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Peter Califano*
Can religious tithes be avoided as a fraudulent conveyance when
a member of a church files for bankruptcy? In the first reported
case of its kind, in 1992 a bankruptcy trustee successfully recovered
funds donated to a church by members of the congregation who had
filed for personal bankruptcy. The court ruled that the tithes were
fraudulent transfers pursuant to 11 U.S.C. § 548, 550 since
the debtors failed to receive "reasonably equivalent value"
in exchange for their tithes. The church was therefore required
to disgorge the funds to the trustee for distribution to the debtors'
creditors. Whether or not this action was the result of an overzealous
bankruptcy trustee is beside the point. This development signals
a new battleground over religious activity and the implementation
of public policy. In 1996, three courts addressed the issue. The
results should make any member of a church, synagogue, or any other
worshipping body, sit up and pay serious attention.
In In re Young1, a husband and wife filed for bankruptcy and had
tithed approximately $13,000 to their church in the one year preceding
the filing of their bankruptcy petition. The debtors actively participated
in church programs, tithed regularly, and even held positions within
the church. There was no question as to the debtors' religious beliefs
and commitment. The bankruptcy trustee nonetheless filed a lawsuit
seeking the return of all monies paid to the church during the one-year
period before the petition. The trustee claimed that the transfers
were fraudulent conveyances, since the payments were made while
the debtors were insolvent, and the debtors had received less than
reasonably equivalent value in exchange for the transfer. Since
the debtors received no money, property or other consideration in
return for their tithes, the trustee claimed that the contributions
to the church were fraudulent transfers. The trustee argued that
debtors' intent was irrelevant.
The Bankruptcy Court in Minnesota agreed. The Court, in a tortured
analysis in which the tithes were analyzed as mere economic transactions,
opined:
In making their contributions, the debtors received unbargained
for benefits, i.e. the privilege to participate in religious worship.
While this worship may have yielded the feelings of association,
comfort, affection, companionship and love, these subjective emotional
benefits cannot be bargained for [cites omitted]. Thus, any benefits
received by the debtors were mere gratuities lacking consideration
and deemed valueless [cites omitted]. (p. 893).
The Young case was appealed2 and later reached the Eighth Circuit.3
Various religious organizations such as the Catholic League for
Religious and Civil Rights and the Church of Jesus Christ of Latter-Day
Saints filed amicus curiae briefs. In May 1996 the Court issued
a split decision holding that the trustee could not avoid the tithes.
Although the Court initially agreed that a strict reading of the
fraudulent conveyance statutes made the contributions avoidable,
it held that nonetheless the Religious Freedom Restoration Action
of 1993 (RFRA) prevented recovery against the church. Under RFRA,
any government act that substantially burdens the exercise of religious
freedom must be justified by a compelling state interest. The Young
court found that the trustee's recovery of contributions did substantially
burden the debtors' free exercise of their religion since it effectively
prevented them from tithing for the one year preceding the filing
of the bankruptcy petition. Since the trustee was unable to articulate
a compelling state interest for upholding the avoidance, the church
was allowed to retain the tithes.
In In re Newman,4 a husband and wife filed for bankruptcy and in
the preceding year had tithed approximately $2,500 to their church.
It was undisputed that the debtors had no fraudulent intent with
respect to the transfers and that their belief in tithing to their
church was a sincere and firmly held belief. Nonetheless, the Bankruptcy
Court in Kansas ruled in favor of the bankruptcy trustee. It found
that the tithes were fraudulent transfers since the debtors had
received no value for their contributions and there was no "exchange"
of any consideration between the debtors and the church. The Court
went on to hold that the debtors' claims of infringement of their
First Amendment rights were unfounded. With respect to RFRA, the
Court ruled that the debtors had failed to show that their free
exercise of religion had been substantially burdened since they
had already tithed their money to their church. Even if avoidance
of the tithes was a substantial burden, the Court also ruled that
the government had a compelling state interest in maintaining the
integrity of the bankruptcy system and ensuring the maximum distributions
to the creditors in the bankruptcy case. The Newman ruling was appealed
and upheld by the District Court5 in November 1996. The Court's
opinion in closing acknowledged the tension between deeply held
religious beliefs and the demands of civil authority, but reminded
the parties that even the Bible directs us to "render thereto
unto Caesar, the things that are Caesar's; and unto God, the things
that are God's" (p. 24). In an extensive opinion in In re Hodge,6
a Bankruptcy Court sitting in Idaho avoided approximately $5,000
in contributions that a husband and wife had contributed to their
church before the filing of their bankruptcy. As in the previous
cases, it was undisputed that the debtors were sincere in their
religious belief in tithing and that the debtors were long-standing
members of their congregation. The Court nonetheless ruled that
since there was no quid pro quo in the exchange of services for
the debtors' contributions and the debtors had been insolvent for
a period of two years proceeding the filing of their bankruptcy
petition (expanded under state law from the typical one-year period),
the tithes could be avoided. Although the Court found that RFRA
prevented the bankruptcy trustee from avoiding the tithes, it went
on to find that RFRA was unconstitutional. It claimed that in passing
RFRA, Congress had usurped the Judicial Branch's role in determining
how constitutional questions involving the Free Exercise Clause
of the First Amendment should be analyzed. Since RFRA was therefore
inapplicable, the tithes could be recovered from the church.
As evidenced by these cases, a troubling trend has emerged in the
bankruptcy courts. From a strict reading of the Code's fraudulent
conveyance statutes, religiously-motivated contributions made to
any religious organization are clearly at risk. Even though the
reported cases to date involved smaller sectarian Christian churches,
there would be nothing to prevent a bankruptcy trustee in pursuing
the more traditional and mainline groups. An aggressive creditor
may even consider the avoidance of tithes in state court based on
state law fraudulent conveyance statutes.
One would not expect religious tithing to fit within the parameters
of a typical commercial transaction that would normally be subject
to a fraudulent conveyance analysis. Apparently, a number of courts
have found otherwise. Although RFRA has given some protection to
the avoidance of tithes, albeit imperfectly, this term the U.S.
Supreme Court will rule on the constitutionality of RFRA (in an
unrelated religious case in Boerne v. Flores, 95-2074) which many
commentators believe will not survive intact.
Without the limited protection of RFRA, and considering the bankruptcy
courts' unwillingness to apply the First Amendment protections of
the Free Exercise or Establishment Clauses, religious organizations
will need to devise a new strategy in responding to this growing
threat. One simple, but effective, response would be to amend the
fraudulent conveyance statutes contained in the Code by providing
an exception to avoidance when there is evidence to show that the
transfer occurred in connection with the practice of sincerely held
religious belief (as evidenced by the member's past religious activities),
and was without fraudulent intent (an approach suggested by the
Hodge Court). Without this change or the protection of a vigorously
applied RFRA, it appears that all religious organizations are at
risk with respect to contributions received from members who subsequently
file for bankruptcy. The Bankruptcy Review Commission, which is
now considering proposals to amend the Code, should be alerted to
this situation and take the appropriate steps to ensure that legitimate
religious donations are not subject to avoidance actions. Good public
policy is not served by maintaining that tithing is a fraudulent
activity.
*Mr. Califano is a partner at the law firm of Cooper, White &
Cooper in San Francisco, CA and is a member of the firm's Bankruptcy
and Creditors' Rights Group.
- Christians v. Crystal Evangelical Free Church,
148 B.R. (Bkrtcy. D. Minn. 1992).
- Aff'd, In re Young, 152 B.R. 939 (D. Minn.
1993).
- In re Young, 82 F.3d 1407 (8th Cir. 1996).
- Morris v. Midway Southern Baptist Church, 183
B.R. 239 (Bkrtcy. D. Kan. 1995).
- In re Newman, 1996 U.S. Dist. LEXIS 18357 (November26,
1996).
- Fitzgerald v. Magic Valley Evangelical Free
Church, 200 B.R. 884 (Bkrtcy. D. Idaho 1996).
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