7th Circuit: Valuable Copy of Book of Mormon Exempt In Bankruptcy Under Illinois Law

In In re Robinson, (7th Cir., Feb. 4, 2016), the U.S. 7th Circuit Court of Appeals, in a bankruptcy case, held that under Illinois law, a debtor's copy of a rare, first edition Book of Mormon is exempt from attachment by creditors.  The court held that the exemption in Illinois law, 735 ILCS 5/12-1001(a), for the debtor's bible does not limit the debtor to retaining only one bible, nor does it limit the exemption to a bible of a particular value. St. Louis Post-Dispatch reports on the decision.

Catholic Diocese of Duluth Files For Bankruptcy Reorganization

The Catholic Diocese of Duluth announced yesterday that it has filed on an emergency basis for bankruptcy protection in order to reorganize under Chapter 11.  The move comes after a jury last month found the Diocese liable for  $4.9 million in a clergy abuse case dating back to 1978. (See prior posting.) As reported by AP, the diocese faces five other sex abuse lawsuits that have already been filed, and has received notices of claims in 12 more.  Minnesota's 2013 Child Victims Act opened a statute of limitations window that closes next May for suit to be filed on old abuse claims. Plaintiff's attorney says that the bankruptcy stay delays attempts to force release of church documents on clergy sex abuse. A hearing on a motion to force release had been scheduled for December 17.  The Diocese's vicar general said that the filing safeguards the Diocese's limited assets, allows it to continue its day-to-day work, and ensures that all victims share justly in the resources available. This is the 15th U.S. diocese or religious order to file for bankruptcy reorganization.

Amicus Brief Filed In Appeal of Bankruptcy Stay of Jewish Religious Court Proceedings

As previously reported, in August a New York federal bankruptcy court held in the case of In re Congregation Birchos Yosef that the statutory automatic stay of proceedings against a debtor that is triggered by the filing of a petition in a bankruptcy reorganization applies to invalidate proceedings against a debtor and its principals in a Jewish religious court (beis din). That decision was appealed to the federal district court. Last week an interesting amicus brief (full text) was filed in that appeal by 3 well-known law professors and a former bankruptcy court judge urging reversal of the bankruptcy court's decision.  The 23-page brief argues in part:

given the intensely religious nature of the beis din proceeding, and the conceded inability of the beis din to enforce its rulings in any secular court, any effort by a bankruptcy tribunal to restrain the Bais Chinuch and other individuals from invoking the beis din as a parallel non-coercive forum of religious conscience violates the Free Exercise Clause of the First Amendment, the provisions of the Religious Freedom Restoration Act (hereafter RFRA), and the Bankruptcy Code.

[Thanks to Max Raskin for the lead.]

Court Confirms Reorganization Plan of Milwaukee Archdiocese

The Milwaukee Journal-Sentinel reports that yesterday U.S. Bankruptcy Judge Susan V. Kelley confirmed the bankruptcy reorganization plan of the Archdiocese of Milwaukee.  The Archdiocese filed for bankruptcy in 2011 under the pressure of clergy sex abuse claims.  Yesterday's reorganization plan is summarized by the Wall Street Journal:

The terms of the settlement divide nearly 600 abuse victims into separate groups. About 350 victims will share the bulk of the $21 million settlement, and about another 100 victims will each receive $2,000, court papers show. About 120 remaining victims, who had previously settled with the archdiocese or otherwise didn't qualify for the settlement, won’t receive any monetary compensation. It also provides a total of $250,000 for victims who come forward in the future, plus $500,000 from the archdiocese’s parishes to provide therapy for victims in any group.

Over $20 million in legal fees have been run up during the protracted bankruptcy proceedings.  Fox News reprints a statement from the Archdiocese on the approval of the plan and a letter sent to Pope Francis on behalf of the first victims to publicly come forward-- deaf survivors who were abused at the St. John's School for the Deaf.

Bankruptcy Code's Automatic Stay Applies To Proceedings In Jewish Religious Court

In In re Congregation Birchos Yosef, (SD NY Bkrptcy, Aug. 24, 2015), a New York federal bankruptcy court held that the statutory automatic stay of proceedings against a debtor that is triggered by the filing of a petition in a bankruptcy reorganization applies to invalidate proceedings against a debtor and its principals in a Jewish religious court (beis din).  In the case, a religious organization in Monsey, New York that had filed for bankruptcy reorganization, as part of the bankruptcy proceedings, instituted suit against a Jewish school, Bais Chinuch L'Bonois, asserting claims for fraud, breach of fiduciary duty and looting of the Debtor’s assets.  In response, Bais Chinuch invoked a beis din which issued a hazmana or summons to individuals controlling Congregation Birchos Yosef inviting them to adjudicate their dispute in the Jewish religious court.  The beis din also issued an ekul or injunction against the parties continuing to pursue the dispute through the Bankruptcy Court.

The Bankruptcy Court held that:

Bais Chinuch and the individuals’ invocation of the beis din proceeding - and the issuance of the beis din's ekul, or injunction - are actually directed at the Debtor through its principals with the intention of wresting control of the Debtor’s adversary proceeding and exerting pressure to have it dismissed....  Because of the principals’ identity of interest here with the Debtor, the automatic stay applies to protect them from the beis din. 

The court went on to hold that enforcement of the automatic stay does not violate the Free Exercise or Establishment Clause of the First Amendment.  It held that RFRA is not applicable, because it does not apply to the Debtor's motion, a private action between private parties.  Even if applicable, application of the automatic stay survives RFRA strict scrutiny.  The court added, "The automatic stay’s enforcement here does not substantially burden the objectors’ free exercise of religion, moreover, when they have invoked a rabbinical court to decide (and interfere with) an essentially commercial dispute."

Milwaukee Archdiocese Settles Remaining Abuse Claims In Bankruptcy Reorganization

The Archdiocese of Milwaukee announced yesterday that it has reached a collective settlement with survivors of clergy sexual abuse that will permit it to complete its four-and-one-half year old Chapter 11 Bankruptcy Reorganization. Key details of the settlement are set out in a summary posted on the Archdiocese's website. Under the settlement, 330 survivors will share $21 million. In addition a $500,000 therapy fund will be set up. 92 additional claimants whose claims were not substantiated will receive $2000 each. The funds for the settlement will come from various sources, including parishes and insurers.  The Cemetery Perpetual Care Trust whose liability has been the subject of extensive litigation will lend the Archdiocese $3 million; reimburse the Archdiocese for $5 million of past cemetery care expenses; and contribute $8 million to settle all claims against its assets.

Attorneys' fees so far have totaled $18.5 million, with additional fees capped at $1.25 million.  Fox 6 News reports that the settlement will be submitted to the bankruptcy court in an Aug. 24 filing, with a hearing scheduled for Nov. 9.  The article also carries the negative reaction to the settlement by advocates for abuse victims, as well as Archbishop Jerome Listecki's favorable reaction to the settlement.

St. Paul-Minneapolis Archdiocese Victims Want Bankruptcy Court To Order Distribution of Video Urging Claimants To File

In the bankruptcy reorganization proceedings of the Catholic Archdiocese of St. Paul and Minneapolis, August 3 is the deadline for sex abuse victims to file claims.  Yesterday's Wall Street Journal reports that in a motion filed June 29 (full text), the Official Committee of Unsecured Creditors (representing victim claimants) presented the bankruptcy court with a seven-minute video urging victims to come forward before the deadline. The motion asks the court to order the Archdiocese to deliver written notice to each parish asking it to play the video after each Mass on the July 11-12 weekend, requesting each parish to post the video (or a link to it) on its website, and ordering the Archdiocese to post the video on its own website. The Archdiocese in its response to the motion (full text) says there has already been adequate notice and the video has already received extensive distribution by the media. The response (full text) of the committee representing individual parishes adds that "Parishes could view the
order and request as implicating First Amendment rights under the U.S. Constitution, " The bankruptcy court will hold a hearing on the motion today.

Milwaukee Archdiocese Seeks Supreme Court Review In Bankruptcy Decision

According to the Milwaukee Journal-Sentinel, yesterday a petition for certiorari was filed with the U.S. Supreme Court in Listecki v. Official Committee of Unsecured Creditors.  In the case, the U.S. 7th Circuit Court of Appeals ruled that $55 million held by the Archdiocese of Milwaukee in a perpetual care trust fund for maintaining Catholic cemeteries is potentially available in the Archdiocese's bankruptcy to satisfy claims of clergy sex abuse victims. (See prior posting.)

7th Circuit: Milwaukee Archdiocese Cannot Protect Cemetery Trust Funds In Bankruptcy

In Listecki v. Official Committee of Unsecured Creditors, (7th Cir., March 9, 2015), the U.S. 7th Circuit Court of Appeals ruled that $55 million held by the Archdiocese of Milwaukee in a perpetual care trust fund for maintaining Catholic cemeteries is potentially available in bankruptcy to satisfy claims of clergy sex abuse victims.  The district court had held that the Archdiocese's free exercise rights under RFRA and the 1st Amendment would be infringed if the trust funds were made available to claimants. (See prior posting.)  The 7th Circuit held, however, that RFRA does not apply unless the government is a party to the suit, and that a creditors' committee in bankruptcy does not act "under color of law" as a governmental instrumentality.  It rejected the Archdiocese's 1st Amendment free exercise assertion, finding that the Bankruptcy Code's fraudulent transfer provisions are neutral and generally applicable. It further held that the Bankruptcy Code reflects a compelling governmental interest in the protection of creditors. AP reports on reactions to the decision.

St. Paul-Minneapolis Archdiocese Files For Bankruptcy Reorganization

On Friday, the Catholic Archdiocese of Saint Paul and Minneapolis filed for Chapter 11 Bankruptcy Reorganization. In a letter (full text) announcing the decision, Archbishop John Nienstedt said it "will allow the finite resources of the Archdiocese to be distributed equitably among all victims/ survivors [of clergy sexual abuse].  It will also permit the Archdiocese to provide essential services required to continue its mission within this 12-county district." The Archdiocese has posted the full text of the Voluntary Petition and other legal and financial documents in the case. Reporting on the filing, MPR News points out that it will stop civil trials that were set to begin on Jan. 26.

Bankruptcy Court Rejects RFRA Defense To Fraudulent Conveyance Recovery

In In re Khan, 2014 Bankr. LEXIS 4205 (Bkrptcy. ED NY, Sept. 30, 2014), a New York federal bankruptcy court rejected a defendant's Religious Freedom Restoration Act defense against an attempt by the bankruptcy trustee to recover some $35,500, the proceeds of certain real estate transactions, as fraudulent conveyances. Defendant, son of Shahara Khan who filed a Chap. 7 bankruptcy petition argued that:

the Trustee's claims amount to a violation of the RFRA because they would undo the transactions entered into between the Debtor and her son in furtherance of their personal religious, cultural, and familial obligations. In particular ... "[i]t is the religious belief and practice of the family that [the] family is one unit and transfer of an asset from [one family member] to the other does not transfer real ownership." ... [and that] "[i]t is against the religious practice of the family to place mother or son as creditor and debtor of each other."....

The court rejected defendant's claim, stating in part:

Here, the record shows that the Defendant sincerely believes, as a matter of his religion and culture, that there can be no "business between mother and son.".... The Defendant and his sister "had a religious call to respect our mother and to show our respect we put our mother['s] name on our first house we ever bought here at the United States."...  

This Court respects and acknowledges the sincerity of the Defendant's religious beliefs. But that does not mean that those beliefs, and the Defendant's free exercise of his religion, is burdened by the relief sought by the Trustee. The Defendant has not shown that the avoidance of the Mortgage Proceeds Transfer and the Sale Proceeds Transfer ... substantially burdens the Defendant's right to practice his religion. He has not shown that he will be required to refrain from engaging in a practice important to his religion, or compelled to choose between following the precepts of his religion or accepting a benefit  under law. Nor has he demonstrated that he is under "substantial pressure . . . to modify his behavior" or "to violate his beliefs."

New Mediation Efforts In Milwaukee Archdiocese Bankruptcy Fail

The Catholic Archdiocese of Milwaukee announced yesterday that its second attempt at mediation with the creditors' committee and abuse victims in its bankruptcy reorganization has failed.  The sticking point is whether some $50 million held by a Cemetery Trust for perpetual care of Archdiocesan cemeteries will be available to Archdiocese creditors.  That issue is currently on appeal to the 7th Circuit after a federal district court held that the Trust asssets were not available to creditors. (See prior posting.)  The Archdiocese has already incurred over $15.4 million in legal fees and expenses in the bankruptcy reorganization.

Interlocutory Bankruptcy Court Order On Recovering Donations To Church Not Appealable

In re Nichols, (D MD, Aug. 15, 2014), is an action by the trustee for the bankruptcy estate of Lynette Tawana Nichols seeking to recover from God's Universal Kingdom Christian Church over $93,000 in contributions the church received from Nichols in the three years preceding her filing for bankruptcy. Nichols was president of the church, and the contributions greatly exceeded those she made in prior years.  The trustee claimed these were fraudulent conveyances that could be recovered for the benefit of Nichols' creditors.  The church argued that the claim was barred by the Religious Freedom Restoration Act, but the bankruptcy court issued an interlocutory order refusing to dismiss the trustee's claim.  It cited the subsequently enacted Religious Liberty and Charitable Donations Act of 1998 (RLCDA) that validates in bankruptcy good faith contributions under 15% of gross income or larger contribtuions that are similar to those a debtor made in past years.  The bankruptcy court concluded that, subject to those protections, the trustee's claim could proceed.

The present opinion involves a motion by the church to appeal the bankruptcy court's interlocutory order to the district court.  However appeal of a bankruptcy court's interlocutory order-- as opposed to an appeal once a final judgment is entered-- is available only if there is a difference of opinion among courts on a controlling issue of law.  The district court concluded that there is no controversy among courts because there is no case law indicating that application of the RLCDA violates RFRA.  Thus an immeidate appeal of the interlocutory order is not appropriate.

Bankruptcy Court, Applying Ministerial Exception, Rejects Defrocked Priest's Claim

In In re Archdiocese of Milwaukee, (ED WI Bankr., Aug. 6, 2014), a federal bankruptcy court held that the ministerial exception doctrine requires dismissal of a claim by by a defrocked Catholic priest for back pay and related amounts.  Marvin Thomas Knighton filed the claim in the bankruptcy reorganization of the Milwaukee Archdiocese, alleging that he was removed from the ministry after a canonical trial even though a state court jury found him not guilty of second degree sexual assault of a child. The court said in part:

[T]he First and Fourteenth Amendments permit hierarchical religious organizations to establish their own rules and regulations for internal discipline and government, and to create tribunals for adjudicating disputes over these matters. When this choice is exercised and ecclesiastical tribunals are created to decide disputes over the government and direction of subordinate bodies, the Constitution requires that civil courts accept their decisions as binding upon them.... Accordingly, this Court cannot second-guess whether the Debtor followed applicable law - whether Canon Law or federal employment discrimination law - in terminating or failing to compensate Mr. Knighton.

The court also found that the claim was barred by the statute of limitations and additionally rejected Knighton's suggestions of racial discrimination.

"Ministerial Exception" Doctrine Leads To Denial of Pension Claim By Removed Priest

In In re Catholic Diocese of Wilmington, (DE Bkrptcy., July 16, 2014), the Bankruptcy Court for the District of Delaware applied the "ministerial exception" doctrine to sustain the Wilmington Diocese's objection to a pension claim filed in the Diocese's reorganization by a priest who has been credibly charged with sexual abuse. The priest, Kenneth Martin, was one of nine priests removed by the bishop from ministerial duties for substantiated claims of abuse against minors. Martin then filed a Canon Law action before the Vatican to obtain a pension and sustenance. The bankruptcy court however rejected Martin's claim for payment, saying in part:

Martin emphasizes that his claim for pension and sustenance is premised upon an anticipated ruling in a Canonical action which will resolve his proper allotted remuneration and overall standing within the Diocese. Yet while the Debtor may be under a separate Canonical obligation to pay sustenance, the Court is barred, by the ministerial exception, from forcing Martin's reinstatement into ministry, or awarding any form of relief that would come at the Debtor's expense on account of his removal.

(See prior related posting.)

7th Circuit Hears Oral Arguments On Several Milwaukee Archdiocese Bankruptcy Issues

The U.S. 7th Circuit Court of Appeals yesterday heard oral arguments in two cases relating to the Archdiocese of Milwaukee. The first is Official Committee of Unsecured Creditors v. Listecki (audio of oral argument). It involves a number of complex legal issues growing out of a trial court decision that $50 million in a cemetery perpetual care trust fund is unavailable to creditors, including abuse victims, in the Archdiocese's bankruptcy reorganization. (See prior posting.) Among other issues is the question of whether RFRA can be raised as a defense to action taken by a Creditors' Committee in bankruptcy.  The case on appeal also involves the refusal of the trial court judge to recuse himself in the case. (See prior posting.)

The second case is Doe v. Archdiocese of Milwaukee (audio of oral argument). It involves the question of whether the bankruptcy court was correct in dismissing the claim of a sexual abuse victim who had signed a settlement agreement with the Archdiocese after mediation.  The victim contends that he was fraudulently induced to sign the agreement.  Milwaukee Journal Sentinel reports on yesterday's arguments.

Milwaukee Archdiocese Files Reorganization Plan; Criticized As Inadequate By Victims

AP reports that the Catholic Archdiocese of Milwaukee yesterday filed its Plan of Reorganization with federal bankruptcy court. Under the Plan, $4 million will be set aside to compensate 125 clergy sex abuse victims-- the smallest per victim payments yet in any of the 11 bankruptcy reorganizations of dioceses around the country. Over 400 individuals filing claims as victims will not receive payment-- including those beyond the statute of limitations, claimants who already received a settlement from the archdiocese and those abused by priests from religious orders or by parish employees. Also $500,000 will be set aside in a lifetime Therapy Fund for victims.  A Q&A on the Plan of Reorganization posted on the Archdiocese's website gives details on the plan. In a letter posted on the Archdiocese's website, Archbishop Listecki said that the Archdiocese will emerge from bankruptcy with at least $7 million in debt, adding:

The archdiocese has historically operated on a balanced budget, so the burden of paying off this debt will certainly be part of our penance.  I wish we wouldn’t have had to spend the past three years and millions of dollars on attorneys’ fees to get to this point, but now we have a Plan that moves us forward.

Abuse victims strongly criticized the Plan as insufficient, one saying: "It is much like being raped all over again...." The victim advocacy group SNAP issued a statement calling the Plan "breath-taking in its callousness, selfishness and arrogance."

Litigation Resumes Over Insurance Coverage In Milwaukee Archdiocese Bankruptcy

As the Catholic Archdiocese of Milwaukee completes work on its plan of bankruptcy reorganization, litigation over insurance coverage resumes with competing court filings.  The Milwaukee Journal-Sentinel reports that the Archdiocese filed suit yesterday in federal bankruptcy court seeking to recover reimbursement from OneBeacon Insurance Co. for over $2.6 million in legal fees incurred defending claims that the Archdiocese allowed priests who were known sexual abusers to have access to children. In litigation begun before the Archdiocese filed for bankruptcy, two state lower courts had ruled that the claims against the Archdiocese fell under the policy exclusion for intentional acts. The Archdiocese appealed those rulings to the Wisconsin Supreme Court, but before that court could decide the appeal the bankruptcy petition was filed and an automatic stay on litigation was triggered. Yesterday, OneBeacon Insurance Co. filed a motion asking the bankruptcy court to lift the automatic stay and allow the state Supreme Court to decide the matter.

Spokane Diocese Suing Its Bankruptcy Lawyers For Malpractice

AP reported on Wednesday that the Catholic Diocese of Spokane has refiled in federal bankruptcy court its bankruptcy malpractice lawsuit against the law firm of Paine Hamblin and two lawyers who were members of the firm. The firm handled the reorganization of the diocese that began with bankruptcy filings in 2004 and ended in 2007 after a $48 million settlement with 175 abuse victims. (See prior posting.)  The malpractice suit seeking return of millions of dollars in legal fees and more millions of dollars in damages was originally filed in 2012, but dismissed on technical grounds. The 2012 suit was described by the Spokane Spokesman-Review:

The diocese... says ... that bankruptcy lawyers Shaun Cross and Greg Arpin failed to explore other means of ending the abuse scandal ... [and] blames the lawyers for writing a bankruptcy plan that failed to assess and adequately fund the risk of new claims, which nearly forced the foreclosure of churches. The lawsuit also accuses the attorneys of a conflict of interest, in shielding former Bishop William Skylstad from testifying in the first civil trial alleging sex abuse by filing for bankruptcy on the eve of that suit.

The law firm says it provided excellent representation in guiding the diocese out of a crisis that included over 180 clergy sex abuse claims.

Hindu Priest Charged In Georgia With Bankruptcy Fraud, Money Laundering

In Atlanta, Georgia last Wednesday, the former priest of a Norcross (GA) Hindu temple and the temple's former CEO were arraigned on federal charges of conspiracy, bankruptcy fraud, money laundering and obstructing justice. According to the Dayton (OH) Daily News, prosecutors charge that the priest, Annamalai Annamalai, a native of India who also goes by the name Dr. Commander Selvam,  fraudulently concealed property belonging to the Hindu Temple and Community Center of Georgia, Inc. from its court-appointed bankruptcy trustee. The indictment charges that the priest funneled over $1 million of Temple money to his own and his family's accounts and businesses, as well as to various priests.