Court: Milwaukee archdiocese can't use First Amendment to protect against claims in bankruptcy

Milwaukee — In a decision that could have far-reaching implications, the 7th Circuit Court of Appeals ruled that the Milwaukee archdiocese can't rely on the free exercise of religion clause in the First Amendment or the Religious Freedom Restoration Act as protections against claims in its bankruptcy case.

The key question in the Milwaukee case of whether approximately $55 million placed in a trust for the care of cemeteries can be used to pay off the archdiocese's debts in bankruptcy was not answered in the decision. Mounting legal fees -- now at least $16 million but possibly as high as $20 million -- raise the question of whether much will be available to pay debts and compensate those who claim to have been sexually abused.

The appellate court decision issued late Monday is not a final decision. The court also found that U.S. District Judge Rudolph Randa, who ruled in the archdiocese's favor, should have stepped aside because of a conflict of interest. A new judge will have to be appointed to decide the issue of the trust fund based on the appellate findings that the First Amendment and Religious Freedom Restoration Act do not apply.

James Stang, a lawyer representing the claimants in the Milwaukee case, said a number of states have local laws similar to the federal Religious Freedom Restoration Act that allow some cases to be handled at the state level.

"In states that do not have these laws, bankruptcy is seen as a way of shielding assets from creditors," he said. "This decision means they can't hide under RFRA anymore."

Stang, who represents many claimants in bankruptcies involving dioceses or religious orders, said he will be in New York this week on a case involving the Christian Brothers who transferred a school in an attempt to minimize its assets.

"Does it happen often?" he asked. "Yeah, it does."     

The Milwaukee archdiocese filed for bankruptcy in January 2011, just before lawsuits involving 17 survivors of sexual abuse were about to go to trial in state court. The Wisconsin Supreme Court had ruled that archdiocesan officials could be sued for fraud if they knowingly allowed abusers to continue in their ministries despite credible allegations having been made to the archdiocese. The state's high court had also ruled that insurance coverage did not have to pay if the archdiocese committed fraud.

When Milwaukee Archbishop Jerome Listecki authorized the Chapter 11 bankruptcy filing, he said the pending lawsuits forced the action. The backdrop for the case was a 2006 agreement by the archdiocese to pay $17 million -- about half from insurance coverage -- to 10 California victims of sexual abuse by priests who had been transferred there after abusing victims in Wisconsin.

In 2007, the archdiocese created a trust fund for the maintenance of eight cemeteries and seven mausoleums it has operated in the Milwaukee area since 1857, transferring some $55 million out of its general fund into the trust. The archdiocese said the money for the cemetery fund had always been kept in a separate account within the general fund, which the appellate court said it accepted as true.

The appellate decision, written by Judge Ann Claire Williams, noted that the then-archbishop, now New York Cardinal Timothy Dolan sent a letter to the Vatican asking for approval of the move, saying: "By transferring these assets to the Trust, I foresee an improved protection of these funds from any legal claim and liability." The Vatican approved the transfer in 2008.

But earlier in the decision, Williams wrote this: "We begin by noting that the issue of whether the archdiocese actually made a fraudulent, preferential or avoidable transfer is not before us."

Claimants in the bankruptcy, including some 570 who say they were sexually abused, argued that moving the money from the archdiocese's general fund into the trust was an illicit attempt to protect the money. Bankruptcy Judge Susan V. Kelley ruled in their favor.

Lawyers for the archdiocese appealed her decision to Randa, claiming protection under the First Amendment and the Religious Freedom Restoration Act, a 1993 federal law aimed at preventing laws that substantially burden a person's free exercise of religion.

The appellate decision found that the Religious Freedoms Restoration Act only applied to government actions, rejecting the archdiocese's argument that the committee representing those who filed claims was acting under the "color of the law" and, therefore, an extension of the government.

While the First Amendment bars laws that prohibit the free exercise of religion, "not all rights require the government be a party in the case," Williams wrote in the decision.

She continued: "Here, we have what was alleged to be a fraudulent or otherwise avoidable transfer, and the court need not interpret any religious law or principles to make that determination, nor must it examine a decision of a religious organization or 'tribunal' on whether or not the transfer was fraudulent."

The committee representing the claimants argued that there is a compelling governmental interest in protecting creditors, and the appellate court agreed, saying this interest "can overcome a burden of the free exercise of religion" and that in this case, the importance of protecting those with claims is "readily apparent."

Key to the bankruptcy law, Williams noted, is to provide protection for the creditors while allowing the debtor -- in this case, the archdiocese -- to continue its work and rebuild after settling claims.

But the decision noted that another federal appellate court had made a different decision: A tithing contribution to a church made by a man who then filed for bankruptcy was found to be protected by the 8th Circuit Court of Appeals.

When two branches of the appellate court disagree on an issue, it can lead to an appeal to the U.S. Supreme Court as a means to resolve the differing opinions. The Chicago court, apparently aware of the rift, discussed conducting a new hearing on the Milwaukee case that would include all 14 of the judges there, not just the three who heard the case. None favored a rehearing.

Stang said because the decision in the Milwaukee case is not a final determination of what will happen to the $55 million cemetery trust, it may not yet be ripe for an appeal to the Supreme Court.

Stang and others representing claimants argued that Randa had an ethical conflict of interest: Nine close relatives were buried in cemeteries affected by his decision. The appellate court agreed that Randa should have stepped aside.

"Here, these were not distant relatives of the judge's -- they were his parents (whose plots he personally bought), two sisters, an uncle, an aunt, his mother- and father-in-law, and his brother-in-law so nine relatives within the third degree," wrote Williams, one of three judges who heard the appeal. "This was problematic."

The rehearing of the issue has not been assigned to a new judge yet but could be assigned to U.S. District Judge Lynn Adelman. The archdiocese appealed another decision made by Kelley in the bankruptcy court -- her ruling that approval of the archdiocese's reorganization plan should wait until after the 7th Circuit ruled -- that is now in Adelman's court.

Jerry Topczewski, a spokesman for the Milwaukee archdiocese, said Kelley "can now move forward with confirming the archdiocese's Plan of Reorganization to emerge from Chapter 11. The Plan resolves the litigation over the Cemetery Trust to the benefit of abuse survivors and also maintains the sacred commitment to provide perpetual care for those buried in Catholic Cemeteries."

The reorganization plan calls for $6 million to be given to abuse survivors but eliminates all but about 135 of the 570 who filed claims. Of that amount, $2 million would be borrowed by the archdiocese from the cemetery trust and $4 million would come from an insurance settlement. Another $4 million from insurance would go toward legal fees.

[Marie Rohde is a freelance writer based in Milwaukee.]