Editor’s note: The full 7th Circuit on July 26 refused to hear the case but issued a supplemental ruling clarifying the three-judge panel’s original opinion. The case now returns to the U.S. District Court for further consideration.

A judge can order the University of Notre Dame to pay back a government grant used to train teachers in Roman Catholic schools if he finds the use was unconstitutional, the 7th U.S. Circuit Court of Appeals ruled.

The judges in Chicago ruled 2-1 on April 13 in Laskowski v. Spellings that Indianapolis federal Judge Larry McKinney acted prematurely when he dismissed the case as moot because the $500,000 Department of Education grant had already been spent.

The American Civil Liberties Union of Indiana, which sued on behalf of taxpayers, wanted the court to order the Education Department to demand repayment. But Circuit Judge Richard Posner said that procedure was needlessly complex.

And though Notre Dame had argued that only the government could violate the religious-establishment clause of the First Amendment, Posner said that shouldn't prevent restitution if a violation were found.

"It would be like a case of money received by mistake and ordered to be returned to the rightful owner," he wrote in the 13-page ruling. "Such orders are routine instances of restitution."

But such an order in a religion case would be unusual, a legal expert said, and should serve as a warning to faith-based organizations to be careful how they spend federal money.

"It's a big deal," said Ira Lupu, a professor of law at George Washington University who specializes in religious issues.

The 7th Circuit did not address the underlying issue - whether using public money for the teacher-training program violated the constitutional separation of church and state. It left that up to McKinney.

For a court to order Notre Dame to pay back the grant, "it would have to be that there is a lack of good faith, where no reasonable person would believe that this conduct is constitutional," said Robert Tuttle, also a law professor at George Washington.

"It's hard for me to see a court saying there's no good-faith reading for this program as constitutional," he added.

Notre Dame received the money to redistribute to other colleges to help them replicate the Alliance for Catholic Education. The program trains teachers who then teach in Catholic schools that have inadequate resources. Private donations also fund the program.

The ACLU of Indiana said the government had no business paying for religious education. The ruling is "another step in our ability to be able to prove that the government should not be subsidizing this type of parochial school training," said ACLU of Indiana attorney Ken Falk.

"From our view of this program, it was purely to teach teachers to teach religion," said Falk, who did not argue the case in court.

The attorney who represented Notre Dame disagreed, saying the school had handled the program in line with previous U.S. Supreme Court decisions.

"There was no teaching of religion involved," said Michael Carvin, an attorney with Jones Day's Washington office. "The money was segregated for secular purposes."

Carvin said Notre Dame might decide to appeal to the Supreme Court. He agreed with Circuit Judge Diane Sykes' 13-page dissent. Sykes wrote that the case was moot and the two-judge majority kept it alive by concocting a "newfangled" remedy inconsistent with previous rulings.

"This is a dramatic expansion of taxpayer standing, and there is no authority for it," she wrote.