Judge Rules She Can't OK Archdiocese Reorganization Plan

By Zach Hoag
The Nuance
June 20, 2014

http://www.jsonline.com/news/religion/judge-rules-she-cant-ok-archdiocese-reorganization-plan-b99296108z1-264069001.html

The Catholic Archdiocese of Milwaukee, which faces more than a dozen civil fraud lawsuits over its handling of clergy sex abuse cases, filed for Chapter 11 bankruptcy protection in January. As the case proceeds, we'll have updates, analysis, documents and more.

U.S. Bankruptcy Judge Susan V. Kelley ruled Friday that she does not have jurisdiction to approve the Archdiocese of Milwaukee's reorganization plan while key questions in a related lawsuit over $60 million it holds in trust for the maintenance of cemeteries are pending before the 7th Circuit Court of Appeals.

The decision is a victory for the creditors committee, which had sought to block approval of the plan until the appellate judges rendered their decision — a process some have said could take a year. And it has forced the cancellation of the October confirmation hearings, at least for now — a setback for the archdiocese.

James Stang, lead attorney for the creditors committee, called Kelley's ruling "an important step in preserving our rights against the cemetery trust while the appeal is pending."

Archdiocese spokesman Jerry Topczewski said the church's attorneys are studying the ruling, but he added: "After nearly four years in bankruptcy, we remain committed to doing what we can to continue to move this proceeding forward."

At issue before the 7th Circuit is whether forcing the archdiocese to put even $1 of the cemetery trust into the bankruptcy estate — and ultimately a settlement for clergy sex abuse survivors — would violate its free exercise of religion under the First Amendment and the 1993 Religious Freedom Restoration Act.

Kelley ruled earlier that it would not. She was overturned by U.S. District Judge Rudolph T. Randa, who found that cemeteries and their proper care play a central role in the Catholic belief in the resurrection of the body after death.

The appellate court also is considering a request by the creditors committee that Randa be barred from hearing any issues related to the cemetery trust because of a conflict of interest.

The appeals court appeared to challenge the archdiocese's contentions and questioned whether all of the $60 million is needed for the cemeteries at a hearing this month.

The trust was created with Vatican approval in 2007 by then-Archbishop Timothy Dolan, now cardinal of New York, to protect the funds from legal liability. And the archdiocese transferred $55 million into it the following year.

Creditors' attorneys have characterized that as a fraudulent transfer to shield the money from abuse victims. The archdiocese maintains the cemetery funds were always held "in trust," and that the trust only formalized that arrangement.

The archdiocese filed for Chapter 11 bankruptcy protection in January 2011 to address its mounting sexual abuse claims, one of several Catholic dioceses and religious orders around the country to do so. Milwaukee's case has been among the largest and most contentious with 575 men and women filing claims alleging they were sexually abused by priests, sisters, teachers and others affiliated with the church over the last half-century or more.

As part of its reorganization plan filed in February, the archdiocese would set aside less than $4 million to compensate 128 victims who were molested by archdiocesan priests and create a $500,000 therapy fund.

The plan would be funded in part by a $2 million loan to the archdiocese from the cemetery trust, in return for a settlement of the cemetery trust lawsuit.

Attorneys for the creditors' committee have called that sum inadequate and say the archdiocese does not have standing to settle the case, because it had ceded that authority to the creditors' committee in an earlier legal move.

The cemetery trust appears to be the abuse victims' last hope for a larger settlement from the archdiocese. Kelley had previously rejected creditors' efforts to pull into the bankruptcy estate assets of the archdiocese's 200 parishes and some $35 million the archdiocese previously held in a parish investment fund.

A 7th Circuit decision in favor of the archdiocese would effectively end the creditors' pursuit of the cemetery trust; a ruling for creditors would return the case to Kelley's court where a new round of legal arguments on numerous other issues would likely ensue.

Kelley said in her ruling that she hoped the confirmation process would not entirely grind to a halt while the appeal is pending. And she urged creditors and the archdiocese to continue working on other issues, including how to classify claims and abuse survivors, and whether the bankruptcy case was filed in good faith.

"Discovery and briefing can and should go forward on these and other issues that do not involve settlement or dismissal of the Cemetery Trust Litigation," Kelley said.

Alternatively, she said, the archdiocese could carve out the cemetery trust provisions — the $2 million loan and settlement of the lawsuit — from its plan, "or alter those provisions in a manner that is acceptable to the (creditors) committee."