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HEARING DATE: OCTOBER 25, 2011 HEARING TIME: 10:00 A.M. TARTER KRINSKY & DROGIN LLP Attorneys for The Christian Brothers Institute, et al. Debtors and Debtors-in-Possession 1350 Broadway, 11th Floor New York, New York 10018 (212) 216-8000 Scott S. Markowitz, Esq. Eric H. Horn, Esq. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ------------------------------------------------------------------- x In re: : : THE CHRISTIAN BROTHERS INSTITUTE, et al. : : Debtors. : ------------------------------------------------------------------- x

Chapter 11 Case No.: 11-22820 (RDD) (Jointly Administered)

DEBTORS OBJECTION TO MOTIONS FOR APPROVAL AND ENFORCEMENT OF SETTLEMENT AGREEMENTS BETWEEN PLAINTIFFS AND THE ARCHDIOCESE AND DISMISSAL AS TO THE ARCHDIOCESE ONLY TO: THE HONORABLE ROBERT D. DRAIN UNITED STATES BANKRUPTCY JUDGE The Christian Brothers Institute (CBI)1 and The Christian Brothers of Ireland, Inc. (CBOI),2 the above-captioned debtors and debtors-in-possession (individually a Debtor and collectively, the Debtors) hereby file this objection (the Objection) to the Corporation of the Catholic Archbishop of Seattles (the Archdiocese) motions for approval and enforcement of settlement agreements between Plaintiffs and the Archdiocese and dismissal as to the Archdiocese only (the Motions). represent as follows:
1

In support of the Objection, the Debtors respectfully

The last four digits of CBIs employer identification number are 0153 and its mailing address is 21 Pryer Terrace, New Rochelle, New York 10804. 2 The last four digits of CBOIs employer identification number are 0603 and its mailing address is10001 S. Pulaski, Room 106, Chicago, IL 60655-3356.

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PRELIMINARY STATEMENT 1. While the Debtors generally support the Archdioceses settlement of the

Adversaries (as defined below), the Debtors submit that funding such Settlements (as defined below) with insurance proceeds as contemplated in the Motions is simply premature. As set forth below, the Debtors believe that they may have an interest in the insurance policies that the Archdiocese is proposing to use to fund the Settlements. 2. In August of this year, the Archdiocese commenced an adversary proceeding to

determine the Debtors rights vis--vis those policies. Until a determination is made by this Court as to the Debtors interest in those insurance policies, the Debtors submit that the Archdiocese should not be permitted to fund the proposed Settlements with the contemplated insurance proceeds. 3. To the extent that those proceeds have already been distributed to the plaintiffs,

the Debtors submit that they should not be prejudiced from receiving the full benefit of such policies to the extent that it is ultimately determined that such policies constitute property of the Debtors estates. 4. Additionally, the Debtors question whether the Archdiocese has the requisite

standing to bring the Motions and note that the Motions are procedurally defective. 5. Accordingly, putting aside the standing and procedural defects, the Debtors

submit that to the extent that insurance proceeds are being used to fund the Settlements, such relief should be denied. GENERAL BACKGROUND 6. On April 28, 2011 (the Petition Date), the Debtors each commenced their

respective Chapter 11 case by filing a voluntary petition for relief under Chapter 11 of Title 11 of

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the United States Code (the Bankruptcy Code). Pursuant to 1107(a) and 1108 of the Bankruptcy Code, the Debtors continue to operate as debtors-in-possession. No trustee has been appointed. 7. The Debtors cases were consolidated for administrative purposes only, by order

dated May 2, 2011. Thereafter, by order dated May 18, 2011, the Debtors were authorized to retain TKD as bankruptcy counsel. 8. On May 11, 2011, the United States Trustee appointed an Official Committee of

Unsecured Creditors (the Committee). The Committee retained Pachulski Stang Ziehl & Jones LLP as its counsel, which was approved by an order of this Court dated July 14, 2011. 9. CBI is a domestic not-for-profit 501(c)(3) corporation organized under

102(a)(5) of the New York Not-for-Profit Corporation Law. CBI was formed in 1906 pursuant to Section 57 of the then existing New York Membership Law. The Not-for-Profit Corporation Law replaced the Membership Law effective September 1, 1970. The purpose for which CBI was, and continues to be, formed was to establish, conduct and support Catholic elementary and secondary schools principally throughout New York State. As a not-for-profit corporation, its assets, and/or income are not distributable to, and do not inure to, the benefit of its directors or officers. CBI depends upon grants and donations to fund a portion of its operating expenses. 10. CBOI is a domestic not-for-profit 501(c)(3) corporation organized under the Not-

for-Profit Corporation Law of the State of Illinois. The purpose for which CBOI was, and continues to be, formed was to establish, conduct and support Catholic elementary and secondary schools principally throughout the State of Illinois, as well as other spiritual and temporal affairs of the former Brother Rice Province of the Congregation of Christian Brothers. As a not-forprofit corporation, its assets, and/or income are not distributable to, and do not inure to the

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benefit of its members, or officers. CBOI depends upon grants and donations to fund a portion of its operating expenses. 11. The cause for the filing of these cases has been extensively detailed in the affidavit

pursuant to Local Bankruptcy Rule 1007-2 filed with the original petitions, and is referred to as if fully set forth herein. In short, the Debtors Chapter 11 cases were filed in an effort to resolve in one forum, the onslaught of litigation and claims asserted by alleged sexual abuse plaintiffs against the Debtors. RELEVANT BACKGROUND A. Congregation of Christian Brothers North American Province 12. The Congregation of Christian Brothers (the Congregation) is a Catholic Members of the Congregation are known as

religious order founded in the early 1800s.

Brothers. The Congregation has had a presence in the United States since the early 1900s, and a presence in Canada since the mid 1800s. Prior to the mid-1960s the Congregation had one province operating in North America. In the mid-1960s, the Congregation divided that province into three distinct provinces: (i) the Western American Province; (ii) the Eastern American Province; and (iii) the Canadian Province. 13. In 2005, those provinces were consolidated by merger and the Congregation of

Christian Brothers North American Province was created (the NAP). B. ODea High School 14. In 1923, the Archdiocese opened ODea High School (OHS) an all-boys

Catholic school. About that time, upon information and belief, the Archdiocese entered into an agreement with the then existing Christian Brothers province to administer OHS for the benefit of the Archdiocese. The NAP currently administers OHS.

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15.

In connection with the Archdioceses ownership of OHS, certain liability

insurance policies were taken out by the Archdiocese. One such policy was issued by the Maryland Casualty Company (currently a member of the Zurich Insurance Group) (Zurich), bearing policy number CB28110713 (the Maryland Policy). The Maryland Policy provided comprehensive general liability coverage in the amount of $300,000 per occurrence for the period of April 1, 1973 through April 1, 1976. Endorsement 1 of the policy provides that the named insured under all parts of the policy shall read as follows: 1. Corporation of the Catholic Archbishop of Seattle; 5. Congregation of Christian Brothers, but only with respect to the Operation of ODea High School. See Endorsement 1 attached hereto as Exhibit A. 16. Prior to the Petition Date, the Debtors, NAP and the Archdiocese were named as

defendants in certain actions commenced in the Superior Court for the State of Washington arising out of allegations of sexual abuse. Many of the allegations stem from abuse which occurred at OHS by Edward Courtney a former Brother. Edward Courtney taught at OHS from 1974 until his removal in 1978. One such action was the matter titled K.A., et al. v. Corporation of the Catholic Archbishop of Seattle, et al., Case No. 09-2-39247-1. That case was removed to this Court and now bears Adversary Case No. 11-08321 (RDD) (the OHS Adversary). C. Briscoe Memorial High School 17. The Briscoe Memorial School (Briscoe) opened in or around 1909 and was Briscoe was administered by Brothers for the benefit of the

owned by the Archdiocese.

Archdiocese. Briscoe was closed in 1970. 18. In connection with the Archdioceses ownership of Briscoe, certain liability

insurance policies were taken out by the Archdiocese. One such policy was issued by the Pacific

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Indemnity Company (currently a member of the Chubb Group of Insurance Companies) (Pacific Indemnity), bearing policy number LAC73510 (the Pacific Indemnity Policy). The Pacific Indemnity Policy provided comprehensive liability coverage in the amount of $500,000 per occurrence for the period of October 11, 1966 through October 11, 1969. A certificate of insurance from Pacific Indemnity states that Name of Insured is Corporation of the Catholic Archbishop of Seattle, Briscoe Memorial School and Congregation of Christian Brothers. See Certificate of Insurance attached hereto as Exhibit B. 19. Prior to the Petition Date, CBI, CBOI, NAP and the Archdiocese were named as

defendants in certain actions commenced in the Superior Court for the State of Washington arising out of allegations of sexual abuse. Many of the allegations stem from abuse which occurred at Briscoe. One such action was the matter titled L.W., et al. v. Corporation of the Catholic Archbishop of Seattle, et al., Case No. 09-2-23995-9. That case was removed to this Court and now bears Adversary Case No. 11-08317 (the Briscoe Adversary and together with the OHS Adversary, the Adversaries). D. The Debtors Schedules of Assets and Liabilities 20. As required, early on in these cases, the Debtors filed their Schedules of Assets

and Liabilities (the Schedules). Listed on Schedule B, are the Maryland Policy and the Pacific Indemnity Policy. The Debtors listed these policies in order to flag for the Court and parties in interest, that the Debtors may have an interest in such policies. This is obviously a critical component to the potential funding of an exit strategy in these cases. As such, the Debtors are working diligently to get a handle on the scope of potential insurance coverage that the Debtors may have an interest in.

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E.

The Declaratory Action 21. On August 16, 2011, the Archdiocese commenced an adversary proceeding (the

Declaratory Action) by filing a complaint in this Court (Adv. Pro. No. 11-8332) against the Debtors and certain insurance companies seeking a declaratory judgment identifying the parties specific interests in the Maryland Policy and the Pacific Indemnity Policy. On August 18, 2011, the Archdiocese filed a corrected complaint in the Declaratory Action. 22. On October 14, 2011, the Debtors filed an Answer and Cross-Claim in the

Declaratory Action. The Debtors filed their Cross Claim against Zurich and Pacific Indemnity seeking a declaration as to their and the Archdioceses specific interest in the Maryland Policy and the Pacific Indemnity Policy. F. Sharing of Insurance Proceeds 23. Prior to the filing of these Chapter 11 cases, CBI and the NAP engaged in

extensive efforts to settle litigation to which they and the Archdiocese were co-defendants. As part of the settlement processes, the NAP and the Debtors participated in various forms of mediation.3 24. During the course of the past ten years, the Archdiocese and the NAP have

entered into certain agreements under which they would split the proceeds of insurance coverage in order to foster and fund settlement of outstanding litigation. In fact, shortly before the Petition Date, during the course of a settlement process with respect to certain litigation, the Archdiocese entered into such an agreement. Such agreement was memorialized in that certain Agreement & Release Regarding Payment of Insurance Proceeds dated as of April 28, 2011 (the Insurance Sharing Agreement).
3

CBI has taken the position that it never operated at OHS and Briscoe. Indeed, CBI is a religious not-for-profit that was formed for the purpose of establishing, conducting and supporting Catholic elementary and secondary schools, principally throughout New York State.

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25.

The document was signed by Brother Kevin Griffith shortly prior to the Debtors

filing of their respective bankruptcy petitions. Brother Griffith is a member of the Provincial Leadership Team of the NAP and is also a vice-president of the Debtors. It is important to note that it is not at all uncommon for individuals serving in religious orders to serve in multiple capacities. The Debtors cases are very different from commercial cases in that regard. G. The Motions 26. On October 11, 2011, the Archdiocese filed the Motions (Docket Nos. 105 and

107). Pursuant to the Motions, the Archdiocese is requesting that this Court approve a settlement relative to the Adversaries as they pertain to the Archdiocese only (collectively, the Settlements). As part of the Settlements, the Archdiocese is requesting a release from any and all liabilities arising out of or related to the Adversaries. 27. The Archdiocese is seeking to use funds from the Maryland Policy, and possibly

the Pacific Indemnity Policy, pursuant to the Insurance Sharing Agreement to fund the Settlements. With respect to the Archdioceses proposed settlement of the OHS Adversary, it is the Debtors understanding that checks were already issued to plaintiffs counsel by both the Archdiocese and Zurich and that the funds have been distributed. OBJECTION A. Payment of Settlements with Insurance Proceeds is Premature 28. While the Debtors generally support the Archdioceses settlement of the

Adversaries, the Debtors submit that funding such settlements with insurance proceeds as contemplated in the Motions is premature. As noted above, in August of this year, the

Archdiocese commenced the Declaratory Action to determine, among other things, the nature and extent of the Debtors interest in the Maryland Policy and the Pacific Indemnity Policy. The

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Debtors filed an Answer and Cross-Claim in the Declaratory Action seeking similar relief. The Debtors believe that they may have an interest in the Maryland Policy and Pacific Indemnity Policy and that interest constitutes property of their respective bankruptcy estates. See In the Matter of Vitek, Inc., 51 F.3d 530, 535 (5th Cir. 1995) (noting that when a debtor corporation owns an insurance policy that covers its own liability vis-a-vis third parties, we like almost all other courts that have considered the issue declare or at least imply that both the policy and the proceeds of that policy are property of the debtors bankruptcy estate) (internal citations omitted). 29. Until the parties are able to fully adjudicate the Declaratory Action, with the

benefit of discovery, if necessary, the Archdiocese should not be permitted to fund the Settlements with any proceeds from the Maryland Policy and/or Pacific Indemnity Policy. Accordingly, the Debtors object to the entry of the Settlements at this juncture to the extent that insurance proceeds are used to fund same. To the extent that the insurance proceeds were already distributed, the Debtors submit that they should not be prejudiced from receiving the full benefit of such policies to the extent that it is ultimately determined that such policies constitute property of the Debtors estates.4 B. The Archdiocese Lacks Standing 30. By the Motions, the Archdiocese is requesting that this Court approve the

Settlements pursuant to Bankruptcy Rule 9019. The Debtors submit that the Archdiocese lacks the requisite standing to bring such a motion, and, as such, the relief requested is inappropriate. 31. Bankruptcy Rule 9019(a) provides as follows: Compromise. On motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement.
4

As noted above, the Debtors believe the insurance proceeds relative to the OHS Adversary were already distributed to plaintiffs counsel who forwarded same to plaintiffs.

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Notice shall be given to creditors, the United States trustee, the debtor, and indenture trustees as provided in Rule 2002 and to any other entity as the court may direct. Fed. R. Bankr. Pro. 9019(a) (emphasis added). Pursuant to the statutory language, only the trustee (or debtor) has the authority to bring such a motion. Indeed, this was recognized by the Second Circuit the controlling authority here in the Smart World case. See In re Smart World Techs., LLC, 423 F.3d 166 (2d Cir. 2005). In that case, the Second Circuit overruled the lower courts decisions permitting a creditor to pursue a settlement pursuant to Bankruptcy Rule 9019. The Second Circuit concluded that Rule 9019, which by its terms permits only the debtor-in-possession to move for settlement, is in complete harmony with the provisions of the Bankruptcy Code delineating the chapter 11 debtors role. Id. at 175. 32. In light of the statutory language and controlling precedent here, the Debtors

submit that the relief requested in the Motions is wholly inappropriate and should not be approved. C. The Motions are Procedurally Improper 33. In addition to the Archdioceses lack of standing to bring a Bankruptcy 9019

motion, the Motions are procedurally improper. As this Court is aware, the Archdiocese filed the Motions on October 11, 2011 and requested a hearing date of October 25, 2011. As required by applicable Bankruptcy Rules, absent a request for a hearing on shortened notice (which was not done here), motions for this type of relief are required to be filed on 21 days notice to all creditors and parties in interest. See Fed. R. Bankr. Pro. 2002(a)(3). That was not done here. As

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such, at a minimum, this Court should adjourn the hearing on the Motions to December 6, 2011 the next scheduled hearing date.5 WHEREFORE, the Debtors respectfully request that the Court deny the Motions and grant such other and further relief as is just and proper. Dated: New York, New York October 20, 2011 TARTER KRINSKY & DROGIN LLP Attorneys for The Christian Brothers Institute, et al. Debtors and Debtors-in-Possession By: /s/ Scott S. Markowitz Scott S. Markowitz Eric H. Horn 1350 Broadway, 11th Floor New York, New York 10018 (212) 216-8000

The Debtors believe it would be beneficial to work with the plaintiffs in the Adversaries to attempt to reach a settlement, which could be funded with insurance proceeds from the Maryland Policy and/or the Pacific Indemnity Policy to the extent that it is determined that the Debtors have a property interest in same. Since the Motion was filed on shortened notice, the Debtors have not had sufficient time to re-commence settlement negotiations. It is noteworthy that three of the plaintiffs receiving monies in the settlements of the Adversaries, only with the Archdiocese, are members of the Creditors Committee.

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