and diocese-wide employment policies; (4) the management of excess parish funds (the Inter-Parish Loan Fund) and parish insurance premiums (the General Insurance Fund); and (5) the operational changes to affiliated non-parish entities.

         Chapter 315 of the Minnesota Statutes, titled "Religious Societies, " governs the operations of religious organizations. See generally Minn. Stat. Ann. §§ 315.01-.51. Chapter 315 addresses the formation and general powers of religious corporations, including parishes and dioceses. The Chapter also addresses tax-exempt property, insurance laws and certain employee benefits, as well as the consolidation, merger, and dissolution of parishes.

         Sections 315.15 and 315.16 govern parish and diocesan corporations. Section 315.15 requires the involvement of the bishop, the vicar general of a diocese, and the priest of the parish when forming a parish corporation. Together, the bishop, vicar general, and parish priest select two laymembers to serve on the parish corporation's board. These five board members form a religious corporation by adopting, signing, and filing articles of incorporation and recording a copy with the county where the parish corporation is located. Laymembers serve on the parish board for two-year terms, at which point the bishop, vicar general, and priest "designate[] and appoint[]" two new laymembers to serve for a subsequent two-year term. Minn. Stat. Ann. § 315.15. According to the Complaint, parish corporations typically adopt and file uniform articles of incorporation and bylaws as provided by the Archdiocese.

         In addition to the corporate formalities established by the state, the Archdiocese follows canon law, which are internal regulations established by Church leadership. The Complaint alleges the Archbishop of the Archdiocese holds "all of the ...

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