Judges raise questions in Milwaukee Archdiocese bankruptcy case, Milwaukee Sentinel

Chicago — Judges at the 7th Circuit Court of Appeals on Monday appeared to challenge a key argument in the Archdiocese of Milwaukee’s efforts to protect $60 million it holds in a trust for the care of cemeteries from being used to pay creditors in its bankruptcy.

The three-judge panel questioned whether the archdiocese needs that entire $60 million to maintain its cemeteries. And one of the jurists, 7th Circuit Judge Claire Ann Williams, said she found issues related to U.S. District Judge Rudolph T. Randa’s decision not to recuse himself from the lawsuit over those funds “troubling.”

The panel — Appellate Judges Williams and Joel Flaum, along with U.S. District Judge Robert Dow of the Northern District of Illinois — heard oral arguments Monday on several issues related to the bankruptcy, including First Amendment questions that could be of national significance as religious liberty cases make their way through courts around the country.

In that lawsuit, filed by Archbishop Jerome Listecki as sole trustee of the cemetery trust, the church argues that forcing it to turn over even $1 from the trust to the bankruptcy estate would substantially burden its free exercise of religion under the First Amendment and the federal Religious Freedom Restoration Act.

Those provisions apply only in cases involving the government. Madison-based attorney Brady Williamson, who is representing the cemetery trust on the religious liberty issues, argued that the creditors committee functions effectively as the government “under color of law” because it is appointed by the bankruptcy trustee and is afforded certain powers and responsibilities under bankruptcy code.

But Dow and Williams appeared to challenge that assertion. Dow said he routinely appoints attorneys, who are paid by the government, as referees in their disputes and otherwise could be seen as supervising them.

“And I don’t know of anyone who’s ever made the argument that they were acting under the color of law,” he said.

U.S. Bankruptcy Judge Susan V. Kelley had ruled earlier that taking a portion of the cemetery funds would not constitute a substantial burden on the church. The archdiocese appealed to U.S. District Judge Rudolph T. Randa, who found that it would, saying Catholic cemeteries and their proper care play a central role in the Catholic belief in the resurrection of the body after death.

And Williamson reiterated that position on Monday.

“The difference between Catholic cemeteries and secular cemeteries is a lot more than how the lawn gets mowed,” he said.

The First Amendment and 1993 Religious Freedom Restoration Act bar the government from substantially burdening the free exercise of religion without a compelling government interest. Marci Hamilton, who represented the creditors committee on the religious liberty issue, told the court that the Archdiocese had moved its cemetery funds into the trust to protect them from legal liability in the years before it entered bankruptcy.

The compelling interest, she said, is protecting individuals who were sexually assaulted from being re-victimized by the archdiocese.

“If in fact a religious organization can cover up childhood sexual abuse by protecting the identity of predators…and move all of its assets right before bankruptcy so it does not have to compensate them…, that is a devastating message to survivors. And that is a compelling interest,” she said.

The Appeals Court on Monday also heard oral arguments on two other issues related to the bankruptcy:

■ Whether Randa’s decision on the the cemetery trust litigation should be vacated, and whether the judge should be barred from hearing future disputes in the case. The creditors committee argues that Randa has a conflict and financial interest in the case because he has numerous relatives buried in archdiocese cemeteries and purchased two crypts for his parents decades earlier. The archdiocese’s attorneys called their motion “a thinly veiled attempt to find a new district court judge who will agree with the committee on the merits of this litigation.”

■ Whether Kelley should have allowed a deaf man who was sexually abused as a child by the late Father Lawrence Murphy to present evidence he says would show that the archdiocese used fraud to induce him to sign a settlement agreement in 2007. That evidence, statements made by the archdiocese during its mediation with the victim, is privileged under Wisconsin law, except in cases where its admission is necessary to prevent a “manifest injustice.” Kelley dismissed his bankruptcy claim against the archdiocese because he had previously signed a settlement agreement. Randa upheld that decision.

The court said it would take all of the cases under advisement and rule at a later date.

The archdiocese filed for Chapter 11 bankruptcy protection in January 2011 in an effort to deal with its mounting sex abuse claims. It has proposed a reorganization plan that would set aside less than $4 million to compensate 128 of the 575 men and women who filed sex abuse claim in the bankruptcy, and create a $500,000 therapy fund.

Kelley approved the plan’s disclosure statement, an overview intended to give creditors enough information to enable them to approve or reject the plan. She has scheduled a four-day hearing in October for the plan itself.

The cemetery trust, which was created in 2007, appears to be the abuse victims’ last hope for a substantially higher settlement from the archdiocese. The creditors committee has moved to block approval of that plan, to give the Circuit Court time to render its decision on the religious liberty issues. That decision is likely to be appealed to the U.S. Supreme Court, though there is no guarantee it would hear it.