The Bankruptcy Code provides that all pending or potential claims against the debtor are automatically stayed and may not be pursued when the debtor formally files for bankruptcy protection. But the law also provides that cases are not stayed against non-debtors, including the individual officers of a bankrupt organization.
The officers may be sued in their individual capacity except in narrow and unusual circumstances, such as when there is such an identity between the debtor and the third party defendant that the debtor may be said to be the real party defendant and a judgment against the third party defendant will in effect be a judgment against the debtor.
The issue of whether the officeholder of a “corporation sole” could be sued during bankruptcy of the corporation arose in connection with the bankruptcy of the Roman Catholic Church of the Archdiocese of Santa Fe, which was incorporated as a “corporation sole” in 1951. Father Thomas Paickattu, an administrator of one of the 93 parishes within the Archdiocese, filed suit against the Archdiocese in state court in October 2018, claiming he was retaliated against for reporting embezzlement. The Archdiocese filed for bankruptcy shortly thereafter and Fr. Paickattu’s suit was stayed.
Fr. Paickattu filed a separate adversary proceeding in the bankruptcy case but it was dismissed without prejudice as premature. In January 2020, he filed a new suit in state court against the Archbishop personally, based primarily on the same set of facts that he had alleged against the corporation. The corporation moved to impose sanctions on Fr. Paickattu for violating the automatic stay.
A corporation sole, the Bankruptcy Court wrote, “is a product of English common law, adopted by the Crown and certain religious officials to reduce unrest caused by interregna. The corporation sole is a vanishing breed in the Unite States, now used mostly by religious organizations like the Roman Catholic Church. The term ‘corporation’ as used in common parlance today refers to what was historically known as ‘corporation aggregate.’” It said that the division of corporations into sole and aggregate is principally of historic interest, since nearly all corporations in this country are aggregate.
“With a corporation sole,” the Court said, “there is one ‘officeholder,’ who functions like the shareholder, director, and officer of the corporation. When he dies, retires, or otherwise leaves his duty station within the organization, his successor automatically becomes the replacement officeholder. Thus a corporation sole may pass from one person to the next without any interruption in its legal status.”
“Given the unusual nature of the corporation sole and its close identity with the officeholder,” the Court said, whether the automatic stay applies to claims asserted against the officeholder “is not readily apparent.”
Distinguishing further between corporations sole and corporations aggregate, the Court concluded that the automatic stay should apply to the officeholder when the claims relate to his corporate duties. The Court said the stay would not apply to an automobile accident cause by the officeholder’s negligent driving on an unrelated fishing trip, but “when the officeholder takes action qua officeholder, it is difficult to separate him from the corporation.” Because the allegations were essentially the same as those originally brought against the corporation sole, the Court concluded that the state action could be stayed.
After the Court had called the relevant law “murky,” “arcane” and “esoteric,” with legal authority “spotty or nonexistent,” it concluded that Fr. Paickattu and his lawyer should not be sanctioned for violating the automatic stay “if they promptly cease and desist.” (In Re: Roman Catholic Church of the Archdiocese of Santa Fe, Bkrptcy Ct., NM, No. 18-13027, 12/14/20.)
YOU NEED TO KNOW
The corporation sole is rarely used today but is used in some states to accomplish the automatic continuation of a religious corporation when the religious leader ceases to serve. It is particularly useful in transferring title to real estate without having to go through the probate process.
We often recommend a “sole member” nonprofit corporation to protect the interests of the founder of a nonprofit, but that is not the same as a corporation sole. In the historic vernacular cited by the Bankruptcy Court in this case, the sole member we recommend is the sole member of an “aggregate” corporation, a term almost entirely forgotten in modern discussion.