When Churches Fail: The Diocesan Debtor Dilemmas

Abstract

This article examines the doctrinal and constitutional dilemmas created when a religious organization goes into bankruptcy, through the lens of the Chapter 11 reorganizations recently commenced by Catholic dioceses in Oregon, Washington and Arizona. The doctrinal dilemma in these cases forces judges to choose between the rules and norms of bankruptcy law, on the one hand, and religious liberty, on the other. The constitutional dilemma forces courts to choose between respecting the Free Exercise (and related) rights of parishioners and Establishment Clause-based protections for tort creditors. The article argues that solutions to these dilemmas may be found through creative use of conflict-of-laws doctrine and what the article calls purposive equity.

Keywords: Bankruptcy, reorganization, Chapter 11, religion, religious liberty, church, free exercise, establishment, RFRA, conflict-of-laws, equity

JEL Classification: K49