Monday, December 12, 2016

Protection for Religious Entities in Bankruptcy

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.

I.                   The First Amendment
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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