Ryan J. Donohue, Thou Shalt Not Reorganize: Sacraments for Sale First Amendment Prohibitions and Other Complications of Chapter 11 Reorganization for Religious Institutions

Publication year2011




Imagine a system in which a church could be made to sell sacraments to the highest bidder. Envision an arrangement that would allow a secular trustee, employed by the United States government, to mandate that a priest accept confessions and instruct repentances-for a price.1What if atonement could simply be bought based on a sliding scale income ratio? Why not just raffle off guaranteed entrances into heaven or a fail-safe happy afterlife? The possibilities become endless and unimaginable. Theoretically, however, these potential externalities would be perfectly legal if chapter 11 reorganizations are followed to the letter of the law with respect to religious institution debtors. For several dioceses of the Catholic Church currently seeking bankruptcy protection under chapter 11, these extreme outcomes could conceivably become realities unless the courts recognize First Amendment religious freedoms and other unique issues pertinent to non-secular bankruptcies.

We live in a nation unquestionably divided by competing morals, rooted in large part in religion. This division is not wholly bound by political party lines, geography, or socioeconomic status.2Current events have led us to find ourselves in the midst of another attempt to exact a tolerable degree of separation between religion and state, on a national and arguably international scale, through the lens of American politics.3The balance of secular and non- secular interests in our daily lives is no doubt a topic of conversation at many dinner tables around the country, and the White House seems to be no exception. President George W. Bush credits his faith as a major influence and source of strength in his duties and decisions, both in the United States and abroad, as leader of the free world and Commander in Chief.4The President's open devotion to his faith has played well with a majority of Americans5and arguably contributed to his reelection to a second term. This approach struck a cord with many Americans who put more stock in faith than was previously anticipated. For example, same-sex marriage was brought to the forefront of American politics during the race for the White House in 2004.6Previously a fringe social issue affecting a minority of the population, the topic of same-sex marriage was met with aggressive opposition along the campaign trail, much of which came from religious interest groups. Even public school policies, while historically unfamiliar in the court of public opinion and in the halls of the U.S. Supreme Court,7are being scrutinized in courts of law with respect to competing secular and non-secular interests, including school prayer8and discussions of evolution and creation theories in school textbooks.9

It seems that, for the moment, the faithful have spoken at least on moral grounds. Eleven states passed constitutional amendments banning the possibility of same-sex marriage through referenda in 2004.10Also garnering national attention, the U.S. Supreme Court has heard a case considering the constitutionality of displaying a statue depicting the Ten Commandments outside a Texas courthouse and held the stand-alone monument is constitutional.11The American moral majority has communicated its message with a unified voice that is louder than recent memory can recall. The message is a simple one: religion is still important to much of the voting population, and it has an indelible place in American life, policy, and values. In a nation so separated in its views on how religion should inform government, if at all, the national discourse in which we find ourselves begs the often discussed yet seldom resolved question: where do we draw the line between religion and state?

Federal bankruptcy law has been one area of U.S. law called upon in efforts to exact a line between religion and state; a line that history and the U.S. Supreme Court have drawn and redrawn time and again.12The financial difficulties of religious organizations have seldom been considered in detail by federal bankruptcy courts. Several dioceses of the Catholic Church, however, were recently left with no alternative outside of bankruptcy protection as the result of adverse judgments, settlements, and legal fees in massive tort claims concerning sexual abuse and misconduct by clergy members.13Along with these filings, questions of First Amendment violations, particularly respecting the religion clauses,14inevitably surface. The business of faith, at least as it was intended, is not inherently commercial, as is the case with traditional for- profit business bankruptcy filings. In fact, Congress and the Supreme Court have recognized numerous exceptions for religious organizations with respect to employment,15taxation,16and other restrictions that are otherwise required of secular institutions and individuals.17On the flip side, the Establishment Clause of the First Amendment requires that the government not excessively entangle itself in religious affairs for fear of establishing or endorsing a particular religious practice or religion in general.18The special case of religious liberty has been debated for centuries,19and this debate continues to inform society's policies and practices with respect to religion in public life.

The purpose of this Comment is to display the dire need for an amendment to the U.S. Bankruptcy Code ("Bankruptcy Code")20that prohibits religious organizations from filing for bankruptcy protection under chapter 11.21A prohibition against reorganization for non-secular bankrupts will avoid First Amendment violations with respect to free exercise and establishment of religion. This Comment will conclude that chapter 722liquidation provides for a more equitable and constitutionally sound option. That is not to say that the preclusion of chapter 11 reorganization for non-secular bodies is without sacrifice. In fact, the result in a liquidation sale may leave a religious institution with no remaining assets after the assets are collected, sold, and the proceeds are distributed to its creditors.23In bankruptcy, a local house of worship may have to close its doors. Organized religion in the United States is decentralized on the whole, however, and allows for many congregations and factions of different religions spread out within every state. The solution proposed herein rests upon the concept that traveling to a neighboring affiliated parish or house of worship is a better externality of bankruptcy than requiring local religious organizations to become entrepreneurial enterprises excessively entangled with government, in violation of the First Amendment religion clauses, to reorganize the local houses of worship.

Part I of this Comment will provide the context for this inquiry by detailing recent bankruptcy filings by religious organizations and the surrounding circumstances. Additionally, Part I provides an overview of bankruptcy law, including a discussion of the purpose of bankruptcy in the United States, the courts' abstention options, chapter 11 reorganizations, and chapter 7 liquidations. Discussing these aspects of bankruptcy law will provide a better understanding of how these provisions may create First Amendment conflicts in a religious institution's bankruptcy case. Part II examines the First Amendment religion clauses, the gradual weakening of their protections in recent years, and the Religious Freedom Restoration Act ("RFRA")24as the appropriate contemporary statutory scheme under which religious liberty violations may be remedied. This examination provides a thorough analysis of the constitutional and statutory mandates to be considered with respect to non- secular bankruptcies. Part III discusses the potential conflict between religious liberty and the requirements of chapter 11 reorganization. Additionally, Part

III explains why chapter 7 liquidation is the more appropriate remedy. Further, this section provides an analysis of some of the red flags that courts should be aware of in non-secular bankruptcies. Part IV of this Comment proposes suggestions for avoiding or remedying potential First Amendment conflicts.



Before embarking on an exploration of the First Amendment implications of a religious organization's bankruptcy reorganization efforts, it is essential to examine the context in which the need arose by looking to current events. It is estimated that costs associated with the recent child sex abuse scandals involving members of the Catholic Church have risen to more than $770 million.25These lawsuits, combined with an economic recession, have led to falling investment income and fewer donations, causing many dioceses around the country to face potential financial ruin.26Many thought that the Archdiocese of Boston would be first in line if in fact a bankruptcy filing was on the horizon for a religious organization.27These rumors proved false, however, likely due to the closing of churches and the sale28or potential sale29of valuable property upon which the Archdiocese's buildings currently stand. Though seeing church buildings on the auction block is an increasingly common occurrence,30Boston Catholics have not yet been forced to wrestle with the unsettling revelation that their local houses of worship and private schools may become property of the estate subject to the will of the courts in a bankruptcy reorganization or liquidation effort. Members of the Catholic


Church in other dioceses around the country, however, have not been so fortunate.

A. Problems in Portland, Tucson, Spokane, and Beyond

On July 6, 2004, the Roman Catholic Archdiocese of Portland, Oregon made history when it became the first Catholic diocese in the nation to file for bankruptcy.31The archdiocese, and the insurance...

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