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Listecki v. Official Comm. of Unsecured Creditors

United States Court of Appeals, Seventh Circuit

March 9, 2015

JEROME E. LISTECKI, as Trustee of the Archdiocese of Milwaukee Catholic Cemetery Perpetual Care Trust, Plaintiff-Appellee,
v.
OFFICIAL COMMITTEE OF UNSECURED CREDITORS, Defendant-Appellant

Argued June 2, 2014

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[Copyrighted Material Omitted]

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Appeal from the United States District Court for the Eastern District of Wisconsin. No. 13-cv-00179 -- Rudolph T. Randa, Judge.

For In the Matter of: ARCHDIOCESE OF MILWAUKEE, Debtor (13-2881): Bruce G. Arnold, Attorney, Daryl L. Diesing, Attorney, WHYTE HIRSCHBOECK DUDEK S.C., Milwaukee, WI.

For OFFICIAL COMMITTEE OF UNSECURED CREDITORS, Appellant (13-2881): Marci A. Hamilton, Attorney, Washington Crossing, PA; James I. Stang, Attorney, PACHULSKI STANG ZIEHL & JONES LLP, Los Angeles, CA.

For JEROME E. LISTECKI, Archbishop, Trustee of the Archdiocese of Milwaukee Catholic Cemetery Perpetual Care Trust, Appellee (13-2881): Brady C. Williamson, Attorney, GODFREY & KAHN S.C., Madison, WI.

For OFFICIAL COMMITTEE OF UNSECURED CREDITORS, Petitioner (13-3353): Marci A. Hamilton, Attorney, Washington Crossing, PA; James I. Stang, Attorney, PACHULSKI STANG ZIEHL & JONES LLP, Los Angeles, CA.

For JEROME E. LISTECKI, Archbishop, Trustee of the Archdiocese of Milwaukee Catholic Cemetery Perpetual Care Trust, Party-in-Interest (13-3353): Brady C. Williamson, Attorney, GODFREY & KAHN S.C., Madison, WI.

For ARCHDIOCESE OF MILWAUKEE, Party-in-Interest (13-3353): Bruce G. Arnold, Attorney, WHYTE HIRSCHBOECK DUDEK S.C., Milwaukee, WI.

For In the Matter of: ARCHDIOCESE OF MILWAUKEE, Debtor (13-3495): Bruce G. Arnold, Attorney, WHYTE HIRSCHBOECK DUDEK S.C., Milwaukee, WI.

For OFFICIAL COMMITTEE OF UNSECURED CREDITORS, Appellant (13-3495): Marci A. Hamilton, Attorney, Washington Crossing, PA; James I. Stang, Attorney, PACHULSKI STANG ZIEHL & JONES LLP, Los Angeles, CA.

For JEROME E. LISTECKI, Archbishop, Trustee of the Archdiocese of Milwaukee Catholic Cemetery Perpetual Care Trust, Appellee (13-3495): Brady C. Williamson, Attorney, GODFREY & KAHN S.C., Madison, WI.

Before FLAUM and WILLIAMS, Circuit Judges, and DOW, District Judge.[*]

OPINION

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Williams, Circuit Judge.

Facing financial problems and lawsuits from victims of sexual abuse, the Archdiocese of Milwaukee filed for Chapter 11 bankruptcy in 2011. A Creditors' Committee composed of abuse victims subsequently sought to void a one-time transfer of $55 million from the Archdiocese's general accounts to a trust earmarked for maintaining cemeteries as fraudulent or preferential under the Bankruptcy Code (the " Code" ). The Committee wanted the $55 million included in the Archdiocese's bankruptcy estate (the " Estate" ), making it available to creditors. However, the district court found that the application of the Code to that transfer would violate the Archbishop's free exercise rights under the Religious Freedom Restoration Act (" RFRA" ) and the First Amendment. We only affirm the district court's conclusion that RFRA is not applicable when the government is not a party to the suit based on the statute's plain language. However, we disagree with the district court's conclusion that RFRA is applicable in this action because the Committee does not act under " color of law" and is not the " government" for RFRA purposes. It is composed of non-governmental actors, owes a fiduciary duty to the creditors it represents and no one else, and has other non-governmental traits. Although the Free Exercise Clause is implicated here, we disagree with the district court's conclusion that it bars the application of the Code to the $55 million. The Code and its relevant provisions are generally and neutrally applicable and represent a compelling governmental interest in protecting creditors that is narrowly tailored to achieve that end.

The Committee sought the district court judge's recusal after the summary judgment order, but the court denied that motion. Because of our holding in Parts A-C of this opinion, it is not necessary to definitively decide this issue.

I. BACKGROUND

The Archdiocese has operated and maintained eight Catholic cemeteries and seven mausoleums in the Milwaukee area since 1857. It states in its complaint, which we accept as true, that it has set aside money for decades to provide perpetual care for those cemeteries in accordance with Canon Law. In April 2007, the Archdiocese created a trust fund (the " Trust" ) to maintain that money. Two months later, the Archbishop sent a letter seeking approval from the Vatican to transfer roughly $55 million (the " Funds" ) into the Trust, noting that " [b]y transferring these assets to the Trust, I foresee an improved protection of these funds from any legal claim and liability." The Vatican approved and the money was transferred in March 2008.

Before the creation of the Trust, the Archdiocese settled a case in which ten victims alleged they were abused by two priests in California. See Tom Heinen, $17 Million Settles 10 Abuse Cases, Milwaukee Journal Sentinel, Sept. 1, 2006, at A1. Ten months later, after the Trust was created, but before the Funds were transferred, the Wisconsin Supreme Court ruled certain statutes of limitations could be tolled, which allowed various sexual misconduct suits to go forward against the Archdiocese. John Doe 1 v. Archdiocese of Milwaukee, 2007 WI 95, 303 Wis.2d 34, 734 N.W.2d 827, 842--47 (Wis. 2007). Some of the resulting cases have been stayed pending the outcome of the bankruptcy petition.

Due in part to those cases, the Archdiocese filed for Chapter 11 bankruptcy on January 4, 2011. The Archdiocese has run the Estate as a debtor-in-possession since the filing. After the filing, the United States Trustee appointed a group of abuse victims to the Committee to represent the

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Archdiocese's unsecured creditors in the proceedings. The Archbishop then, in his role as trustee of the Trust, sought declaratory judgment from the bankruptcy court that the Funds would not " be used to satisfy any of the claims the Committee intends to pursue" against the Archdiocese because application of the Code to the Funds would violate the Archbishop's free exercise rights and RFRA. (We will call the plaintiff the " Archdiocese," even though it was technically the Trust and the Archbishop that brought the present action.) However, the complaint created a conflict because the plaintiff-Archbishop sought to limit the size of the Estate, and the Archdiocese as debtor-in-possession had little incentive to vigorously defend that complaint or assert affirmative defenses since it acts through its sole corporate member, the Archbishop. In other words, the declaratory complaint resulted in the Archbishop initiating an adversary action (as Trustee) against himself (as sole corporate member of the Archdiocese). Recognizing this problem, the parties entered into a stipulation, approved by the bankruptcy court, stating that the Committee was " granted derivative standing to assert and litigate the Avoidance and Turnover Claims against the Archbishop for the benefit of the Debtor's estate." The Committee asserted as a counterclaim that the transfer of money into the Trust was fraudulent and preferential and should be avoided pursuant to the Code.

The Committee moved for summary judgment on Count III, which sought a declaration that the First Amendment and/or RFRA bar the application of the avoidance and turn-over provisions of the Code to the Funds. The Archdiocese responded and filed a cross-motion for summary judgment. The Archdiocese attached the Archbishop's affidavit, saying he had a Canonical duty to " properly maintain[] in perpetuity" the cemeteries and mausoleums, and " [i]f the Committee is successful in converting the [Funds] into property of the Debtor's estate, there will be no funds or, at best, insufficient funds, for the perpetual care of the Milwaukee Catholic Cemeteries." There was no discovery taken on whether this imposed a substantial burden on his religious beliefs, and attorneys for both sides later agreed to stay the cross-motion until the Committee's summary judgment motion was adjudicated.

The bankruptcy court granted the Committee's motion, but the district court reversed. It found the Committee was acting under color of law for RFRA purposes and that the Archbishop's exercise of religion would be substantially burdened if the Funds were required to become part of the Estate. It granted the Archdiocese's cross-motion for summary judgment on both RFRA and First Amendment grounds and dismissed the case. Two weeks later, the Committee filed motions to vacate and for recusal of the district court judge based on information it obtained after the ruling. The Committee argued that the judge was biased, or a reasonable person would question his impartiality, based on documents showing he has nine family members who were buried between 1972 and 2013 in cemeteries owned by the Archdiocese: his father and mother (who passed away in 1975 and 1976, respectively), two sisters (1985 and 2001), an uncle (1972), an aunt (1985), his brother in-law (2013), and his wife's parents (1984 and 2010). The Committee also produced an Agreement that the judge signed with the Archdiocese on August 1, 1975, the day after his father passed away, for the purchase of his parents' burial plots. The judge denied the motion to recuse, stating he had no financial or other interest in the litigation and no reasonable person would perceive a substantial risk of

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bias in the case. The Committee filed a petition for a writ of mandamus with this court seeking the judge's recusal, and also appealed the summary judgment decision.

II. ANALYSIS

We begin by noting that the issue of whether the Archdiocese actually made a fraudulent, preferential or avoidable transfer is not before us. The issues before us relate only to Count III, which sought a declaration that the First Amendment and/or RFRA bar the application of the avoidance and turnover provisions of the Code to the Funds. We review the district court's decision that such a bar existed de novo. Kvapil v. Chippewa Cnty., 752 F.3d 708, 712 (7th Cir. 2014).

A. RFRA Does Not Apply in Suits in Which the " Government" Is Not Involved

The Committee contends it is not the " government" and therefore RFRA does not apply. We first determine whether RFRA applies when the " government" is not a party to action. We have previously said in dicta that " RFRA is applicable only to suits to which the government is a party." Tomic v. Catholic Diocese of Peoria, 442 F.3d 1036, 1042 (7th Cir. 2006), abrogated on other grounds by Hosanna-Tabor Evangelical Lutheran Church & Sch. v. EEOC, 132 S.Ct. 694, 181 L.Ed.2d 650 (2012). Based on RFRA's plain language, its legislative history, and the compelling reasons offered by our sister circuits, we now hold RFRA is not applicable in cases where the government is not a party.

We begin by first examining RFRA's plain language. See Barma v. Holder, 640 F.3d 749, 751 (7th Cir. 2011) (noting statutory interpretation begins with the plain language of the statute). It states, " [g]overnment shall not substantially burden a person's exercise of religion even if the burden results from a rule of general applicability ...." 42 U.S.C. § 2000bb-1(a). Subsection (b) provides an exception, stating that " [g]overnment may substantially burden a person's exercise of religion only if it demonstrates that application of the burden to the person--(1) is in furtherance of a compelling governmental interest; and (2) is the least restrictive means of furthering that compelling governmental interest." 42 U.S.C. § 2000bb-1(b). In other words, this is a burden shifting test in which the government must make a showing after the plaintiff demonstrates a substantial burden. Rweyemamu v. Cote, 520 F.3d 198, 203 n.2 (2d Cir. 2008) (" [W]e think the text of RFRA is plain ... in that it requires the government to demonstrate that application of a burden to a person is justified by a compelling governmental interest" (emphasis in original) (internal citation omitted)). It is self-evident that the government cannot meet its burden if it is not party to the suit. See Hankins v. Lyght, 441 F.3d 96, 114--15 (2d Cir. 2006) (Sotomayor, J., dissenting) (" Where, as here, the government is not a party, it cannot 'go [] forward' with any evidence. In my view, this provision strongly suggests that Congress did not intend RFRA to apply in suits between private parties." ). A private party cannot step into the shoes of the " government" and demonstrate a compelling governmental interest and that it is the least restrictive means of furthering that compelling governmental interest because the statute explicitly says that the " government" must make this showing.

If the intent were not yet clear, we find further support for this interpretation from the " [j]udicial relief" section of the statute. 42 U.S.C. § 2000bb-1(c). Congress stated that " [a] person whose religious exercise has been burdened in violation of this section may assert that

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violation as a claim or defense in a judicial proceeding and obtain appropriate relief against a government." Id. (emphasis added). The relief is clearly and unequivocally limited to that from the " government." If the government is not a party, no one can provide the appropriate relief. See Gen. Conf. Corp. v. McGill, 617 F.3d 402, 410 (6th Cir. 2010) (" The text of the statute makes quite clear that Congress intended RFRA to apply only to suits in which the government is ...


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