Milwaukee Archbishop Jerome Listecki speaks at a news conference in Milwaukee last year. The U.S. Court of Appeals today is taking up several issues related to the Milwaukee Archdiocese bankruptcy. Credit: Associated Press

SHARE Archdiocese Bankruptcy The Catholic Archdiocese of Milwaukee, which faces more than a dozen civil fraud lawsuits over its handling of clergy sex abuse cases, filed for Chapter 11 bankruptcy protection in 2011. As the case proceeds, we'll have updates, analysis, documents and more. Go to section

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Chicago — Judges at the 7th Circuit Court of Appeals on Monday appeared to challenge a key argument in the Archdiocese of Milwaukee's efforts to protect $60 million it holds in a trust for the care of cemeteries from being used to pay creditors in its bankruptcy.

The three-judge panel questioned whether the archdiocese needs that entire $60 million to maintain its cemeteries. And one of the jurists, 7th Circuit Judge Ann Claire Williams, said she found issues related to U.S. District Judge Rudolph T. Randa's decision not to recuse himself from the lawsuit over those funds "troubling."

The panel — Appellate Judges Williams and Joel Flaum, along with U.S. District Judge Robert Dow of the Northern District of Illinois — heard oral arguments Monday on several issues related to the bankruptcy, including First Amendment questions that could be of national significance as religious liberty cases make their way through courts around the country.

In that lawsuit, filed by Archbishop Jerome Listecki as sole trustee of the cemetery trust, the church maintains that forcing it to turn over even $1 in cemetery funds to the bankruptcy estate would substantially burden its free exercise of religion under the First Amendment and the federal Religious Freedom Restoration Act. Proceeds from the estate would go to finance a settlement with sex abuse victims and the archdiocese's reorganization.

Attorneys for the creditors committee argue that the First Amendment and RFRA, as it is called, apply only in cases involving the government. Madison-based attorney Brady Williamson, who is representing the cemetery trust on the religious liberty issues, argued that the creditors committee functions effectively as the government "under color of law" because it is appointed by the bankruptcy trustee and is afforded certain powers and responsibilities under the bankruptcy code.

"Under that argument, every corporation, every LLC and LLP in the United States would be a government actor and would be subject to RFRA liability," said James Stang, lead attorney for the creditors committee, who added that no court has ever found a creditors committee to be acting as the government.

Dow and Williams appeared skeptical of Williamson's argument. Dow noted that he routinely appoints and supervises attorneys in his role as a judge.

"And I don't know of anyone who's ever made the argument that they were acting under the color of law," he said.

Conflicting rulings

U.S. Bankruptcy Judge Susan V. Kelley had ruled earlier that taking a portion of the cemetery funds would not constitute a substantial burden on the church. The archdiocese appealed to U.S. District Judge Rudolph T. Randa, who found that it would, saying Catholic cemeteries and their proper care play a central role in the Catholic belief in the resurrection of the body after death.

And Williamson reiterated that position on Monday, calling the belief in the resurrection "one of the most important precepts" of the Catholic faith.

"The difference between Catholic cemeteries and secular cemeteries is a lot more than how the lawn gets mowed," he said.

The First Amendment and 1993 Religious Freedom Restoration Act bar the government from substantially burdening the free exercise of religion without a compelling government interest. Marci Hamilton, who represented the creditors committee on the religious liberty issues, told the court that the archdiocese had moved its cemetery funds into the trust to protect them from legal liability in the years before it entered bankruptcy. And she called the religious liberty issues an attempt by the church to circumvent laws on fraudulent transfers in bankruptcy.

The government's compelling interest, she said, is in protecting individuals who were sexually assaulted from being re-victimized by the archdiocese, and providing a disincentive to others who might consider moving their assets to shield them from victims.

"If in fact a religious organization can cover up childhood sexual abuse by protecting the identity of predators...and move all of its assets right before bankruptcy so it does not have to compensate them..., that is a devastating message to survivors. And that is a compelling interest," she said.

Related issues

The Appeals Court on Monday also heard oral arguments on two other issues related to the bankruptcy:

■ Whether Randa's decision on the the cemetery trust litigation should be vacated, and whether the judge should be barred from hearing future disputes in the case. The creditors committee argues that Randa has a conflict and financial interest in the case because he has numerous relatives buried in archdiocese cemeteries and purchased two crypts for his parents decades earlier. Williamson said Randa has no conflict or financial interest, and in his brief to the court called the creditors' filing "a thinly veiled attempt to find a new district court judge who will agree with the committee on the merits of this litigation."

■ Whether Kelley should have allowed a deaf man who was sexually abused as a child by the late Father Lawrence Murphy to present evidence that he says would show that the archdiocese used fraud to induce him to sign a settlement agreement in 2007. That evidence, statements made by the archdiocese during its mediation with the victim, is privileged under Wisconsin law, except in cases where its admission is necessary to prevent a "manifest injustice." Kelley dismissed the man's bankruptcy claim against the archdiocese because he had previously signed a settlement agreement. Randa upheld that decision.

Hamilton and Stang told the court they had never before sought the recusal of a federal judge in their combined 58 years of practicing law, but were prompted by what they considered Randa's lack of impartiality.

Williamson said the creditors' attorneys had ample time before Randa ruled to investigate any connection he may have with the cemeteries. But Judge Williams said the onus is on the judge to divulge any conflict, not on the parties to investigate.

Flaum questioned whether they were seeking Randa's recusal because of his religion, a move that would not be allowed under federal court rules.

"This has nothing to do with his being Catholic," said Hamilton. "For us, it's about the public integrity of the case."

The judges said Monday that they would take the cases under advisement and rule at a later date.

While not legally binding outside the 7th Circuit, the Milwaukee decision on the religious liberty issues could be of national significance as courts across the country attempt to strike a balance between the rights of individuals and organizations to live out their "sincerely held" religious beliefs, and laws intended to protect society at large and promote the greater good. The 1993 Religious Freedom Restoration Act is also at issue in the U.S. Supreme Court cases over the the Obama administration's requirement that employers, except churches and other houses of worship, provide free access to contraceptive care for employees.

The panel's decision in the Milwaukee case, which takes up distinctly different issues, "could have some persuasive value nationally,' said Douglas Laycock, a professor at the University of Virginia Law School, who consulted on the Milwaukee case early on.

Bankruptcy litigation

The archdiocese filed for Chapter 11 bankruptcy protection in January 2011 in an effort to deal with its mounting sex abuse claims. It has proposed a reorganization plan that would set aside less than $4 million to compensate 128 of the 575 men and women who filed sex abuse claims in the bankruptcy, and create a $500,000 therapy fund.

Kelley last week approved the plan's disclosure statement, an overview intended to give creditors enough information to enable them to approve or reject the plan, and issued an order allowing it to be distributed to creditors. She has scheduled a separate four-day hearing in October for the plan itself.

Lawyers for the committee, which comprises abuse victims but represents all creditors, have urged all to vote no, saying it is not in their best interest.

They have filed a motion to bar Kelley from approving the plan, in part because issues are pending in another court — a move intended to give the 7th Circuit judges time to rule on the religious liberty issues.

The cemetery trust, created in 2007, appears to be the abuse victims' last hope for a larger settlement from the archdiocese. A decision favoring the archdiocese would effectively bar any claim that victims have to the cemetery trust, and likely two other major assets where potential litigation has been put on hold: the archdiocese's headquarters complex known as the Cousins Center and the Faith in our Future Trust created to hold proceeds from a $105 million capital campaign.

A ruling favoring creditors would spur a new round of costly legal battles at the bankruptcy court level and could push the parties toward a higher settlement figure, legal observers have said.