Bankruptcy disputes simmer as second mediation stalls

By Elizabeth Hardin-Burrola
Gallup Independent
August 18, 2015

http://gallupindependent.com/

ALBUQUERQUE – Attorneys for the Diocese of Gallup, its insurers and clergy sex abuse claimants met for a second round of court-ordered mediation in Albuquerque Wednesday and Thursday, but once again the mediation talks stalled.

In a hearing before U.S. Bankruptcy Judge David T. Thuma Friday, attorneys praised the efforts of the new mediator, attorney Frank “Dirk” Murchison, but indicated disputes over insurance coverage — and money — were at the heart of the stalemate.

Attorney James Stang, legal counsel for the Official Committee of Unsecured Creditors, which represents the interests of clergy sex abuse claimants, told Thuma “the fact we’re here this morning and that we’re not all smiling” indicated that the mediation was unsuccessful. Several other attorneys, however, expressed the belief that a mediated settlement was still a possibility.

“Nobody walked out and told Mr. Murchison that nobody was going to call him again, and he made it very clear that he remains available to continue to work,” Susan G. Boswell, the diocese’s lead bankruptcy attorney, told the court.

Objections and apology

Friday’s hearing was scheduled as a preliminary hearing on the motions for relief from the automatic stay filed by three clergy sex abuse claimants. An automatic stay is an injunction that halts lawsuits against the debtor once a bankruptcy petition is filed.

Two of the sex abuse claimants had filed lawsuits in Arizona against the Diocese of Gallup prior to the diocese filing its Chapter 11 petition in November 2013. The third claimant recently filed a clergy sex abuse lawsuit in Arizona in spite of the automatic stay. The three claimants, who are represented by Phoenix attorney Robert E. Pastor, are requesting that Thuma lift the stay and allow their clergy sex abuse cases to proceed to trial in an Arizona state court.

The first half of Friday’s hearing was devoted to disagreements about those motions: whether they were filed with the proper legal terminology and procedures, and what court might possibly have jurisdiction over them. Attorneys for the diocese and its insurers all filed objections to the motions.

Diocesan attorneys pointed out that the diocese had removed the first pending lawsuits to the Arizona Bankruptcy Court in February 2014, and subsequently the venue was transferred to the New Mexico Bankruptcy Court, where the cases are pending as adversary proceedings. In bankruptcy court, adversary cases are separate lawsuits filed within a bankruptcy case.

Stang, who submitted a memorandum in support of Pastor’s motions, apologized to the court for forgetting that the cases had been removed. He suggested that Pastor will file new motions to correct the error and cover the proper legal bases.

Diocesan attorneys also argued that the deadline to remand the cases has expired, but if Thuma allows the cases to proceed to trial, they will not go to the Arizona state court but rather they will go to U.S. District Court where they will face a long wait.

A final hearing on the matter is slated to be scheduled in October.

Shifting conflicts

The issue of insurance coverage, or how much money insurance companies should contribute to a settlement, dominated the remainder of the hearing and appears to be the major logjam that is obstructing the settlement talks.

The insurance discussion also revealed the shifting conflicts and allegiances between the Diocese of Gallup and its insurers.

David Spector, an attorney for Catholic Mutual, advised Thuma that his company is planning to file an adversary case against the New Mexico Property and Casualty Insurance Guaranty Association possibly this week, and he said Catholic Mutual would be asking Thuma for an expedited resolution of the dispute.

The guaranty association provides protection to the Diocese of Gallup for the insurance policies the diocese had from 1965 to 1977 with the Home Insurance Company, which is now insolvent.

“It’s a coverage issue that could materially advance the resolution of this case,” Spector said, explaining Catholic Mutual had just recently become aware of the issue. “It involves very considerable amounts of money, and it’s important and it involves positions taken by the New Mexico Guaranty Fund.”

Edward A. Mazel, an attorney for the guarantee association, appeared to be caught off guard by Spector’s announcement. The day before, Mazel had joined both the Diocese of Gallup and Catholic Mutual in their objections to the stay relief motions. In April, the two insurers were allies in their public dispute with the diocese regarding their requests for more information about sex abuse claims.

“It changes the whole dynamic, and I’m not sure that’s the best way to proceed here,” Mazel said of Spector’s plans to file an adversary case. Mazel argued that an attempt to amicably resolve the insurance coverage issues should be made before litigation is pursued.

Boswell urged both insurance providers to work cooperatively to resolve the insurance coverage dispute.

“If I could manufacture money — legally — I’d have this case resolved tomorrow,” Boswell said. “I can’t do that. And the diocese alone does not have the resources in order to get this case resolved without the participation of its insurers.”

Thuma concluded the hearing by reminding the attorneys about their mounting legal fees and expenses.

“Let’s all stay reminded of the fact we’re running this for the creditors and not the professionals,” he said. “And if we end up with no money for the abuse survivors, that’s going to be a failure of the whole process. And I’d consider that I failed, and that you all had too. Let’s avoid that scenario.”