Restructuring

Contributed by Doron P. Kenter.

By the authority of the Heavenly Court, and by the authority of the earthly court, we hold it permissible to pray with those who have transgressed… — Kol Nidrei (Preamble)

Kim Davis is the Rowan County clerk who famously made headlines for her tiff with Survivor, the arena rock band behind the Rocky III hit “Eye of the Tiger.”  Perhaps less importantly, anyone with a television, a newspaper, or internet access is aware of her faith-based refusal to issue marriage licenses to gay couples, notwithstanding her legal obligation to do so.  As we approach Yom Kippur, the Day of Atonement, we examine a recent bankruptcy court decision highlighting the tension between religious proceedings and the uniform laws of bankruptcy in the United States, and the steps that bankruptcy courts can take when religious actors or tribunals attempt to circumvent applicable U.S. law. 
In that case, the United States Bankruptcy Court for the Southern District of New York was asked to enforce the automatic stay to enjoin litigants from proceeding with an action against a chapter 11 debtor’s principals in the Jewish religious court known as a beit din.  Batei din (plural of beit din) are traditionally convened on an ad hoc basis to oversee religious matters such as conversion to Judaism and religious divorce proceedings.  In many ultra-orthodox communities, batei din also adjudicate civil matters, including business disputes.  What happens, then, when litigants attempt to invoke a beit din while a bankruptcy case is pending?  Will bankruptcy courts compel Jewish religious courts to discontinue their proceedings?
In Congregation Birchos Yosef, the debtor, after filing for chapter 11, commenced an action in the bankruptcy court against Bais Chinuch L’Bonois, Inc., a nearby private school, and against certain individuals allegedly acting with it, asserting a number of claims in connection with an alleged looting of the Congregation’s assets.  Both communities are ultra-Orthodox Jewish organizations, duly incorporated under New York law, and located just a few blocks from each other in Rockland County.  In response, Bais Chinuch and the individual defendants invoked a beit din, which, in turn, issued a “hazmana” (a type of summons) to the debtor’s principals to participate in a proceeding regarding the dispute that formed the basis of the debtor’s complaint.  The beit din further issued an ekul (injunction) against the debtor’s principals, enjoining them from pursuing the adversary proceeding in the bankruptcy court.  The summons further advised the debtor’s principals that their failure to participate in the beit din proceeding could result in a “siruv” (a contempt of court order, or a form of excommunication) which, at a minimum, would constitute a “shunning” by their community and, potentially, by other members of the Orthodox Jewish community.
The debtor then advised the beit din that its proceeding violated the automatic stay and requested that the beit din terminate its proceeding.  In response, the beit din issued a second hazmana (summons), once again threatening the debtor’s principals with shunning or excommunication if they failed to participate.  As the bankruptcy court recognized, the debtor’s principals could have ignored the summons and allowed the beit din to issue its ruling, but “that choice would involve substantial courage in light of the clear and imminent harm that would result” – i.e., the social stigma and other collateral effects of ignoring the command of the religious panel, including harms suffered by their children, who had already been harassed and threatened with expulsion from school as a result of their parents’ actions and refusal to participate before the beit din.  Consequently, the debtor moved to enforce the automatic stay as to the defendants and the beit din, seeking an order of the bankruptcy court that the religious proceeding violated the automatic stay of actions against the debtor pursuant to section 362 of the Bankruptcy Code.
Bais Chinuch and the other defendants objected, arguing that their conduct was not barred by the automatic stay because the beit din’s hazmana (summons) was limited to the debtor’s principals, and did not seek any response from the debtor itself.  That argument was rejected summarily because the beit din’s summons was directed as to the principals principally (and solely) to the extent that they directed the debtor to act in the chapter 11 case.  And, according to the bankruptcy court, it is well-established that the automatic stay applies to actions against a debtor’s principals where they have an “identity of interest” with the debtor, with no further action being necessary on the part of the debtor (for example, a motion to extend the automatic stay).  Judge Drain noted, “[i]f that were not the case, there would be such a hole in the automatic stay that it would have no force. Parties in interest in bankruptcy cases could walk right through it simply by suing the debtor’s principals for actions which they took in that capacity.”  Moreover, Judge Drain concluded that the beit din was convened specifically for the purpose of taking control of the adversary proceeding in the debtor’s bankruptcy case, observing that “[t]here is no question that those who invoked the bei[t] din foresaw the consequences of their actions on the Debtor and this case and that they are engaging in considerable hypocrisy in arguing to the contrary.”  Consequently, he imposed coercive sanctions in the amount of $10,000 per day to ensure that Bais Chinuch and the other defendants adhered to his decision in the bankruptcy case, in which he directed them to promptly request that the beit din discontinue its proceeding.
Judge Drain next turned to the question of whether enforcement of the automatic stay would constitute a violation of the free exercise or establishment clauses of the First Amendment.  Citing to extensive case law, the bankruptcy court noted that the free exercise clause does not bar enforcement of neutral, generally applicable laws that are also general and neutral “as applied” (i.e., those that are not “in practice aimed or used to promote or restrict religious belief”).  In addition to Employment Division v. Smith and the recent Hobby Lobby decision, Judge Drain pointed to Universal Church v. Geltzer, in which the Second Circuit Court of Appeals concluded that the fraudulent transfer laws pursuant to the Bankruptcy Code do not violate the First Amendment because they have a secular purpose, they do not advance or inhibit religion in their principal or primary effects, and do not foster an excessive entanglement with religion.  Applying current constitutional principles, Judge Drain held that the automatic stay is, both on its face and in practice, neutral and generally applicable.  Judge Drain further recognized that because section 362(d) of the Bankruptcy Code permits parties in interest to seek relief from the stay in bankruptcy court, the stay itself must be broad and universally applicable in the first instance to ensure sweeping compliance by any parties in interest who would seek to proceed against the debtor outside the bankruptcy court.
Judge Drain rejected the defendants’ sole authority cited in support of its First Amendment arguments.  They had cited to a law review article from 2011, in which the author observed that enforcement of the automatic stay could run afoul of the Free Exercise clause where religious enforcement actions are taken in “a religious community [that] conceive[d] of aggrieved plaintiffs as private attorneys general – each obligated or encouraged to file suit in order to protect and promote religious communal values.”  That argument simply did not hold water.  In Judge Drain’s words:

Not only does this proposition ignore Smith and its progeny, it also would create an unworkable test based on the Court’s assessment of “communal” rather than “individual,” or individualistic, religious intent.  Moreover, it overlooks that the automatic stay protects the debtor’s estate and other creditors, too, who, except for the rare bankruptcy case, are not all subject to the same religious strictures and institutions, including the customary resolution of disputes by a religious court.

Accordingly, neither the free exercise clause nor the establishment clause precluded the bankruptcy court from enforcing the automatic stay as it pertained to claims that were (in effect) asserted against the debtor in a separate religious tribunal.
Although the outcome of the decision may not be especially surprising in light of the facts before the court, Judge Drain’s well-reasoned decision sets important precedent for any future attempts to circumvent the inherent protections of the Bankruptcy Code by proceeding in a religious forum.  It does, however, leave open several interesting questions, some or all of which may yet be raised in this or in other proceedings:

• Did the debtor win the battle but lose the war? Did its successful efforts to enjoin the beit din from issuing a formal ekul (injunction) or siruv (shunning, or excommunication) result in adverse effects for the debtor’s principals in their tight-knit community (or beyond)?  If so, will other potential debtors be chilled from seeking relief in the bankruptcy courts in the first place if they believe that they will be isolated and/or excommunicated for doing so, rather than proceed in the religious courts?
• What would happen if parties in a bankruptcy action seek to lift the stay to proceed before a beit din? Would it matter is the beit din had already been convened and had begun its deliberations?
• Similarly, can litigants consent to proceed before a beit din? If so, what effect would the beit din’s judgment be given in bankruptcy court? Would it differ from an out-of-court arbitration?  Would it threaten the structural integrity of the courts (see, e.g., Wellness International Network v. Sharif)?

On Tuesday evening, Jewish communities will convene a figurative beit din at the Kol Nidrei service to commence the 25-hour day of fasting, prayer, and reflection that is Yom Kippur, the Day of Atonement.  Although it is unlikely that any bankruptcy courts will intervene in that proceeding, we cannot help but appreciate the similarities between the financial “fresh start” that is meant to be conferred via bankruptcy and the spiritual fresh start that is afforded to all those who seek it in these Days of Awe and on the Day of Atonement.