Religious freedom law a focus in church bankruptcy

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CHICAGO — A lawsuit tied to the Archdiocese of Milwaukee’s bankruptcy will go before the federal appeals court in Chicago on Monday, with judges hearing arguments in a case that experts say could make millions of dollars held in trust available to victims of clergy sexual abuse and impact other cases involving gay marriage, health care and religion.

Attorneys representing clergy sexual abuse victims have asked the 7th U.S. Circuit Court of Appeals to reinstate a lawsuit seeking to have about $55 million in a cemetery trust fund made available to compensate their clients.

The trust fund has been a focal point of the Milwaukee archdiocese’s increasingly bitter and contentious bankruptcy case. Sexual abuse victims believe New York Cardinal Timothy Dolan created the fund to hide money from them when he was archbishop of Milwaukee. Church leaders maintain creation of the trust was a mere formality because the money was donated to care for the archdiocese’s cemeteries and always used for that purpose.

Hundreds of sexual abuse victims have filed bankruptcy claims against the archdiocese, and without the trust money, it has relatively few assets. A proposed bankruptcy reorganization plan would provide about $4 million to compensate about 125 victims, but it would give nothing to many more.

The Milwaukee case is unusual among church bankruptcies because of the large number of victims, as well as its length and a lack of insurance coverage, which has made it more difficult to settle, said John Manly, a California attorney who has represented clergy sexual abuse victims in other cases.

The archdiocese filed for bankruptcy in 2011, saying it would not have enough money if victims’ lawsuits went against it. Dolan wrote a letter to the Vatican in 2007, recommending a trust as a way to provide “an improved protection of these funds from any legal claim and liability.” The year before, the Milwaukee archdiocese had agreed to pay more than $16 million to settle with 10 California residents abused by two of its priests while they lived there.

Many other U.S. dioceses also have money in trust, but in most church bankruptcy cases, victims have been able to gain some access to that money, Manly said.

“Milwaukee, the archdiocese there, seems to be bucking the trend,” he said.

The appellate judges could ask attorneys about the trust on Monday, but the appeal before them focuses on the complicated legal reasoning a lower court judge gave when he dismissed the lawsuit brought by attorneys representing the victims and other creditors.

U.S. District Judge Rudolph Randa said the archdiocese was protected by the 1993 Religious Freedom Restoration Act and First Amendment freedom of religion.

The scope of the Religious Freedom Restoration Act has been an issue in gay marriage cases and Hobby Lobby’s challenge of the federal health care law’s birth control mandate. The federal law protects religious organizations from government intervention, and in some cases, the mere use of courts to enforce laws or resolve disputes between private parties has been enough to trigger it, said Marc Stern, a lawyer for the American Jewish Committee.

Questions remain, lending the Milwaukee archdiocese case great interest, he added.

“It’s sort of a sad case,” Stern said, noting that the bankruptcy case pits sexual abuse victims against donors who gave money to keep up cemeteries. “There really are two sets of innocent parties, and somebody walks away harmed.”

The case is the first church bankruptcy to reach a federal appeals court with questions about the use of trust funds and the Religious Freedom Restoration Act, attorneys said. Any decision will likely be appealed to the U.S. Supreme Court.