Milwaukee archdiocese loses interference argument

By Matt Miller
Deal Pipeline
January 25, 2013

A Wisconsin judge has shot down the Archdiocese of Milwaukee's attempt to shield assets of a related trust through invocation of the Religious Freedom Restoration Act of 1993, ruling that in a Chapter 11 bankruptcy, there are limits to what constitutes government interference in religious expression.

With the Jan. 17 ruling, Judge Susan Kelley of the U.S. Bankruptcy Court for the Eastern District of Wisconsin in Milwaukee issued a partial summary judgment against Archbishop Jerome Listecki in his role as trustee of the Milwaukee Catholic Cemetery Perpetual Care Trust. The archdiocese created the trust in 2007, with $55 million in funding in 2008 to insure cemetery upkeep. The archdiocese asserts the trust is a "separate and distinct legal entity" and completely independent of the archdiocese.

The archdiocese has been in bankruptcy since Jan. 4, 2011, and creditors want to include that money in the debtor's estate, asserting that the transfer represented a fraudulent conveyance to avoid first lawsuits related to sex abuse and then the bankruptcy itself. Kelley's decision isn't the final word. "We do plan to take it to the district court," said Timothy Nixon, a partner with Godfrey & Kahn SC who represents the cemetery trust.

The trust has 14 days from the decision to file its argument with the U.S. District Court for the Eastern District of Wisconsin and Judge Rudolph Randa. Listecki sued the archdiocese's unsecured creditors' committee in January 2012. The archbishop asserted that inclusion of the cemetery trust violates the 1993 religious freedom act and the First Amendment. The creditors countersued.

The archdiocese has few other noninsurance assets, according to James Stang, who represents the abuse victims through the unsecured creditors' committee. In November, the archdiocese sued Stonewall Insurance Co., Lloyds of London and several other insurers in an attempt to gain coverage for the settlement.

Kelley's ruling comes as the only remaining bankrupt Catholic diocese remains far apart from any kind of settlement with the 575 sex abuse victims that constitute creditors. Two years after the Milwaukee archdiocese filed for Chapter 11, it has yet to file a reorganization plan and continues to aggressively challenge abuse claims. It filed more than 100 objections to claims on Jan. 21.

The sex abuse scandal involving the archdiocese touches a particularly raw nerve, as many of the victims were deaf children abused by the priest who headed the Wisconsin school they attended.

In his attempt to keep the cemetery trust funds out of bankruptcy court, Listecki maintained that the religious freedom act applies because of linkages between the unofficial creditors' committee and government entities, specifically the U.S. Trustee, which appointed the committee, and the bankruptcy court, which approved the appointment. This is the so-called government actor provision within the law. Kelley dismissed this argument. The court "rejects the Archbishop's suggestion that this court's enforcement of the bankruptcy code and supervision of this bankruptcy case makes the committee a governmental actor for purposes of RFRA," Kelley wrote in her decision. "Such a nexus would render virtually every participant in a bankruptcy case the government."

Stang, who has represented abuse victims in six of the eight dioceses and both the religious orders that have filed for Chapter 11, said Kelley's ruling marks the first time a bankruptcy judge has ruled definitively that players within the bankruptcy process - including the court, the trustee and creditors - aren't "government actors" as proscribed by the religious freedom act.

"The ruling is very important in its application of this case," Stang said. "It's also important for all Chapter 11 cases when creditors take action against a religious debtor."

However, the broader question of any government-related action that creates a substantial burden in a religious institution's ability to function continues to loom large over the decision. The cemetery trust's lawyers raised that question of restriction in their complaint. They claimed that including the trust funds would prohibit the church from caring for the burial sites, as church doctrine requires.

The substantial burden issue has been raised before in church bankruptcy cases. But it has never been completely adjudicated, as the dioceses have agreed to reorganization plans before higher courts could rule. "You have a tension between RFRA and bankruptcy law, and how to balance these competing pushes in competing claims," said Michael J. Broyde, a law professor at Emory University School of Law, who is also a senior fellow at the university's Center for the Study of Law and Religion. Broyde, for one, is skeptical. Historically, bankruptcy judges "in that tension between Statute X and bankruptcy law, frequently don't get the balance correct."

But judges face another tough balancing act when weighing bankruptcy against religious function, especially when a religious institution voluntarily files for Chapter 11. To what degree can that institution - or entities related to it - then turn around and claim religious immunity?


















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