The Catholic Archdiocese of Milwaukee sought to insulate $55 million of its funds from lawsuits brought by victims of priestly sex abuse, according to a letter penned by then-Archbishop of Milwaukee Timothy Dolan, so it transferred those funds into a separate trust set up to care for the archdiocese’s cemeteries and mausoleums. Once the sexual abuse victims sought those funds in a bankruptcy proceeding, however, the archdiocese claimed that it had a religious liberty right not to use that money to compensate victims of abuse.
Though a federal district judge agreed with the archdiocese that its religious freedom includes this right not to compensate victims in 2013, a bipartisan panel of the United States Court of Appeals for the Seventh Circuit reversed that decision on Monday. The Seventh Circuit noted that “the issue of whether the Archdiocese actually made a fraudulent, preferential or avoidable transfer is not before us,” so it remains to be seen whether the abuse victims will be compensated out of the $55 million worth of funds. Nevertheless, the Seventh Circuit’s decision means that the archdiocese will not be able to hide behind claims of religious liberty in order to avoid liability for the actions of its clergy — or, at least, it means as much so long as it is not reversed on appeal.
At least 45 Milwaukee priests face allegations of sexual abuse, including one priest who was accused of molesting close to 200 deaf boys. The cemetery trust was created after the archdiocese agreed to a $17 million settlement involving ten victims who alleged that they were abused by priests in California, but the $55 million worth of funds were not transferred to that trust until after a Wisconsin Supreme Court decision which allowed other lawsuits by alleged victims of priestly abuse to move forward. Dolan, who is now a cardinal and the Archbishop of New York, wrote to the Vatican regarding the $55 million in funds that “[b]y transferring these assets to the Trust, I foresee an improved protection of these funds from any legal claim and liability.”
The archdiocese declared bankruptcy in 2011, in part due to the financial burden of the lawsuits brought by alleged abuse victims.
Religious freedom became an issue after the archdiocese claimed that it had a Canonical obligation to “properly maintain in perpetuity” the cemeteries and mausoleums funded through the trust. If victims of sex abuse or other creditors are compensated out of these funds, the archdiocese says, “there will be no funds or, at best, insufficient funds, for the perpetual care of the Milwaukee Catholic Cemeteries,” and thus the archdiocese claims that it will be unable to fulfill a religious obligation.
In rejecting this claim that the archdiocese has a religious right to spend the trust’s funds on burial places and only on burial places, the Seventh Circuit offers several reasons why religious freedom cannot trump the rights of the archdiocese’s creditors and those of its clergy’s victims. Perhaps most significantly, the court holds that the archdiocese’s religious liberty claim would fail even under the strictest level of constitutional scrutiny.
Drawing a comparison to a Supreme Court decision holding that religious objectors may not opt out of Social Security taxes, the court notes that federal bankruptcy law, like Social Security, “’serves the public interest by providing a comprehensive … system with a variety of benefits available to all participants’ nationwide.” Just as Social Security “aids those who have reached a certain age or are disabled, the Code aids those who have reached a certain financial condition and who need assistance repaying or recovering a debt.”
Yet, if religious objectors were able to opt out of parts of the bankruptcy code, that would undermine the comprehensive nature of that code. It would also lead to absurd consequences, according to the court. The rule proposed by the archdiocese “would favor a dishonest debtor at the creditors’ expense,” by preventing courts from inquiring into whether a religious entity made a fraudulent transfer in order to dodge its debts. “This would undermine the compelling interest of the Code by allowing a debtor who has made preferential, fraudulent and avoidable transfers to intentionally harm its creditors.”
Additionally, the Seventh Circuit explained, permitting religious exemptions from bankruptcy law could lead unscrupulous debtors to game the system. “If an exemption to the Code was created in the name of religious beliefs,” the court warned, “we can envision scenarios in which individuals would join religious sects to circumvent the Code, all in the name of religion, and gain an ‘economic advantage over’ their secular competitors.”