The Increasing Acceptance of Derivative Standing

By: Jordan Milite

St. John’s School of Law

American Bankruptcy Institute Law Review Staff

In In re Roman Catholic Church of Archdiocese of Santa Fe, the United States Bankruptcy Court for the District of New Mexico, held, in a matter of first impression, that bankruptcy courts have authority to confer derivative standing on creditors or committees to assert claims.[1] In 2012, the Archdiocese of Santa Fe (“Debtor”) along with its 90 parishes began restructuring its assets after creating the Archdiocese of Santa Fe Real Estate Corporation (“RE Corp.”).[2] Debtor then created a real estate trust and a financial assets trust, both effective January 1, 2013, and made RE Corp. the only trustee.[3] The archbishop was the sole member of RE Corp. and had control over the purchases, sales, leases, and improvements of any real estate held by the trust.[4] Debtor claimed that the trusts were made to support the religious, charitable, and educational purposes of the parishes.[5] Just over two years before its petition, Debtor transferred parcels of real estate to the real estate trust valued at more than $34.2 million.[6] Debtor similarly transferred financial assets worth roughly $25.5 million to its financial assets trust.[7] On December 3, 2018, Debtor filed a voluntary petition for relief under Chapter 11 of the United States Code (the “Bankruptcy Code”).[8] Thereafter, the US Trustee appointed an official committee of unsecured creditors (the “UCC”).[9] Subsequently, the UCC filed three complaints against Debtor challenging its transfers to the real estate trust, and the financial assets trust, and the parishes’ claimed interest in property titled in Debtor’s name.[10]

The New Mexico bankruptcy court concluded, consistent with decisions from other courts, that a committee can be granted derivative standing upon a showing that it (1) made a demand on the debtor to bring a claim, (2) the demand was unjustifiably refused, (3) the claim is colorable, and (4) the committee seeks court permission to bring the claim.[11] The Court highlighted that every court dealt with the question of derivative standing following the 2000 decision by Justice Scalia in Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A. has allowed it.[12] Here, the Debtor argued there was no colorable claim, which the court noted is “[a] claim that is legitimate and that may reasonably be asserted, given the facts presented and the current law …”[13] According to the Debtor, the claims against it were not colorable under The First Amendment, The Religious Freedom Restoration Act, and The Religious Autonomy Doctrine.[14] Despite the Debtor’s defenses, the court found that the UCC’s claims were colorable.[15] Considering the First Amendment defense, the court found there was no finding that the government barred religious activity.[16] The Religious Freedom Restoration Act was not applicable as the government was not a party.[17] And last, the court explained, “[a] claim to recover an alleged fraudulent transfer does not appear to be the kind of intrachurch dispute that the religious autonomy doctrine typically protects from court interference.”[18] The court found that the UCC therefore should be granted derivative standing to bring claims on behalf of the estate. [19]

The New Mexico bankruptcy court concluded that the UCC, and similarly situated committees, should be permitted to bring proposed claims by way of derivative standing.[20] The court relied on the public policy benefits of derivative standing and highlighted the implications of its holdings. Allowing derivative standing will prevent the costly and time-consuming “years of motion practice, discovery, discovery disputes, trials, appeal, remands, and retrials.”[21] Additionally, the court explained that the millions spent on attorney fees could instead be paid to valid abuse claims.[22]