By David S. Hilzenrath
Tuesday, March 22, 2011; 12:58 AM
When alleged Ponzi schemer Monroe Beachy sought refuge in bankruptcy court last year, many of his investors and fellow members of the Amish community complained that their deeply held religious beliefs had been violated.
In court filings, they focused less on any financial fraud Beachy might have perpetrated than on his decision to draw them into a judicial proceeding. Resolving financial disputes through the courts is contrary to their faith, they said, and more than 2,000 of them urged the court to let them resolve the matter among themselves. Amid the backlash, Beachy had a change of heart and asked the court to let him withdraw his bankruptcy filing.
On Friday, a judge rejected that request.
Citing the separation of church and state, federal bankruptcy judge Russ Kendig said it would be unconstitutional for the court to dismiss the case and cede control of the matter to a religious group.
"The debtor in this case is clearly asking this court to delegate its function to a religious body," Kendig wrote. "Any such delegation is forbidden by the Establishment Clause," the judge wrote, referring to part of the First Amendment.
The court is responsible for distributing Beachy's assets among his creditors. He filed for bankruptcy under Chapter 7 of the code, which provides for an orderly liquidation.
When Beachy, who had been a trusted figure in the Amish community, made his bankruptcy filing last year, he owed investors about $33 million but had only about $18 million in assets to cover those debts.
The possessions he listed included a horse, buggy and harness.
He entered bankruptcy court after learning that he was under investigation by the Securities and Exchange Commission, the SEC said in a court filing opposing the motion to dismiss.
In February, the SEC charged Beachy with fraud, saying that after losing much of his clients' money the 77-year-old resident of Sugarcreek, Ohio, sent investors monthly account statements showing phony returns and balances.
Though he told investors he was putting their money in risk-free government securities, Beachy invested in junk bonds and other speculative investments, the SEC said, and he promised higher interest rates than banks were offering at the time.
Beachy settled with the SEC without admitting or denying wrongdoing.
Members of the Amish community had proposed setting up a private alternative to court-supervised bankruptcy. They formed a committee to oversee the matter under the supervision of Amish bishops and an Amish church.
In testimony last fall, one of the bishops said "that the Bible forbids the use of force and that the filing of this case amounts to a use of force by the debtor against his creditors," the judge wrote. "He also explained that the public spectacle of bankruptcy pollutes Amish testimony to the outside world," the judge wrote.
Supporters of the out-of-court solution argued that forcing them to pursue their claims through the courts was a violation of their religious freedom.
But not all of Beachy's investors were Amish.
Even if the out-of-court alternative was constitutional, it would probably break down because at least some of the creditors would continue to press legal claims, the judge wrote.
Citing Beachy's financial condition, the SEC did not fine him. But the agency reported Friday that he had agreed to be barred from working with brokers or investment advisers. The settlement also prohibited him from offering penny stocks.