IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF WISCONSIN. Case No svk. Hon. Susan V. Kelley

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1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF WISCONSIN In re: Case No svk ARCHDIOCESE OF MILWAUKEE, Chapter 11 Debtor. Hon. Susan V. Kelley MOTION TO DETERMINE THAT THE CONTINUING FORMATION OF CLERGY FUNDS ARE NOT PROPERTY OF THE ESTATE The Archdiocese of Milwaukee, debtor and debtor-in-possession (the Debtor or the Archdiocese ), moves for a determination that the Continuing Formation of Clergy Funds are not property of the bankruptcy estate under 11 U.S.C 541. I. Continuing Formation. BACKGROUND 1. Formation is the forming or shaping of the human, spiritual, academic, and pastoral dimensions of an individual s life and it involves education about spiritual and religious matters of the Roman Catholic Church. (Declaration of Barbara Anne Cusack in Support of the Debtor s Motion to Determine that the Continuing Formation of Clergy Funds are Not Property of the Estate (the Cusack Decl. ) 3.) 2. Ongoing religious formation is a right and duty of the priest and imparting it is a right and duty of the Church. ( Cusack Decl. 4.) Daryl L. Diesing Bruce G. Arnold Francis H. LoCoco Lindsey M. Greenawald Whyte Hirschboeck Dudek S.C. 555 East Wells Street, Suite 1900 Milwaukee, Wisconsin Telephone: (414) Facsimile: (414) ddiesing@whdlaw.com Case svk Doc 3103 Filed 05/08/15 Page 1 of 11

2 3. Individual priests are responsible for their own ongoing religious formation. (Id. 5.) 4. Ongoing religious formation is permanent and can never be considered ended, neither on the part of the Church who gives it nor or the part of the minister who receives it. (Id. 7.) The bishop must reserve a special solicitude for the permanent religious formation of his priests. (Id. 6.) 5. While linked to an individual priest, ongoing religious formation is also linked to priests commitment at ordination to serve well the people of God through their ministry and through their own personal faith commitment. (Id. 10.) 6. Currently, priests and parish directors are entitled to and expected to utilize fiftytwo hours (or ten days) for continuing religious formation each year and deacons are required to participate in a minimum of twenty hours of continuing religious formation each year. II. The Funds. 7. To honor these canonical obligations, Archbishop William E. Cousins created the Office of Continuing Formation of Clergy (the Office of Continuing Formation ) in (Declaration of Father William L. Stanfield in Support of Debtor s Motion to Determine that the Continuing Formation of Clergy Funds Are Not Property of the Estate (the Stanfield Decl. ) 3). Each parish, institution, or agency (the Contributing Entities ) pays the same amount -- initially $150 for each priest in service -- for continuing formation. (Id. 7.) Contributing Entities are instructed to make checks payable to the Office of Continuing Formation -- not the Archdiocese of Milwaukee and, once received, the funds are held in an account managed exclusively by the Director of the Office of Continuing Formation and the Continuing Formation of Clergy Advisory Board for the benefit of the priests, deacons, and parish directors. (Id..) WHD/ Case svk Doc 3103 Filed 05/08/15 Page 2 of 11

3 8. The Office of Continuing Formation directs and oversees activities and programs that will foster the lifelong formation of priests, deacons, and parish directors. (Id. 3.) 9. The Office of Continuing Formation administers two funds -- the Continuing Formation Fund and the Development and Programming Fund (collectively, the Funds ) -- for the benefit of priests, deacons, and parish directors. (Id. 8.) 10. The Continuing Formation Fund is made up of: (1) Individual Accounts; (2) the Sabbatical Account; (3) the Priest/Parish Director s Special Study Account; and (4) the Deacon Special Studies Account. (Id. 10.) The Individual Account is used to reimburse priests, parish directors, deacons, and deacons wives for their continuing formation. (Id. 11.) The Sabbatical Account is used to fund priests and parish directors sabbaticals. (Id. 12.) The Priest/Parish Director s Special Study Account is used to fund advanced and special studies for priests and parish directors. (Id. 13.) The Deacon Special Studies Account is used to fund special study programs for deacons. (Id. 14.) 11. The Programming and Development Fund covers costs for researching, developing, and offering programs for continuing formation. (Id. 15.) 12. The Director of the Office of Continuing Formation and the Continuing Formation of Clergy Advisory Board make all decisions regarding dispersal of the Funds. (Id. 16.) 13. The Office of Continuing Formation pays all costs of administration using only the funds it holds for the continuing formation of priests, deacons, and parish directors. (Id. 17.) 14. From its inception in 1975 to 2008, the Office of Continuing Formation employed its own bookkeeper. (Id. 18.) When the bookkeeper retired in 2008, the Office of Continuing WHD/ Case svk Doc 3103 Filed 05/08/15 Page 3 of 11

4 Formation contracted with the Archdiocese of Milwaukee to purchase certain accounting services. (Id. 19.) The Office of Continuing Formation reimburses the Archdiocese of Milwaukee for all purchased services. (Id. 20.) III. Use of the Funds. 15. The Contributing Entities where the priest/parish director is employed or where the deacon has a covenant makes an annual contribution to the priest s, deacon s, or parish director s individual account, which is maintained by the Office of Continuing Formation. (Id. 21.) Currently, Contributing Entity provide $1,000 for each priest, deacon, and parish director. (Id..) Contributing Entities are instructed to make checks payable to the Office of Continuing Formation, and funds received are placed in the Continuing Formation Fund. (Id..) 16. The annual contribution from the Contributing entity fulfills the Archbishop s canonical obligation to see that priests, deacons, and parish directors have the means (the benefit provided by their respective parish) and the institution (the Continuing Formation Fund) to participate in ongoing formation. (Id. 22.) Only priests, parish directors, and deacons may draw from their Individual Accounts.. (Id. 23.) 17. The Office of Continuing Formation either reimburses the individual priest, parish director, or deacon for the costs of continuing formation or the money is paid directly to the program attended by the priest, parish director, or deacon. (Id. 24.) 18. The Office of Continuing Formation provides the priests, parish directors, and deacons with a complete account of the Funds annually. (Id. 25.) This includes total contributions, reimbursements, sabbatical expenses, and current balances for the Funds. (Id.) The priests, parish directors, and deacons also receive a statement of the status of their individual account. (Id..) WHD/ Case svk Doc 3103 Filed 05/08/15 Page 4 of 11

5 19. Priests, deacons, and parish directors complete an annual report indicating how they have fulfilled their continuing formation obligations. (Id. 26.) 20. Since inception, the Funds have been maintained as a separate unit in the Fiduciary Income Investment Account. (Declaration of John Marek in Support of the Debtor s Motion to Determine that the Continuing Formation of Clergy Funds are Not Property of the Estate (the Marek Decl. ) 3.) 21. The Contributing Entities are instructed to make checks payable to the Office of Continuing Formation. (Id. 4.) Upon receipt of monies for continuing formation, the funds are deposited in the Fiduciary Income Investment Account, and the funds are never deposited into the Archdiocese s general operating account. (Id. 5.) 22. The Funds are used only by the Office of Continuing Formation to provide for continuing religious formation. (Id. 6.) The Funds are fully disclosed on the Archdiocese s audited financial statements as Custodial Funds Held for Others, and the Funds have never been used for any purpose other than continuing religious formation and the costs of administering the Funds. (Id. 7.) ARGUMENT IV. The Funds are not Property of the Estate. A. The Funds are Trust Funds. 23. The Archdiocese has no equitable interest in the money deposited by the Contributing Entities. The Funds are held in a common law resulting trust for the benefit of priests, parish directors, and deacons to provide for their continuing religious formation. 24. Section 541(d) of the Bankruptcy Code excludes from the estate any property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest. 11 U.S.C. 541(d). WHD/ Case svk Doc 3103 Filed 05/08/15 Page 5 of 11

6 25. It is a well-settled principle that debtors do not own an equitable interest in property that they hold in trust for another, and thus, those trust funds are not property of the estate. Marrs-Winn Co. v. Giberson Electric, Inc. (In re Marrs-Winn Co.),, 103 F.3d 584, 589 (7th Cir. 1996) (quoting City of Farrell v. Sharon Steel Corp., 41 F.3d 92, 95 (3d Cir.1994)). 26. Resulting trusts are an integral part of Wisconsin s common law. See, e.g., Cont l Ill. Nat l Bank & Trust Co. v. Schoendorf (In re Wher s Trust), 152 N.W.2d 868, 884 (Wis. 1967) (acknowledging the equitable principle for imposing a resulting trust, though not doing so in that case). Wisconsin courts look to the Restatements of the American Law Institute for guidance on the common law, including the common law of trusts. See, e.g., Zastrow v. Journal Commc ns, Inc., 2006 WI 72, 718 N.W.2d 51; In re Archdiocese of Milwaukee, 483 B.R. 855, 868 (Bankr. E.D. Wis. 2012). 27. A resulting trust arises when a person (the transferor ) makes or causes to be made a disposition of property under circumstances (i) in which some or all of the transferor s beneficial interest is not effectively transferred to others (and yet not expressly retained by the transferor) and (ii) which raise an unrebutted presumption that the transferor does not intend the one who receives the property (the transferee ) to have the remaining beneficial interest. Restatement (Third) of Trusts 7 cmt. a (2003). Such a trust arises from an intention that is legally attributed to a transferor based on the nature of the transaction, rather than from manifested intent. Id. 28. This Court previously provided guidance on this very topic in considering whether another of the Archdiocese s funds -- the Parish Deposit Fund -- was a resulting trust and, therefore, excluded from the property of the estate. In re Archdiocese of Milwaukee, 483 B.R. at There, the Court looked to the definition of a resulting trust adopted in Official WHD/ Case svk Doc 3103 Filed 05/08/15 Page 6 of 11

7 Comm. Of Unsecured Creditors v. Catholic Diocese of Wilmington Inc. (In re Catholic Diocese of Wilmington), where that court noted: [W]here a person makes or causes to be made a disposition of property under circumstances which raise an inference that he does not intend that the person taking or holding the property should have the beneficial interest therein, unless the inference is rebutted or the beneficial interest is otherwise effectively disposed of. In re Catholic Diocese of Wilmington, Inc., 432 B.R. 135, (Bankr. D. Del. 2010) (quoting Restatement (First) of Trusts 404). 29. In reaching its conclusion, this Court noted that [t]he PIA [in the Diocese of Wilmington case] and the Parish Deposit Fund feature many similarities, including the purpose, voluntary nature, ability of investors to withdraw their funds upon request, and belief by both the diocese and the investors that all funds within the PIA remained the property of the investors. In re Archdiocese of Milwaukee, 483 B.R at Here, the Funds consist entirely of the contributions made by the Contributing Entities for the benefit of the priests, deacons, and parish directors in the pursuit of their continuing religious formation. The Funds were given to the Office of Continuing Formation to be custodied for the beneficiaries and with the expectation that the Funds would be used only for that purpose. Similar to the Parish Deposit Fund, the Contributing Entities intended that the funds would remain the property of the beneficiaries and would never become the property of the Archdiocese. The beneficiaries of the Funds -- priests, parish directors and deacons -- are separate entities from the Archdiocese. Disbursements are made only upon proof of expenses by the beneficiaries. Any unused amounts in the Individual Accounts are used solely to fund other qualifying expenses of the beneficiaries. As such, the Funds are a resulting trust. 31. Similar to the Parish Deposit Fund, the Funds assets have never been used for the operations of the Archdiocese. In addition, the Formation Fund was set up as a restricted WHD/ Case svk Doc 3103 Filed 05/08/15 Page 7 of 11

8 account on the Archdiocese books and is listed on the Archdiocese s financial statements as a Custodial Fund Held for Others. 32. Accordingly, the money in the Funds are not property of the Debtor s estate. B. Alternatively, the Funds are not Property of the Estate Under 541(b)(1). 33. Even assuming, arguendo, that the Funds were not a resulting trust, the Funds are still not property of the estate under 541(b)(1). Subsection (b)(1) exempts from the property of a debtor's estate any power that the debtor may exercise solely for the benefit of an entity other than the debtor. 11 U.S.C. 541(b)(1). 34. At least one court has held that where a debtor holds the legal interest of the Trust in his capacity as trustee, and, as such, this interest cannot come into the bankruptcy estate because property of the estate does not include any power or interest [the debtor] may exercise solely for the benefit of an entity other than himself as a bankruptcy debtor. Loux v. Gabelhart (In re Carriage House, Inc.), 120 B.R. 754, 765 (Bankr. D. Vt. 1990) aff d, 146 B.R. 352 (D. Vt. 1992). 35. By implication, powers that a debtor may exercise for his own benefit are included in the bankruptcy estate. In re Johnson, 513 B.R. 333, 343 (Bankr. S.D. Ill. 2014); see also 5 Collier on Bankruptcy , at (Alan N. Resnick & Henry J. Somme reds., 16 th ed. 2015) ( [I]f the power in question may be exercised for the benefit of another entity, but is capable of conferring benefit on the debtor also, it becomes property of the estate ). 36. The term entity includes person, estate, trust, governmental unit, and United States Trustee U.S.C. 101(15). The term person includes individual, partnership, and corporation U.S.C. 101(41). WHD/ Case svk Doc 3103 Filed 05/08/15 Page 8 of 11

9 37. Here, the Office of Continuing Formation has the power to make contributions only to non-debtor beneficiaries and only upon adequate proof of expenses. The Archdiocese cannot exercise this power for its own benefit because all beneficiaries of the Funds are entities separate from the Archdiocese. The Contributing Entities, which provide this benefit for the religious formation of their priests, deacons, or parish directors, are also separate legal entities. 38. Because the power to make disbursements is solely for the benefit of non-debtors, this power is not property of the bankruptcy estate for the bankruptcy trustee to exercise. V. The First Amendment of the United States Constitution Prohibits Any Determination Regarding the Canonical Obligations to Provide Perpetual Care. 39. The First Amendment of the United States Constitution prohibits the making of any law respecting an establishment or religion, or prohibiting the free exercise thereof. U.S. Const. amend. I. 40. The First Amendment provides religious institutions with the power to decide for themselves, free from state interference, matters of church government as well as those of faith and doctrine. Kedroff v. St. Nicholas Cathedral of Russian Orthodox Church in N. Am., 344 U.S. 94, 116 (1952); see also Serbian E. Orthodox Diocese for U.S. of Am. & Canada v. Milivojevich, 426 U.S. 696, (1976). Civil courts do not have subject matter jurisdiction to adjudicate ecclesiastical matters. Watson v. Jones, 80 U.S. 679, (1871) ( But it is a very different thing where a subject-matter of dispute,... a matter over which the civil courts exercise no jurisdiction,-- a matter which concerns theological controversy, church discipline, ecclesiastical government, or the conformity of the members of the church to the standard of morals required of them,--becomes the subject of its action. ). This rule is often referred to as the church autonomy doctrine or the ecclesiastical abstention doctrine. WHD/ Case svk Doc 3103 Filed 05/08/15 Page 9 of 11

10 41. Questions regarding the need for continuing religious formation, the amount of continuing formation, the type of continuing formation, and the subject matter of continuing formation are matters of faith and doctrine and are purely ecclesiastical in nature. The First Amendment prohibits this Court from deciding matters of faith. McCarthy v. Fuller, 714 F.3d 971, 975 (7th Cir. 2013) ( A secular court may not take sides on issues of religious doctrine. ). 42. This is precisely the type of inquiry that the First Amendment prohibits. The inquiry would require the Court to determine issues such as the appropriate number of continuing formation hours per priest, deacon, and parish director; the type of continuing formation, e.g., whether priests, deacons, and parish administrators should be permitted to take sabbaticals or study at universities outside the Archdiocese; or whether a given seminar, course, conference, workshop, or other religious formation program aids the individual s theological, spiritual, and pastoral formation. CONCLUSION 43. The Debtor has never had a legal or equitable interest in the Funds and merely custodies them for others. Accordingly, this Court should determine that the Funds are not property of the estate. WHD/ Case svk Doc 3103 Filed 05/08/15 Page 10 of 11

11 Dated this 8th day of May, Respectfully submitted, ARCHDIOCESE OF MILWAUKEE Debtor and Debtor in Possession By its counsel, Whyte Hirschboeck Dudek S.C. P.O ADDRESS: 555 East Wells Street, Suite 1900 Milwaukee, Wisconsin Telephone: (414) Facsimile: (414) By: /s/ Daryl L. Diesing Daryl L. Diesing Bruce G. Arnold Francis H. LoCoco Lindsey M. Greenawald WHD/ Case svk Doc 3103 Filed 05/08/15 Page 11 of 11

12 IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF WISCONSIN In Re: ARCHDIOCESE OF MILWAUKEE, Debtor. Case No svk Chapter 11 Hon. Susan V. Kelley NOTICE OF MOTION TO DETERMINE THAT THE CONTINUING FORMATION OF CLERGY FUNDS ARE NOT PROPERTY OF THE ESTATE PLEASE TAKE NOTICE that on May 8, 2015 the Debtor filed it Motion to Determine that the Continuing Formation of Clergy Funds are not Property of the Estate (the Motion ) in the above-captioned chapter 11 bankruptcy case. PLEASE TAKE FURTHER NOTICE that copies of the Motion are on file with the Court. You may also obtain copies of these pleadings by (a) contacting Christopher Lerario by phone at (414) or by at clerario@whdlaw.com; or (b) accessing the website of the Debtor s noticing agent, Kurtzman Carson Consultants, LLC at YOUR RIGHTS MAY BE AFFECTED. You should read these papers carefully and discuss them with your attorney, if you have one in this bankruptcy case. If you do not have an attorney, you may wish to consult with one. If you do not want the Court to grant the Debtor's request as set forth in the Motion, or you want the Court to consider your views on the Motion, then on or before May 22, 2015, you or your attorney must: Daryl L. Diesing Bruce G. Arnold Francis H. LoCoco Lindsey M. Greenawald Whyte Hirschboeck Dudek S.C. 555 East Wells Street, Suite 1900 Milwaukee, Wisconsin Telephone: (414) Facsimile: (414) ddiesing@whdlaw.com Case svk Doc Filed 05/08/15 Page 1 of 3

13 File with the court your objection to the Motion, explaining your position and the reasons for your objection. You may file electronically via the Court s Case Management/Electronic Case Filing system, or mail your objection to: United States Bankruptcy Court Eastern District of Wisconsin 517 East Wisconsin Avenue Milwaukee, WI If you mail your request to the Clerk of Court for filing, you must mail it early enough to that the Clerk s Office will receive it on or before the date stated above. You must also mail or a copy to: Daryl L. Diesing Whyte Hirschboeck Dudek S.C. 555 East Wells Street, Suite 1900 Milwaukee, WI ddiesing@whdlaw.com PLEASE TAKE FURTHER NOTICE, if you or your attorney does not take these steps, the Court may decide that you do not oppose the relief sought in the Motion, and enter an order granting the relief that is requested by the Debtor. [Signature Page Follows] WHD/ Case svk Doc Filed 05/08/15 Page 2 of 3

14 Dated this 8 th day of May, Respectfully submitted, ARCHDIOCESE OF MILWAUKEE Debtor and Debtor-in-Possession By its counsel, Whyte Hirschboeck Dudek S.C. By: /s/ Daryl L. Diesing Daryl L. Diesing Bruce G. Arnold Francis H. LoCoco Lindsey M. Greenawald POST OFFICE ADDRESS: 555 East Wells Street, Suite 1900 Milwaukee, WI Telephone: (414) Facsimile: (414) ddiesing@shdlaw.com barnold@whdlaw.com flococo@whdlaw.com lgreenawald@whdlaw.com WHD/ Case svk Doc Filed 05/08/15 Page 3 of 3

15 IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF WISCONSIN In re: ARCHDIOCESE OF MILWAUKEE, Debtor. Case No svk Chapter 11 Hon. Susan V. Kelley DECLARATION OF BARBARA ANNE CUSACK IN IN SUPPORT DEBTOR S MOTION TO DETERMINE THAT THE CONTINUING FORMATION OF CLERGY FUNDS ARE NOT PROPERTY OF THE ESTATE Barbara Anne Cusack declares, pursuant to 28 U.S.C and under penalty of perjury, that the following is true and correct: being duly sworn, deposes and says: 1. I am Chancellor of the Archdiocese of Milwaukee (the Archdiocese or Debtor ). 2. I offer this declaration in support of the Debtor s Motion to Determine that the Continuing Formation of Clergy Funds are Not Property of the Estate. Responsibility 3. Formation is the forming or shaping of the human, spiritual, academic, and pastoral dimensions of an individual s life and it involves education about spiritual and religious matters of the Roman Catholic Church. 4. Ongoing religious formation is a right and duty of the priest and imparting it is a right and duty of the Church. (Canons 279, 384.) 5. Individual priests are responsible for their own ongoing religious formation. (USCCB, The Basic Plan for the Ongoing Formation of Priests, 2001.) 6. The bishop must reserve a special solicitude for the permanent religious formation of his priests. (Canon 384) WHD/ Case svk Doc Filed 05/08/15 Page 1 of 2

16 The Right is Permanent for the Benefit of the Priests and the Catholic Faithful 7. Ongoing religious formation is permanent and can never be considered ended, neither on the part of the Church who gives it nor or the part of the minister who receives it. (Vatican Congregation for Clergy, Directory on the Ministry and Life of Priests New Edition, February 11, 2013, n. 91 [Unofficial Translation]) 8. The priest himself is first and principal person responsible for permanent (ongoing) formation. In effect, each priest has the responsibility to be faithful to the gift of God and to the dynamic conversion taking place each day. (Ibid., n. 105.) 9. Ongoing formation helps the priest to be and act as a priest in the spirit and style of Jesus the Good Shepherd. (Pope John Paul 11, Pastores dabo vobis, March 29, 1992, n. 73) 10. While linked to an individual priest, ongoing religious formation is also linked to priests commitment at ordination to serve well the people of God through their ministry and through their own personal faith commitment. (USCCB, The Basic Plan for the Ongoing Formation of Priests, 2001.) 11. Ongoing formation is ecclesial and social. It unfolds in a context of the community of faith as well as the more defined community of the presbyterate with its bishop. Although formation has to do with an individual s growth, the community they serve -- the Church -- benefits greatly from the growth of its priests. (USCCB, The Basic Plan for the Ongoing Formation of Priests, 2001.) Dated: May 8, 2015 Barbara Anne Cusack WHD/ Case svk Doc Filed 05/08/15 Page 2 of 2

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21 IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF WISCONSIN In re: ARCHDIOCESE OF MILWAUKEE, Debtor. Case No svk Chapter 11 Hon. Susan V. Kelley DECLARATION OF JOHN J. MAREK IN IN SUPPORT DEBTOR'S MOTION TO DETERMINE THAT THE CONTINUING FORMATION OF CLERGY FUNDS ARE NOT PROPERTY OF THE ESTATE John J. Marek declares, pursuant to 28 U.S.C and under penalty of perjury, that the following is true and correct: being duly sworn, deposes and says: 1. I am the Treasurer and Chief Financial Officer of the Archdiocese of Milwaukee (the "Debtor" or "Archdiocese"). 2. I offer this declaration in support of the Debtor's Motion to Determine that the Continuing Formation of Clergy Funds are Not Property of the Estate. 3. Since inception, the Continuing Formation Fund and the Development and Programming Fund (collectively, the "Funds") have been maintained as a separate unit in the Fiduciary Income Investment Account. 4. Each parish, institution, or agency (the "Contributing Entities") is instructed to make checks payable to the Office of Continuing Formation. 5. Upon receipt of monies for continuing formation, the funds are deposited in the Fiduciary Income Investment Account, and the funds are never deposited into the Archdiocese's general operating account. 6. The Funds are used only by the Office of Continuing Formation to provide for continuing religious formation. WHD/ l Case svk Doc Filed 05/08/15 Page 1 of 2

22 7. The Funds are fully disclosed on the Archdiocese's audited financial statements as "Custodial Funds Held for Others," and the Funds have never been used for any purpose other than continuing religious formation and the costs of administering the Funds. Dated: May g, 2015 WHD/ Case svk Doc Filed 05/08/15 Page 2 of 2

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