Bankruptcy code doesn’t violate Catholic Archdiocese’s rights, the Seventh Circuit holds

Listecki v. Official Comm. of Unsecured Creditors, Nos. 13-2881, 13-3353, 13-3495 (7th Cir. Mar. 9, 2015). 

In 2008, the Catholic Archdiocese of Milwaukee transferred $55 million to a trust to fund its cemeteries and mausoleums. Not long before the transfer, the Archdiocese had been hit with a number of sexual-abuse lawsuits. 

In 2011, the Archdiocese filed for bankruptcy and asked the bankruptcy court to rule that none of the money in the $55 million trust could be used to satisfy the Archdiocese’s unsecured creditors—a group that included sexual-abuse plaintiffs. Normally, that money would be subject to the bankruptcy code, which allows a bankruptcy court to order that certain funds be turned over to the bankruptcy estate for distribution to creditors. According to the Archdiocese, though, applying the bankruptcy code to the trust would violate both RFRA and the First Amendment’s Free Exercise Clause. Not surprisingly, the Archdiocese’s position was opposed by the unsecured creditors. 

The bankruptcy court rejected the Archdiocese’s position. The district court reversed, however, and ruled that applying the bankruptcy code would violate RFRA and the Free Exercise Clause. Not long after, the unsecured creditors asked the district courtJudge Rudolph Randato vacate his decision and recuse himself, on the ground that he has nine close family members buried in the Archdiocese’s cemeteries. (Recall that the trust at the center of this dispute was intended to fund those cemeteries.) Judge Randa denied the motion. 

On appeal, the Seventh Circuit rules that RFRA doesn’t apply to suits, like this one, to which the federal government isn’t a party. It also rules that the Free Exercise Clause doesn’t prevent the bankruptcy code from being applied to the Archdiocese’s trust. And, finally, because the Seventh Circuit’s rules require the case to be reassigned to another district court judge, the panel does not reach the recusal issue. It strongly intimates, however, that Judge Randa should have recused himself—indeed, should have recused himself without even waiting for a motion.