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In a decision that could have far-reaching implications, the 7th Circuit Court of Appeals ruled that the Milwaukee archdiocese can't rely on the free exercise of religion clause in the First Amendment or the Religious Freedom Restoration Act as protections against claims in its bankruptcy case.

The key question in the Milwaukee case of whether approximately $55 million placed in a trust for the care of cemeteries can be used to pay off the archdiocese's debts in bankruptcy was not answered in the decision. Mounting legal fees -- now at least $16 million but possibly as high as $20 million -- raise the question of whether much will be available to pay debts and compensate those who claim to have been sexually abused.

The appellate court decision issued late Monday is not a final decision. The court also found that U.S. District Judge Rudolph Randa, who ruled in the archdiocese's favor, should have stepped aside because of a conflict of interest. A new judge will have to be appointed to decide the issue of the trust fund based on the appellate findings that the First Amendment and Religious Freedom Restoration Act do not apply.

James Stang, a lawyer representing the claimants in the Milwaukee case, said a number of states have local laws similar to the federal Religious Freedom Restoration Act that allow some cases to be handled at the state level.

"In states that do not have these laws, bankruptcy is seen as a way of shielding assets from creditors," he said. "This decision means they can't hide under RFRA anymore."

Stang, who represents many claimants in bankruptcies involving dioceses or religious orders, said he will be in New York this week on a case involving the Christian Brothers who transferred a school in an attempt to minimize its assets.

"Does it happen often?" he asked. "Yeah, it does."

The Milwaukee archdiocese filed for bankruptcy in January 2011, just before lawsuits involving 17 survivors of sexual abuse were about to go to trial in state court. The Wisconsin Supreme Court had ruled that archdiocesan officials could be sued for fraud if they knowingly allowed abusers to continue in their ministries despite credible allegations having been made to the archdiocese. The state's high court had also ruled that insurance coverage did not have to pay if the archdiocese committed fraud.

When Milwaukee Archbishop Jerome Listecki authorized the Chapter 11 bankruptcy filing, he said the pending lawsuits forced the action. The backdrop for the case was a 2006 agreement by the archdiocese to pay $17 million -- about half from insurance coverage -- to 10 California victims of sexual abuse by priests who had been transferred there after abusing victims in Wisconsin.

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Court: Milwaukee archdiocese can't use First Amendment to protect against claims in bankruptcy