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Appeals court rules against archdiocese on key bankruptcy issue

Earlier this month, a federal appellate court issued an important decision that has implications for both bankruptcy law and constitutional law.

The decision concerns a key aspect of the Archdiocese of Milwaukee's bankruptcy claim. The archdiocese initially filed Chapter 11 bankruptcy in 2011, when it was embroiled in civil lawsuits stemming from allegations of sexual abuse by priests. That same year, the archdiocese transferred $55 million into a trust fund for cemetery maintenance, effectively shielding those funds from the grasp of claimants in the civil lawsuits.

Under the bankruptcy code, creditors can challenge asset transfers designed to remove funds from their reach. The creditors in this case – including hundreds of sex abuse victims – contend that the archdiocese created the trust solely to keep the funds out of their hands.

On appeal, the archdiocese argued that invalidating the transfer would violate its religious freedom. The appellate court rejected this argument.

In ruling against the archdiocese, the court addressed only the scope of religious freedom under the First Amendment and federal law, deciding that the bankruptcy code did not infringe on religious freedom in this context. Notably, the court didn't address whether the $55 million transfer actually violated the bankruptcy code. That determination remains to be seen. It also remains to be seen whether the archdiocese will pursue further appeal to the U.S. Supreme Court.

The case illustrates the complexity of bankruptcy cases. Reorganizing any entity – whether a nonprofit organization or for-profit corporation – is a convoluted undertaking. So, too, are the nuances involved in reorganizing personal finances through individual bankruptcy.

Source: Wisconsin Law Journal, “Court: Judge erred on Milwaukee archdiocese fund,” March 9, 2015.

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