This is an article that I wrote for the National Conference of Bankruptcy Judges this year.
Freedom of religion is enshrined in the
First Amendment to the Constitution which protects the free exercise of
religion, as well as legislation such as the Religious Freedom Restoration Act[1]
the Religious Land Use and Institutionalized Persons Act of 2000[2]
and the Religious Liberty and Charitable Donation Protection Act[3]. When religious and secular parties clash in
bankruptcy court the constitutional and statutory protections of religion are
often invoked but rarely successful.
This paper will give a brief overview of the issues.
The First Amendment
states that “Congress shall make no law respecting an establishment of
religion, or prohibiting the free exercise thereof . . . “ While the establishment clause is rarely
brought up in the bankruptcy context, the establishment clause appears in
numerous reported decisions in which parties objected that the application of
bankruptcy law restricted their free exercise of religion.
A. Neutral,
Generally Applicable Laws
The basic principle of
free exercise jurisprudence is that “neutral, generally applicable laws may be
applied to religious practices even when not supported by a compelling government
interest.”[4] In other words, an impact on religion will
not exempt a person or entity from laws that do not specifically target
religion and which apply to everyone else.
This holding dooms most free exercise challenges to bankruptcy law since
the Bankruptcy Code is a “neutral, generally applicable law.” Examples of unsuccessful free exercise
challenges include: a church that objected to a trustee’s attempt to recover
tithes as a fraudulent transfer,[5] a
church that objected to a claim that gifts were solicited based on undue
influence,[6] a church that argued that being required to
obey the automatic stay and release parochial school transcripts interfered
with its free exercise,[7] a
church that objected to paying U.S. Trustee fees as an imposition on its free
exercise,[8]
and debtors who argued that the means test interfered with their religious
freedom.[9] In each of these cases, bankruptcy law
arguably burdened a religious practice but was not designed to specifically
attack religion. This was all the more
compelling in the cases where the debtors had voluntarily sought bankruptcy
protection but did not want to accept the requirements that came with that
choice.
An interesting subset
of these cases involved religious parties who sought to supplant bankruptcy law
with proceedings according to their religious tradition. In In
re Congregation Birchos Yosef,[10]
a religious congregation brought an adversary proceeding alleging fraud, breach
of fiduciary duty and looting of the debtor’s assets. In response, the defendants invoked a beis din proceeding against the
principals of the debtor. The debtor’s
principals were “invited” to participate in a proceeding before a Jewish
religious court and were enjoined from proceeding in bankruptcy court. If they failed to respond, they would be
subject to a sirov which could lead
to shunning by their religious community and potentially by all Orthodox
Jews. The debtor filed a motion to
enforce the automatic stay. After
finding that the automatic stay was implicated, the court found that the free exercise
clause was not implicated.
The automatic
stay is clearly neutral on its face and is also neutral and generally
applicable, as far as religious exercise is concerned, in practice. It applies
to anyone who falls within the ambit of 11 U.S.C. § 362(a) (here, to
anyone who commences a proceeding or takes another action covered by
either 11 U.S.C. § 362(a)(1) or (3)). It prohibits the invocation of
all covered proceedings, whether in state or federal court, a foreign court, or
a beis din. To the extent relevant, the clearly secular interests that
the automatic stay protects - to prohibit self-help and funnel all of the
activity covered by the stay through the bankruptcy court from the instant that
the bankruptcy case commences until, after motion on proper notice, the court
lifts the automatic stay in light of neutral interests that Congress believed
warrant such relief - are not directed at religious observance or excessively
entangled with religion. Indeed, the automatic stay could not be more narrowly
tailored in light of religious observance, because its function is to apply to
everyone, with certain neutral exceptions, requiring a motion under 11 U.S.C. § 362(d) for relief from
the stay where the stay is even remotely applicable, let alone under the facts
here, before one can be assured that the stay will not be violated. (citation
omitted).[11]
In
another proceeding, an Amish businessman filed chapter 11 following allegations
that he was operating a Ponzi scheme.[12] After his case was converted to chapter 7,
the trustee objected to his discharge. His
Amish creditors formed a committee for the purpose of creating a religious
alternative to the bankruptcy proceeding.
The debtor filed a motion to dismiss his case in favor of proceeding
before the Amish tribunal. 2,316 of his
creditors supported the request. The
trustee, the U.S. Trustee and the SEC objected.
At the hearing, the Amish creditors explained that they believed that
Biblical scripture forbade them from using the courts to resolve financial
disputes and that “the public spectacle of bankruptcy pollutes Amish testimony
to the outside world.”[13] The Court found that not only was dismissal
not required by the free exercise clause but that dismissal in favor of a
religious tribunal would violate the establishment clause as well.
B. Matters
of Church Governance
A
subset of First Amendment issues involves cases where a court would be required
to rule on church doctrine or governance.
The Supreme Court has held that the secular courts will not overturn
decisions by religious tribunals on matters of religious law[14]. “Religious organizations have the freedom ‘to
decide for themselves, free from state interference, matters of church
governance as well as those of faith and doctrine.”[15] However, separating matters of church
governance from secular law is challenging in the bankruptcy arena.
The
application of the ecclesiastical exception is illustrated by two cases
involving priests who filed proofs of claim alleging that they were improperly
terminated.[16] In one instance, a priest who was removed
from ministry following a canonical trial filed a claim for defamation, slander
and libel.[17] In the other, a priest removed by his Bishop
filed a claim for pension and sustenance.[18] In both cases, the Court found that it could
not decide the claim without evaluating whether the church body had followed
church law. Under the ecclesiastical or
ministerial exception, both courts found that they could not allow the claim.
However, it is more
difficult to apply the exception when the case involves disputes between church
personnel and third parties. This is
illustrated by the case of The Catholic
Bishop of Spokane.[19] In that case, a dispute arose between the
diocese and the Tort Claimants Committee.
The Committee argued that the property of the individual parishes, which
was often held in the name of the archdiocese, was property of the estate. The Diocese argued that ownership of the
property should be determined under church law. After quoting from a Supreme Court decision
stating that members of religious body impliedly consent to being governed by church
law, the Court went on to say:
The debtor and
defendants would finish this quote with the following: “and all who do business with or have
monetary claims against the religious body are also bound to submit to its
rules.”[20]
The Court ultimately found that “(t)his
is a purely secular dispute between creditors and a bankruptcy debtor, albeit
one which is a religious organization.[21] As a result, the Court found that property
of the estate was determined by 11 U.S.C. §541 and applicable state law rather
than church law.[22]
A
First Amendment challenge was also rejected in a case where tort claimants
wanted to question the Archbishop about how the church dealt with claims of
sexual abuse.[23] The Debtor and the Archbishop objected that
matters of internal church governance should be off limits. The Court disagreed.
In these tort
claims, the dispute is not over church doctrine or beliefs, but over liability
for misconduct by those in the church's employ. The court is not called upon to
resolve any matters of ecclesiastical or theological doctrine. Instead,
evidence of internal church policy may be relevant to the question of what the
church did at what time in dealing with allegations of sexual abuse of minors
by its priests. Thus, the internal church governance doctrine, even if it gave
rise to some sort of discovery privilege under some circumstances, is not
implicated in these tort claims.[24]
A court also rejected the claim that a
person could not be found to be a “responsible person” under the Internal
Revenue Code based on review of the church’s bylaws.[25] Thus, in order for the First Amendment to
bar judicial examination of a matter related to church matters, it is not
enough that church governance might be examined. Rather, the Court must be called upon to
decide a religious rather than a secular concern.
II.
RFRA
Through a series of
three enactments, Congress has attempted to provide statutory protection for
religious practices. The Religious
Freedom Restoration Act (RFRA)[26]
“was enacted in 1993 in response to Employment
Division, Department of Human Resources v. Smith, 494 U.S. 872 (1990), in
which the Supreme Court held that burdens on religious exercise are
constitutional under the Free Exercise Clause if they result from a neutral law
of general application and have a rational basis.”[27] RFRA
stated that “(g)overnment shall not substantially burden a person’s exercise of
religion”[28]
unless two factors are present: the
burden is “in furtherance of a compelling governmental interest” and “is the
least restrictive means of furthering that compelling governmental interest.”[29]
The Supreme Court found
that RFRA was unconstitutional, at least as applied to the states.[30] In response, Congress passed RLUIPA which is
limited to land use and incarcerated persons.[31] Additionally, Congress passed the Religious
Liberty and Charitable Donation Protection Act (RLCDPA) which amended the
Bankruptcy Code to provide that charitable contributions to qualified religious
or charitable entities may not be recovered as fraudulent transfers so long as
they did not exceed 15% of gross annual income or were consistent with prior
giving patterns.[32]
For bankruptcy
purposes, RFRA and RLCDPA are the relevant statutes. RFRA appears to remain viable as a
restriction on the federal government.[33] RLCDPA is an amendment to the Bankruptcy
Code.
Just as with First
Amendment challenges, most RFRA challenges to bankruptcy law have been
unsuccessful. The most important
recent case is Listecki v. Official
Committee of Unsecured Creditors.[34] In Listecki,
the Archdiocese of Milwaukee transferred $55 million to a trust fund for care
of cemeteries. The Diocese filed an
adversary proceeding seeking a declaratory judgment that the First Amendment
and/or RFRA barred recovery of the funds.
The Official Committee of Unsecured Creditors brought a motion for
summary judgment on this claim which was granted by the Bankruptcy Court. This meant that a suit to recover the funds
was not precluded. The District Court
reversed, which meant that the fraudulent transfer claim could not be
brought. The Seventh Circuit reversed
the District Court with the result being that an action could be brought.
The Seventh Circuit
opinion thoroughly rejected the application of RFRA. First, it found that for RFRA to apply, the
government must be a party to the action.
RFRA only applies to a situation where the government substantially
burdens a person’s exercise of religion.
The Court concluded that an Official Committee of Unsecured Creditors
was not the government. The definition
of “government” under RFRA includes a “person acting under color of law.” A private entity only becomes a government
actor when it is “performing an action that is traditionally the exclusive
prerogative of the state.”[35] Because recovering transfers is
traditionally a function of private trustees and debtors-in-possession, it was
not within the exclusive prerogative of the state. Because the Committee was not a government
actor, then RFRA could not apply.
The Court also found
that “the protection of creditors . . .
is a compelling governmental interest that can overcome a burden on the free
exercise of religion.”[36] Finally, the Court found that the avoidance
provisions of the Code were “narrowly tailored to achieve the interests of expanding
the estate to pay creditors, thereby protecting their interests.”[37] Thus, the Seventh Circuit found that RFRA
was not a bar to a suit by the Official Committee of Unsecured Creditors to
recover the money transferred to the cemetery fund.[38]
[1] 42 U.S.C. §2000bb-1.
[2] 42
U.S.C. §2000cc.
[3] 11
U.S.C. §548(a)(2).
[4] City of Boerne v. Flores, 521 U.S. 507,
514 (1997).
[5] Universal Church v. Geltzer, 463 F.3d
218 (2nd Cir. 2006), cert. den.,
549 U.S. 1113 (2007).
[6] In re The Bible Speaks, 869 F.2d 628 (1st
Cir. 1989).
[7] In re Scroggins, 209 B.R. 727 (Bankr. D.
Ariz. 1997).
[8] In re Gates Community Chapel of Rochester,
212 B.R. 220 (Bankr. W.D. N.Y. 1997).
[9] In re Meyers, 467 B.R. 451 (Bankr. E.D.
Wis. 2012).
[10]
535 B.R. 629 (Bankr. S.D. N.Y. 2015).
[11] 535
B.R. at 637-38.
[12] In re Beachy, 2011 Bankr. LEXIS 2718
(Bankr. N.D. Ohio 2011).
[13] Id. at *6.
[14] Watson v. Jones, 80 U.S. 679 (1871).
[15] Kedroff v. St. Nicholas Cathedral of Russian
Orthodox Church in N. Am., 344 U.S. 94, 116 (1952).
[16] In re Archdiocese of Milwaukee, 515 B.R.
579 (Bankr. E.D. Wisc. 2014); In re Catholic Diocese of Wilmington, Inc.,
513 B.R. 639 (Bankr. D. Del. 2014)
[17] In re Archdiocese of Milwaukee, supra.
[18] In re Catholic Diocese of Wilmington, Inc.,
supra.
[19]
329 B.R. 304 (Bankr. E.D. Wash. 2005).
[20]
329 B.R. at 322.
[21]
329 B.R. at 323.
[22]
The same result followed in In re Roman
Catholic Archbishop of Portland, 335 B.R. 842 (Bankr. D. Ore. 2005), which
involved application of 11 U.S.C. §544.
[23] In re Roman Catholic Archbishop of Portland,
335 B.R. 815 (Bankr. D. Ore. 2005).
[24]
335 B.R. at 825.
[25] Vaughn v. Internal Revenue Service, 2012
U.S. Dist. LEXIS 107755 (E.D. N.C. 2012).
[26] 42 U.S.C. §2000bb-1.
[27] Little Sisters of the Poor Home for the Aged
v. Burwell, 794 F.3d 1151, 1174 (10th Cir. 2015), vacated by, remanded by, Zubik v. Burwell, (2016).
[28]
42 U.S.C. §2000bb-1(a).
[29]
42 U.S.C. §2000bb-1(b).
[30] City of Boerne v. Flores, supra.
[31] Cutter v. Wilkinson, 544 U.S. 709, 715
(2005).
[32]
11 U.S.C. §548(a)(2)(A).
[33] Young v. Crystal Evangelical Free Church,
141 F.3d 854 (8th Cir. 1998).
[34] 780
F.3d 731 (7th Cir. 2015).
[35] 780
F.3d at 740.
[36]
780 F.3d at 745-46.
[37]
780 F.3d at 748.
[38] In re Catholic Bishop of Spokane, 329
B.R. 304 (Bankr. D. Wash. 2005) reached a similar result.
[39]
No. 15-30125 (Bankr. D. Minn.).
[40]
No. 15-30125 (Bankr. D. Minn.), Dkt. #696.
[41]
No. 15-30125 (Bankr. D. Minn.), Dkt. #725.
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