Federal Religious Freedom Act Not Valid Defense to Bankruptcy Avoiding Actions

January 2013

In a case of first impression, the Honorable Susan V. Kelley of the United States Bankruptcy Court for the Eastern District of Wisconsin ruled that a creditors’ committee is not a “government actor” in the context of the Religious Freedom Restoration Act (“RFRA”), 42 U.S.C. § 2000bb-1. RFRA prohibits government from substantially burdening religious exercise unless the burden is narrowly tailored to serve a compelling governmental interest.

The issue arose in an adversary proceeding within the Archdiocese of Milwaukee’s chapter 11 bankruptcy case. Since January 2011, the firm has served as counsel for the official committee of unsecured creditors (the “Committee”) in the Archdiocese’s bankruptcy case. The Milwaukee Catholic Cemetery Perpetual Care Trust (the "Trust") filed an adversary proceeding against the Committee in an attempt to keep approximately $57 million outside of the bankruptcy estate and therefore out of reach of the Archdiocese’s creditors. Archbishop Jerome Listecki, Archbishop of the Archdiocese of Milwaukee, serves as trustee of the Trust. The Committee filed counterclaims against the Trust, including avoidance actions and other claims resolving that the $57 million at issue in the adversary proceeding is property of the estate under the Bankruptcy Code, 11 U.S.C. §  101 et seq.

The Archdiocese of Milwaukee created the Trust in April 2007 while twelve state court cases were pending against it relating to the sexual abuse of children. Then-Archbishop Timothy Dolan (now Cardinal Dolan, Archbishop of the Archdiocese of New York) signed the trust agreement establishing the Trust in his capacity as both Archbishop of the Archdiocese of Milwaukee and as Trustee of the Trust. In March 2008, the Archdiocese of Milwaukee transferred more than $55 million from its accounts to the Trust’s account, and thereafter continued transferring funds from its accounts to the Trust.

Along with the Committee’s special counsel for constitutional and federal statutory law Professor Marci Hamilton, the Committee filed a motion for partial summary judgment seeking a ruling that the Trust’s invocation of RFRA is not a valid defense to the Committee’s avoidance actions. The Committee asserted three arguments: (1) RFRA applies only where the government is a party to the litigation; (2) RFRA may not be applied to invalidate state law, such as the Wisconsin fraudulent transfer laws; and (3) the Bankruptcy Code applies neutral, generally applicable provisions that do not violate free exercise claims under the First Amendment of the U.S. Constitution.  The bankruptcy court ruled in the Committee’s favor on all three arguments. 

This decision is important for any case involving a religious entity as a debtor in bankruptcy or as a litigant in adversary proceedings.

A pdf version of the court's decision can be retrrieved by the link below.

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