11-22820-rdd

Doc 317

Filed 05/07/12

Entered 05/07/12 16:44:21 Pg 1 of 8

Main Document

HEARING DATE: MAY 8, 2012 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 REPLY TO OFFICIAL COMMITTEE OF UNSECURED CREDITORS OBJECTION TO DEBTORS MOTION FOR AN ORDER AUTHORIZING THE DEBTOR TO USE CERTAIN PROCEEDS FROM THE SALE OF THE DEBTORS REAL ESTATE LOCATED AT 74 WEST 124TH STREET TO PAY ORDINARY COURSE OBLIGATIONS TO: THE HONORABLE ROBERT D. DRAIN UNITED STATES BANKRUPTCY JUDGE The Christian Brothers Institute (CBI or the Debtor), debtor and debtor-inpossession herein, hereby files this reply (the Reply) to the objection (the Objection) (Docket No. 315) of the Official Committee of Unsecured Creditors (the Committee) to the Debtors motion for an order authorizing the Debtor to utilize a portion of the proceeds generated from the sale of the Debtors real estate to pay ordinary course obligations. In support of the Reply, CBI respectfully states as follows: PRELIMINARY STATEMENT 1. The Debtor seeks the unremarkable relief of utilizing its unencumbered cash to

{Client/001718/BANK376/00485136.DOC;1 }

11-22820-rdd

Doc 317

Filed 05/07/12

Entered 05/07/12 16:44:21 Pg 2 of 8

Main Document

meet its ordinary course obligations.1 These obligations include support and basic sustenance of the Brothers, as well as continuation of the Debtors mission. The expenses the Debtor seeks to pay are those which the Debtor has paid in the ordinary course of its business for over 100 years, and includes financial support to St. Josephs Residence (St. Josephs), an assisted living facility where approximately 24 elderly and/or infirm Brothers reside.2 2. As the Court may be aware, CBI is the fee owner of the property located at 30

Montgomery Circle, New Rochelle, New York, where St. Josephs operates. As part of the Debtors operating expenses, the Debtor currently pays approximately $86,000 per month to support St. Josephs facility, which it has done on a monthly basis since 1990. Importantly, this $90,000 monthly payment has been disclosed in every operating report filed in this case. The Debtor questions the Committees timing and motives for objecting to the Debtors financial support of St. Josephs. The Debtor is of the view that the Committee is attempting to create a set of facts which they will claim supports the displacement of these Brothers for the sole purpose of liquidating this real estate asset in order to satisfy unliquidated sexual abuse claims. With that in mind, the Debtor will address the Committees objection. 3. The Committee attempts to justify its opposition on the grounds that CBI has not

demonstrated that its current monthly payment of approximately $86,000, to support St. Josephs satisfies either the horizontal or vertical test often utilized by courts in determining whether a transaction by a debtor-in-possession is in the ordinary course of business. As further detailed below, the use of proceeds from the sale of its fixed assets to meet its ordinary course obligations satisfies both the horizontal and the vertical test. One need only to run a cursory internet search to obtain examples of numerous religious orders or charitable institutions that have sold
1

CBOI sold a residence in Chicago and the sale proceeds were deposited into its operating account and available for ordinary course use, which the Committee has not objected to. 2 St. Josephs has been in continuous operation since 1990.

{Client/001718/BANK376/00485136.DOC;1 }

11-22820-rdd

Doc 317

Filed 05/07/12

Entered 05/07/12 16:44:21 Pg 3 of 8

Main Document

fixed assets such as real estate in order to raise cash to meet its obligations.3 See Exhibit A. With respect to the vertical test, to the extent applicable at all, CBI submits that a hypothetical creditor would certainly expect a religious order short on cash to sell assets to meet its obligations.4 4. The real question here, which the Debtor submits the Court should answer in the

negative, is whether the Committee should be able to prevent a not-for-profit debtor-inpossession from using its own unencumbered cash to pay expenses that it incurs and has incurred in the ordinary course of business for decades on the theory that it may not have sufficient monies to fully pay all of the unliquidated sexual abuse proof of claims that the Committee expects will be filed by the August 1, 2012 bar date.5 Accepting the Committees position turns Chapter 11 practice on its head and amounts to the granting of a pre-judgment attachment which the plaintiffs in the pending sexual abuse litigation cases would certainly not be able to obtain outside of bankruptcy. 5. The Committee also argues that CBIs funding of approximately $86,000 per

month to support the operations of St. Josephs facility is unnecessary because St. Josephs unaudited financial statement, which the Debtor timely provided to the Committee, reflects approximately $300,000 in an investment account.6 Here, again, the Committee misses the mark. Certainly, there is no requirement that a not-for-profit institution utilize its restricted
3

In fact, in the early 1980s, the Debtor sold the real estate where Power Memorial Academy, a famous New York City high school, formerly operated, and portions of the monies were utilized to meet ordinary course obligations. 4 As the Court may be aware, CBI is the fee owner of the property located at 30 Montgomery Circle, New Rochelle, New York, where St. Josephs operates. As stated above, the Debtor questions the Committees motives with respect to its objection as the Debtor believes their ultimate goal is to relocate the Brothers to a different location so that the property can be sold in order to satisfy unliquidated sexual abuse claims. 5 To date, although notices have been sent to at least 150,000 potential claimants, only 18 sexual abuse claims have been filed, of which one-third were based on allegations which occurred in New York State many years ago and are plainly barred by New Yorks three year statute of limitations. 6 The Committee complains that the Debtor has not responded to discovery. This is simply inaccurate. The Committee served discovery demands by email on April 25, 2012, with respect to the Debtors motion. The document requests required that the Debtor provide documents on or before May 4, 2012. The Debtor provided various financial documents related to St. Josephs on May 3, 2012, the day before the due date.

{Client/001718/BANK376/00485136.DOC;1 }

11-22820-rdd

Doc 317

Filed 05/07/12

Entered 05/07/12 16:44:21 Pg 4 of 8

Main Document

endowment funds to meet ordinary course obligations. Additionally, even if St. Josephs was required to utilize these funds to meet its expenses, these funds would only be sufficient to meet expenses for approximately three months. RELEVANT BACKGROUND 6. CBI formerly owned the property located at 74 West 124th Street, New York,

New York, where Rice High School operated for many decades. Shortly after the Filing Date, Rice High School ceased operations and the Debtor, in the exercise of its business judgment, elected to market and sell the property. This Court approved the sale process and in or about early April 2012, the sale closed and the Debtor is holding the sale proceeds as per the sale order. 7. In the sale motion, the Debtor disclosed its intention to utilize the sale proceeds to

fund ordinary course obligations. Rather than litigating over sale proceeds which had not yet been received, the Debtor agreed, in an effort to demonstrate good faith, to a provision in the sale order which provides that the sale proceeds will be segregated and not utilized absent written consent by the Committee or a further order of this Court. The Committee recently consented to releasing approximately $1,000,000 in professional fees from the sale proceeds, including $450,000 to Committee counsel.7 8. The Debtor requested that the Committee consent to the release of a portion of the

funds to enable the Debtor to meet its ordinary course obligations. The Committee requested a budget and the Debtor complied. The Committee raised numerous questions with regard to the budget and the Debtor provided answers. In short, the Debtor seeks to utilize a portion of the sale proceeds in accordance with a budget to meet its necessary and ordinary expenses, which primarily include support of the Brothers and support of various missions undertaken by the religious order. These are expenses which the Debtor has funded in the ordinary course of its
7

There is approximately $6,900,000, remaining from the sale proceeds.

{Client/001718/BANK376/00485136.DOC;1 }

11-22820-rdd

Doc 317

Filed 05/07/12

Entered 05/07/12 16:44:21 Pg 5 of 8

Main Document

operations for nearly a century.

Notwithstanding the Committees allegations, CBI has

undertaken to reduce expenses and generate additional income. See Exhibit B. REPLY A. The Expenses CBI Seeks to Pay are Undoubtedly Ordinary Course Obligations 9. Notwithstanding the Committees conclusory statements and citation to

boilerplate bankruptcy law, the expenses the Debtor seeks to pay from the sale proceeds are undoubtedly ordinary course obligations. As set forth in the budget annexed to the Debtors motion as Exhibit A, these expenses include Brothers support, payroll, insurance, and the like. These expenses are no different than are incurred by any business, whether for profit or not-forprofit. These expenses satisfy both the horizontal and vertical tests which courts have utilized in gauging whether a transaction is ordinary course. The horizontal test evaluates the proposed transaction from an industry-wide perspective. There can be no doubt that religious orders and not-for-profit institutions have sold real estate when cash was short to raise monies to meet its obligations. In fact, in the early 1980s, CBI sold the real estate in Manhattan near Lincoln Center where Power Memorial Academy formerly operated. A portion of those sale proceeds were utilized to meet its ordinary course obligations and to fund sexual abuse settlements, as the Debtor now seeks to use these sale proceeds. With respect to the vertical test which examines a debtors transaction from the vantage point of a hypothetical creditor and inquires whether the transaction subjects a creditor to economic risks of a nature different from those he accepted when he decided to extend credit, the Debtor submits that such test is hardly relevant. All of the creditors here are alleged tort victims. Such creditors did not have any expectations of whether CBI could sell real estate and utilize sale proceeds to continue its operations. In any event, it is not unreasonable for a not-for-profit entity which is facing a cash

{Client/001718/BANK376/00485136.DOC;1 }

11-22820-rdd

Doc 317

Filed 05/07/12

Entered 05/07/12 16:44:21 Pg 6 of 8

Main Document

shortage to sell fixed assets to alleviate its cash flow difficulties. B. CBI has Demonstrated Sound Business Judgment for use of a Portion of the Sale Proceeds 10. The Committee argues that CBI has failed to demonstrate a sound business

judgment for utilizing a portion of the sale proceeds. CBI strongly disagrees. First, CBI is not seeking to utilize all of the sale proceeds, but only as much as is necessary to meet its ordinary and necessary obligations. The Committee argues that the Debtor should reach out to donors or other sources of funds to meet its ordinary obligations. There is no such requirement under the Bankruptcy Code. In fact, the Debtors Chapter 11 case is different than a for profit business Chapter 11 case as Congress has specifically excluded not-for-profit entities from conversion to Chapter 7 absent the Debtors consent. Here, while it may be true that the sale proceeds are not being replaced, this is a Chapter 11 reorganization case and not a liquidation. As this Court is no doubt aware, the goal of the Debtors Chapter 11 case is to resolve in one forum all unliquidated sexual abuse claims and provide for a reasonable treatment of such claims. The Debtor has been in operation in the United States for over 100 years and intends to continue on after resolving the sexual abuse claims and obtaining a discharge. 11. The Debtors Brothers, many of which have been in the order since graduating

high school or college, are elderly. In fact, the average age is approximately 70 years old. These Brothers have dedicated their lives to the religious order and implementing the mission of the order. As a condition of being in the order, the Brothers have taken, among other things, a vow of poverty. The Brothers often taught and performed ministry at schools at extremely modest salaries, well below the typical teacher salary. The quid pro quo is that the Brothers will be supported at a minimal level of sustenance as long as they remain in the religious order. This has been how the Debtor has operated for approximately 100 years, which is similar to other

{Client/001718/BANK376/00485136.DOC;1 }

11-22820-rdd

Doc 317

Filed 05/07/12

Entered 05/07/12 16:44:21 Pg 7 of 8

Main Document

religious orders. Certainly, it is an exercise of sound business judgment for the Debtor to continue to support its approximately 250 Brothers from its unencumbered cash. C. The Committees Suggestion that the Debtor needs to Bolster Donations or Seek out Other Funds to Meet its Ordinary Course Obligations Should be Rejected 12. The undercurrent of the Committees objection is that CBI should not be able to

utilize its unencumbered cash because based upon Committees counsel discussions with plaintiffs lawyers, the Committee expects at least 130 sexual abuse claims will be filed against the Debtor. While this may be true, these claims are all unliquidated personal injury claims. The Committee also seeks to require CBI to fund its operations by obtaining grants and/or donations. First, relying solely upon grants and/or donations is irresponsible, at best, and certainly not a sound business practice. The Committee somehow believes that there is a hidden stash of funds which will be easily made available to CBI if the Court restricts CBIs use of its own funds. This is not the case as there is no requirement for any entity to voluntarily fund CBIs operations. 13. Similarly, the Committee argues that CBI should not be permitted to fund St.

Josephs because its financial statements from June 2011 indicate that it holds approximately $298,000 in investments. These funds were the result of a donation and have been set aside to fund a restricted endowment for St. Josephs. St. Josephs is currently at capacity and due to the average age of the Brothers, contingency plans will need to be implemented to care for the future needs of aging Brothers. In any event, even if St. Josephs were required to use the restricted funds in the endowment for ordinary operations, the amount of funds would only be sufficient to cover St. Josephs operations for approximately three months. CONCLUSION 14. The Committees opposition to the Debtors motion requesting Court permission

{Client/001718/BANK376/00485136.DOC;1 }

11-22820-rdd

Doc 317

Filed 05/07/12

Entered 05/07/12 16:44:21 Pg 8 of 8

Main Document

to utilize its own unencumbered funds to meet its ordinary course obligations lacks merit and is disingenuous. A debtor-in-possession is entitled to continue in the ordinary course of its

business and utilize its unencumbered assets to satisfy its post-petition obligations. Simply because the Committee asserts that a particular expense may not be necessary or could possibly be reduced, does not mean that the Debtor should not have access to unencumbered funds. If the Committee believes the Debtor is spending money frivolously, the Bankruptcy Code contains other provisions to address this perceived problem. However, the Court should not restrict the Debtors use of its own unencumbered cash based upon the Committees flimsy and unsupported accusations. WHEREFORE, CBI respectfully requests that the Court grant the motion and authorize the use of real estate sale proceeds to meet its ordinary course obligations and overrule the Committees objection and grant such other and further relief as is just and appropriate. Dated: New York, New York May 7, 2012 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

{Client/001718/BANK376/00485136.DOC;1 }

11-22820-rdd

Doc 317-1

Filed 05/07/12 Entered 05/07/12 16:44:21 Pg 1 of 5

Exhibit A

11-22820-rdd

Doc 317-1

Filed 05/07/12 Entered 05/07/12 16:44:21 Pg 2 of 5

Exhibit A

11-22820-rdd

Doc 317-1

Filed 05/07/12 Entered 05/07/12 16:44:21 Pg 3 of 5

Exhibit A

11-22820-rdd

Doc 317-1

Filed 05/07/12 Entered 05/07/12 16:44:21 Pg 4 of 5

Exhibit A

11-22820-rdd

Doc 317-1

Filed 05/07/12 Entered 05/07/12 16:44:21 Pg 5 of 5

Exhibit A

11-22820-rdd

Doc 317-2

Filed 05/07/12 Entered 05/07/12 16:44:21 Pg 1 of 4

Exhibit B

11-22820-rdd

Doc 317-2

Filed 05/07/12 Entered 05/07/12 16:44:21 Pg 2 of 4

Exhibit B

11-22820-rdd

Doc 317-2

Filed 05/07/12 Entered 05/07/12 16:44:21 Pg 3 of 4

Exhibit B

11-22820-rdd

Doc 317-2

Filed 05/07/12 Entered 05/07/12 16:44:21 Pg 4 of 4

Exhibit B