Diocese of Burlington Bankruptcy Case

What’s Happening in the Diocese of Burlington Vermont Case?

The Committee representing child sexual abuse creditors in the Diocese of Burlington Vermont bankruptcy case recently brought to a boil a dispute that has been simmering since the case started two years ago. The dispute is about who owns “parish” property that creditors estimate to be worth $500 million. The Committee says the diocese owns this property even though it is held in charitable trusts for the benefit of parishes and two high schools that the diocese set up in 2006. In July 2026, the Committee asked the bankruptcy court for permission to litigate the validity of these trusts with the goal of capturing the property as a source of payment of their claims against the diocese. 

In support of its motion, the Committee alleged that the parishes within the diocese are merely “operating divisions” of the diocese, entirely subject to the diocese’s control, and with no legal existence separate from the diocese. The charitable trusts set up in 2006 are similarly invalid shams set up to look like separate entities (“self-settled” trusts). The 2006 transfers to these sham entities clearly reduced the pool of assets titled in the diocese’s name for no value in return to the diocese in fraud of creditors. The 2006 transfers were part of scheme by the bishop at that time to hide diocesan wealth from sex abuse creditors. 

The Committee’s motion for permission to challenge the 2006 transfers packs a punch because underhanded scheming to hide wealth from creditors is an obvious form of fraud. A debtor who knows his creditors are about to seize his property to satisfy their claims has a powerful incentive to hide that property so they cannot reach it. A debtor might give in to the urge to bury his valuables under the floorboards. If the debtor has property too big to bury, however, he may decide to arrange a “transfer” of his wealth to a friend with whom he is in cahoots. The fraudulent plan is to transfer property in form to a party that is ostensibly legally distinct, but who in substance the debtor controls. If the plan works, the debtor can protect the property from his creditors (“not my property in form”) and by colluding with the transferee retain all the benefits of ownership of the property (“my property in substance”). The law that protects creditors by invalidating fraudulent property transfers has been around for centuries. It generally respects “bona fide” property transfers by protecting the transferred property from claims by the debtor/transferor’s creditors except when the transfer is a sham arranged with a colluder to unfairly deprive creditors of recourse to the property.

The diocese argued that the court should not grant the Committee permission to challenge the 2006 transfers and that its refusal to sue to recover the property transferred in 2006 was a reasonable exercise of its discretion. It asserted that the charitable trusts it created for the benefit of parishes in 2006 are valid and legally distinct from the diocese, and that the transfers to the trusts was part of a publicized program to align formal title to property under Vermont law with the parishes’ and schools’ canonical interests in the property. The diocese further asserted that any possible challenge to the validity of the transfers is barred under the Vermont statute of limitations. 

Last Friday (July 28, 2026), the bankruptcy court granted the Committee’s motion for leave to bring an adversary action to challenge the debtor’s position that property held in charitable trusts for the benefit of parishes is not available to satisfy the claims of sexual abuse creditors. Normally, in bankruptcy reorganization case, the debtor has the power to sue non-debtor third parties to recover property that should be treated as the debtors. Bankruptcy courts have recognized that in certain circumstances where the debtor refuses to bring these suits, the Committee is entitled to “derivative standing” to do so. The Committee had to show that it demanded that the debtor act to recover the property from the parishes; that the suit to recover the property is “colorable”- meaning that it has a reasonable chance of achieving a recovery greater than the cost of litigation; and the debtor unjustifiably refused to bring the suit or abused its discretion. The standard requires that the bankruptcy court do a preliminary cost/benefit analysis to determine whether conferring standing on the Committee is “sufficiently likely” to be successful to justify the expected time and expense that the litigation will likely produce. The bankruptcy court held that the Committee had established the requisite circumstances for standing to sue.

It is important to note that the court did not decide whether the 2006 charitable trust transfers are valid or whether the property held by the charitable trusts is the debtor’s property. It only held that the Committee had alleged facts that met the requirements for derivative standing to challenge the 2006 transactions. The bankruptcy court noted in its order that the Parishes have retained counsel to represent them and have already briefed many of the issues. As the court noted in its order, the result is not an unqualified victory for sexual abuse creditors. The court noted, “Regardless of its outcome, the proposed litigation will be expensive and time consuming.” If the parties cannot settle quickly, the diocese, the parishes, and sexual abuse creditors will suffer. 

Turning to the merits of the dispute, the Committee’s challenge to the 2006 transfers is by no means a sure thing. Not every wealth-depleting transfer to an affiliated transferee is fraudulent. A transfer that is bona fide at the time it is made does not become invalid even though in retrospect creditors are worse off because of it. A debtor with enough assets to pay his creditors on the day he transfers property can do so validly, even if later his fortunes reverse and he becomes unable to pay his creditors. The Committee’s challenge depends among other things on whether the diocese was solvent in 2006. That will depend on whether, at that time, the diocese was liable to sexual abuse creditors beyond its ability to pay. The diocese was no doubt aware of the possibility of liability to sexual abuse creditors in 2006. It is not clear, however, that the specter of possible liability counts, for this purpose, as liability at the time of the transfer. Accounting principles permit and require booking “contingent” liability only when it is “probable” (not merely a possibility) and can be “reasonably estimated.” (FASB ASC 450). Legislation that retroactively eliminated Vermont’s six-year statute of limitations for child sexual abuse claims did not appear until 2019. The upshot is that the diocese has an argument that the 2006 transfers were not fraudulent, but rather prudent management of the risk of possible future liability. Even assuming the 2006 transfers were fraudulent, the diocese contends that it has a complete defense under the Vermont statute of limitations law that applies to fraudulent transfer claims. 

One thing is clear. Resolving this dispute about who “owns” the property held in charitable trusts since 2006 is critical for the diocese’s chances of a successful reorganization in chapter 11. In any bankruptcy case where the debtor wants to “reorganize” (keep its property and continue in operation rather than “liquidate” by quitting operations and turning over its property to creditors), the debtor must persuade creditors that they will do as well or better by taking the bankruptcy payout as they would outside of bankruptcy.  Whether a proposed settlement amount is big enough to persuade creditors to accept it depends on how it compares to creditors’ estimate of the liquidation value under state foreclosure law of their debtor’s property.  The larger the liquidation value of the diocese’s property, the larger the settlement creditors reasonably expect in exchange for their support for a plan of reorganization that releases the diocese and its affiliates from liability.   

Marie T. Reilly
Professor of Law Emerita
Penn State Dickinson Law
University Park, PA