The Seventh Circuit Injects Common Sense into Religious Liberty Debates with Official Committee of Unsecured Creditors V. Listecki

By Marci A. Hamilton
The Verdict
March 19, 2015

https://verdict.justia.com/2015/03/19/the-seventh-circuit-injects-common-sense-into-religious-liberty-debates-with-official-committee-of-unsecured-creditors-v-listecki

There are times when I despair that the United States will never return to the common sense religious liberty principles established by the Framers and respected by the Supreme Court in its long line of First Amendment, free exercise decisions. From Reynolds v. United States through Employment Div. v. Smith and Church of Lukumi Babalu Aye v. Hialeah, the Court has held the line on extreme demands for religious liberty rights. They—the Framers and the Court—have been responsible for creating a system of ordered liberty where believers are full-fledged members of the community, accountable to the laws that apply to everyone else, while having the ability to request legislative exemptions, which have been granted hundreds of times. It’s a system that has worked for centuries (including for the Native American Church members who lost in Smith).

Congress let loose the furies when it caved to demands for extreme rights with the Religious Freedom Restoration Act (“RFRA”) and its unfortunate “least restrictive means” test, which persuades believers (and courts) that the laws that apply to everyone else should be shaped specifically to a believer’s particular beliefs. This reasoning has opened a new and scary dialogue about carving back the public accommodations laws to permit believers to refuse service to those they disapprove, e.g., Arizona’s state RFRA, which was vetoed last year, and this year’s pending Indiana RFRA. The public rhetoric has been about the LGBTQ community and same-sex marriage, which is bad enough, but the principle equally applies to discrimination based on race, gender, and national origin. Such reasoning is poisoning the United States and threatening the Court’s careful and delicate balance between extraordinary religious diversity, the rule of law, and plain old common sense.

With these thoughts in mind, last week’s unanimous opinion by the United States Court of Appeals for the Seventh Circuit involving the Milwaukee Archdiocese bankruptcy is a much-needed breath of fresh air.

The Milwaukee Archdiocese Bankruptcy Is Filed to Avoid Compensating Survivors of Clergy Sex Abuse

As I discuss here, Timothy Cardinal Dolan, when he was Archbishop of Milwaukee, set into motion the conflict between the Archdiocese and its creditors that culminated in the dispute decided last week. He engaged in scorched earth tactics in the few live clergy abuse cases, including pursuing extreme religious liberty arguments; blocked statutes of limitations reform with the argument that the Archdiocese would be “bankrupt” if it had to pay the victims for what it had done to them; he moved $55 million to a “trust” for purposes of avoiding compensating victims; and negotiated settlements with victims that were pennies on the dollar of what the victims deserved, in effect removing them from the pool of victims who could sue in the event of SOL reform or who would be part of a bankruptcy if it were ever filed.

Dolan left for the New York Archdiocese in 2009, and Jerome Edward Listecki was appointed Milwaukee’s Archbishop. In 2011, under Listecki’s leadership, the Archdiocese filed for voluntary federal bankruptcy under Chapter 11, in response to a small number of clergy sex abuse cases.

As part of a Chapter 11 bankruptcy, the parties agree on a “bar date,” which is a deadline that amounts to the proposition: “sign up now or forever hold your peace.” (It’s my view such bar dates are a violation of due process for persons who are being asked to give up a right to go to court and cruel to survivors not yet ready to come forward, but that is a discussion for another day.) Listecki invited all survivors to come into the bankruptcy, implying there would be compensation for even those outside of the statute of limitations, which would be the vast majority of victims in Milwaukee.

In other diocesan bankruptcies, the bar date yielded a significant number of survivors, but not an outrageous number. In Milwaukee, the bar date deadline gathered over 500 survivors. Unbeknownst to the survivors stepping forward, Dolan had moved $55 million into the so-called “Cemetery Trust” several years earlier, thus limiting the funds available to compensate survivors.

The $55 million “Cemetery Trust” was uncovered by the excellent bankruptcy attorneys representing the creditors committee, Pachulski, Stang, Ziehl, and Jones, led by Jim Stang, the most experienced archdiocesan bankruptcy attorney in the United States. Their discovery of the trust suggested that there were means for the Archdiocese to help these hundreds of victims. The committee of creditors moved to include the funds in the bankrupt’s estate, arguing they were fraudulently transferred under Wisconsin law, which is incorporated by reference by the federal Bankruptcy Code.

What followed has been four years of survivors being dragged through federal court proceedings as the Archdiocese has pursued a take-all-prisoners attitude to the bankruptcy litigation. And a fight over religious liberty, believe it or not.

The Archdiocese Invokes the First Amendment and the Religious Freedom Restoration Act to Circumvent Fraudulent Conveyance and Fraud Laws, and Shield the Vast Majority of Its Assets From the Victims

The Archdiocese[1] has asserted every defense imaginable, including Wisconsin statute of limitations on child sex abuse against the vast majority of the survivors who came forward before the bar date. For purposes of this column, I will focus on its argument that it had a free exercise right to keep every penny of the Cemetery Trust from the survivors.

I have come into a number of diocesan bankruptcies solely for the purpose of addressing RFRA and the First Amendment issues, and Milwaukee is no exception. My first reaction was disbelief that free exercise of religion would be invoked to nullify laws against fraud, but the Milwaukee Archdiocese’s intent was plain enough, so I turned to briefing and arguing these issues in the bankruptcy court, before Judge Susan Kelley.

The religious liberty arguments have been extremely straightforward from the beginning in my perspective.

The Bankruptcy Court: The Committee Was a Private Actor, RFRA Only Applies Against Government Actors, the Bankruptcy Code Is a Neutral Law of General Applicability, and What Is Included in the Estate Was a Matter of State Law

The bankruptcy court ruled in favor of the Committee all the way down the line. First, the Committee was a private entity, not a government entity. Therefore, RFRA was beside the point, because its plain language and legislative history make it clear it is only available against a government.

Second, the issue whether the movement of the $55 million was a fraudulent transfer was a matter of state law. Under City of Boerne v. Flores, the federal RFRA may not be invoked against state laws and, therefore, RFRA was doubly irrelevant.

Third, the federal Bankruptcy Code did not violate the First Amendment’s free exercise clause. It would not be subjected to strict scrutiny under the Free Exercise Clause, because the exemptions it contained that benefit religious entities could not be construed as proof the law singled out or discriminated against religious entities. Therefore, rational basis review applied, and under that standard, the Bankruptcy Code is plainly constitutional.

Judge Kelley’s opinion concluded, therefore, that the Archdiocese’s free exercise arguments failed, and the next step was to determine under state law whether Dolan’s movement of the $55 million constituted a fraudulent transfer or fraud.

The District Court Reverses the Bankruptcy Court

Through a series of procedural moves that I still wonder about, we then landed in the District Court, where we briefed the issues as though in the first instance for Judge Rudolph Randa. While awaiting notice regarding oral argument, Judge Randa issued a remarkable opinion reversing the Bankruptcy Court.

First, as all courts have correctly held in this case, Randa held that RFRA is only available against a government entity.

Second, Randa departed from the Bankruptcy Court on whether the committee was a “government actor.” He ruled that the committee acted under “color of law,” because it was approved by the bankruptcy court and a creature of law. We argued that if the committee was a government actor, then so would be each and every corporation, which are also not natural entities but legal entities created by law. He did not agree.

Third, Judge Randa held that under RFRA, the inclusion of even a single penny from the Cemetery Trust in the bankrupt’s estate would impose a “substantial burden” on the Archdiocese. On his reasoning, whether there is a “substantial burden” on a religious entity is “coterminous” with whatever the believer says its beliefs are. He ignored that “substantial burden” is a fact question, that the committee had the right to raise a question about sincerity (given that cemetery funds had been used to satisfy clergy abuse settlements in Los Angeles), and that there had been no discovery on the issue yet.

He then reasoned that bringing any of the Cemetery Trust into the bankrupt’s estate would have dire consequences: “Archbishop Listecki would be forced to choose between obedience to church doctrine and obedience to a civil judicial authority.” In Listecki’s own words:

In my lay and ecclesiastical capacities, responsible for the religious, moral, and fiscal health of the Archdiocese—as well as the Trust—I have never been placed in a position of having to choose between a doctrinal directive or mandate from church authorities and a lawful order from a civil judicial authority. No religious leader in American society should be compelled to make that choice, which is no choice at all in light of the overriding deference owed one’s highest religious authority.

And defer Judge Randa did, ruling that on the undeveloped record, the Archdiocese prevailed under RFRA. He also added his own personal gloss on Catholic beliefs:

For the Church and therefore Catholics, Catholic cemeteries reflect the Catholic belief in the resurrection of Jesus and the community’s commitment to the corporal work of mercy of burying the dead. Resurrection of the dead, of course, has always been an essential element of the Christian faith, beginning with Jesus’ own resurrection. For Catholics, moreover, the belief in resurrection is a belief in the ultimate resurrection of one’s own body. According to this belief, the soul separates from the physical body at death to meet God, while awaiting reunion with its body, transformed and resurrected through the power of Jesus’ resurrection, on the last day.

This was the first time it occurred to us to ask or care if he was Catholic.

Fourth, Randa relied on dictum in the Seventh Circuit that seems to require that strict scrutiny apply in First Amendment free exercise cases, even if it is contrary to controlling Supreme Court precedent. His conclusion: including one cent from the trust in the estate would violate the First Amendment.

The District Court: A Motion for Recusal of Judge Randa

No litigator in federal (or state) court relishes the need to ask for a presiding judge to recuse him or herself. Polling the Stang lawyers and myself, not one of us had ever asked for recusal in over 100 years of combined litigation. But Randa’s reasoning was so extraordinary, we had to ask the question: could he have some connection to the cemeteries that might explain his tortured free exercise reasoning, his leap past the discovery phase, and his uninvited endorsement and reticulation of Catholic beliefs?

Short answer: he did. He had purchased his parents’ burial plot in an Archdiocesan cemetery, and he has seven other close relatives buried in the cemeteries in question. Thus, he had a pecuniary interest in the outcome of the case, or at the least he had created the appearance of impropriety that requires federal judges to recuse themselves. Even so, as I say, no sane or good lawyer jumps at the chance to ask a federal judge to recuse him or herself.

The ruling was so outrageous, though, we bit the bullet and filed a recusal motion. The Archdiocese stepped in and defended him, saying that we had sat on our rights to request recusal and should have asked this question earlier. Our collective response: What? Why in the world would we assume he was conflicted out of a bankruptcy proceeding? And, in any event, he has an obligation to disclose potential conflicts himself.

The Archdiocese also argued that the Committee was on an anti-Catholic road, but we were adamant that it was not Randa’s Catholic faith that was the problem, it was how far he had strayed in this case from standard recusal principles (and into forbidden Establishment Clause territory).

Randa denied our recusal motion, and we were off to the Seventh Circuit, now with not only a set of free exercise arguments but also this recusal issue.

The Seventh Circuit Restores Common Sense

The oral argument was held in May 2014, and the decision was reached last week. For good reason, there was some trepidation regarding what might be coming. But Judge Williams’s well reasoned opinion was worth the wait.

The Seventh Circuit, district court, and bankruptcy court all agreed that RFRA applies only to suits against government actors. That is an extremely important holding, and should put the brakes on the anti-textual and disingenuous arguments by RFRA supporters that it somehow provides rights for individuals to sue other private entities. Among other provisions describing the burden shifting that starts with the believer and shifts to the “government,” RFRA states that “[a] person whose religious exercise has been burdened in violation of this section may assert that violation as a claim or defense in a judicial proceeding and obtain appropriate relief against a government.” It is a canon of statutory interpretation that a statute’s plain language controls, and there is precious little, if any, ambiguity on the issue. Indeed, a contrary conclusion requires that one twist oneself into the proverbial pretzel.

Then the Seventh Circuit departed from Randa’s path.

First, the court reasoned, a creditors committee, which is, after all, composed solely of private creditors, is not a government actor: “Just because the court appoints an entity and supervises some of its actions does not make it a governmental actor.” Hear hear. But as a testament to the Archdiocese’s choice of throwing everything but the kitchen sink at this litigation, Judge Williams needed over seven pages to respond to their many arguments on this issue. Suffice it to say that the opinion puts this issue to rest.

Second, the Seventh Circuit held, in something of a stretch, that the First Amendment’s free exercise clause can be applied in a suit between two private parties, without a state actor as a party. There is only one case in which the Supreme Court has recognized a free exercise right in a suit between private parties, McDaniel v. Paty. But in the Seventh Circuit’s defense, that case is there, and it can hardly overturn Supreme Court precedent. The upshot is that while the committee is not a government actor, the First Amendment could be implicated in this dispute between two wholly private parties.

Third, the Archdiocese had invoked a line of cases that prohibit the judiciary from interfering with religious entities, saying the courts must stay out of their decision to move $55 million into a trust to keep it away from survivors and while likely planning a bankruptcy. Church lawyers like to call this the “church autonomy” doctrine, a label the Supreme Court has never embraced. We pointed out that the courts are only barred from hearing a case involving a religious entity when the issue is “intrachurch” and it involved solely ecclesiastical issues, e.g., what to believe. Judge Williams rightly found that this dispute over whether the movement of $55 million into the trust before bankruptcy was fraudulent to the detriment of creditors was not solely an “intrachurch” dispute and was not “wholly ecclesiastical.” Moreover, refreshingly, the opinion casts doubt on the notion that the First Amendment ever protects religious entities from charges of fraud at all.

Proceeding to the First Amendment analysis, the court held that a law that includes religious exemptions that benefit religious entities is still “neutral” and “generally applicable.” Under Employment Div. v. Smith, that means that the law is subject to deferential, rational basis review, and under this level of scrutiny, the federal Bankruptcy Code is constitutional.

That should have been the end of the free exercise analysis, as the opinion notes, but a prior 2006 Seventh Circuit land use case—Vision Church, United Methodist v. Village of Long Grove—had appended an additional rule that strict scrutiny applies even to facially neutral laws if they “unduly burden” the religious entity. In effect, in that case, the Seventh Circuit had revised the Supreme Court’s First Amendment doctrine through some creative interpretation. It is so wrongheaded and in contravention of the Supreme Court’s clear doctrine that this aspect of Vision Church should have been permitted to be a “derelict on the waters,” never to be visited again. But in this case it was harmless error, because even assuming a substantial or undue burden on religious conduct, the Bankruptcy Code’s protection of creditors against fraud satisfied strict scrutiny.

The opinion, however, did seem to invite future litigants to ask for overruling or reconsideration of this part of Vision Church. Very good idea.

Finally, the opinion wrapped up with some memorable language:

“If an exemption to the Code was created in the name of religious believers, we can envision scenarios in which individuals would join religious sects to circumvent the Code, all in the name of religion, and gain an ‘economic advantage over’ their secular competitors.

. . . .

We do not believe that there is, nor can there be, a religious exception that would allow a fraudulent conveyance in the name of free exercise.”

On my hard copy of the opinion, I wrote in the margin the first time I read it: “Thank you.” What kind of country would we live in if one can act fraudulently at will, simply because one is religious?

The Seventh Circuit Explains When Recusal Is Appropriate

The court sent the case back down to a different trial court judge, which mooted the recusal motion. But that did not stop this unanimous panel from rendering some pithy observations. Here are a few highlights: lawyers and their clients should have the benefit of being able to presume a judge’s impartiality. Lawyers everywhere should be comforted by this ruling that they are not under an obligation to investigate or anticipate a judge’s potential conflicts, and if they do not, suffer negative consequences for failing to unilaterally delve into a possible need for recusal early in the litigation.

The committee had argued that there was reason to question Judge Randa’s impartiality in light of his emotional attachment to his family members. The Archdiocese responded, in a nutshell: “Pshaw.” Judge Williams wrote: “We think it surprising, given this litigation involves cemetery care and strongly held beliefs about the same, that the Archdiocese would give so little weight to the importance of where the deceased are buried.” Actually, it borders on the shocking until one traces the Milwaukee Archdiocese’s scorched earth tactics that began long before this bankruptcy was filed.

What about the judge’s familial connections to so many buried in these cemeteries, especially his parents? “This was problematic.” The opinion then closes on a nod to the Judicial Canon of Ethics.

In this era of overheated demands for “religious liberty” to discriminate and to carve up the law to fits one’s beliefs, this decision was pure oxygen. The Archdiocese threw every religious liberty theory against the wall it could, hoping some would stick to avoid the laws against fraud! None did, and under the court’s thoughtful and persuasive reasoning, they never should.

Next, the courts will have to make a legal determination regarding whether and how much of the $55 million—under state and federal law—should be part of the ultimate reorganization. Thus, as good as this result is for religious liberty doctrine, and it is excellent, one can still worry about the Milwaukee survivors who have been treated so badly by this Archdiocese before and during this bankruptcy—setting aside the abuse itself. It is a sad fact that they still have more to endure.

[1] I don’t think I have ever dropped an endnote in one of my columns over the last 15 years, but what to call the entity on the other side of the creditors’ committee at this stage of the proceedings was so complicated that I simply quote it here to explain why I am using “Archdiocese.” If you are not a bankruptcy attorney, feel free to skip. In the words of the Seventh Circuit:

“After the filing, the United States Trustee appointed a group of abuse victims to the Committee to represent the Archdiocese’s unsecured creditors in the proceedings. The Archbishop then, in his role as trustee of the Trust, sought declaratory judgment from the bankruptcy court that the Funds would not “be used to satisfy any of the claims the Committee in- tends to pursue” against the Archdiocese because application of the Code to the Funds would violate the Archbishop’s free exercise rights and RFRA. (We will call the plaintiff the ‘Archdiocese,’ even though it was technically the Trust and the Archbishop that brought the present action.) However, the complaint created a conflict because the plaintiff- Archbishop sought to limit the size of the Estate, and the Archdiocese as debtor-in-possession had little incentive to vigorously defend that complaint or assert affirmative defenses since it acts through its sole corporate member, the Archbishop. In other words, the declaratory complaint resulted in the Archbishop initiating an adversary action (as Trustee) against himself (as sole corporate member of the Archdiocese). Recognizing this problem, the parties entered into a stipulation, approved by the bankruptcy court, stating that the Committee was ‘granted derivative standing to assert and litigate the Avoidance and Turnover Claims against the Archbishop for the benefit of the Debtor’s estate.’ The Committee asserted as a counterclaim that the transfer of money into the Trust was fraudulent and preferential and should be avoided pursuant to the Code.” (emphasis added).