Tension Between the Trustee and the Tithe Is P.L. 105-183 Absolution

Tension Between the Trustee and the Tithe Is P.L. 105-183 Absolution

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When I last addressed the issue of the ability of bankruptcy trustees to recover tithes or other charitable contributions,1 the question of the applicability of the Religious Freedom Restoration Act (RFRA) (42 U.S.C. §§2000bb et seq.) as a defense to a fraudulent transfer was an open question. The Eighth Circuit Court of Appeals answered in the affirmative shortly thereafter.2

The issue of RFRA's constitutionality was also in dispute until the Supreme Court resolved that question in part in City of Boerne v. Flores, U.S., 117 S.Ct. 2157, 138 L.Ed.2d 1007 (1997). The Supreme Court expressly held that RFRA was unconstitutional as applied to state laws such as zoning ordinances of general applicability (117 S.Ct. 2171). The court reaffirmed that §5 authorized Congress only to "enforce" the Fourteenth Amendment but did not provide sufficient power to the federal government to define the substance of it.3 However, congressional legislation under the Fourteenth Amendment was not to be limited to purely enforcement statutes.4 Congress could proscribe conduct that falls beyond the reach of the Fourteenth Amendment but only to remedy or prevent constitutional violations.

Nonetheless, even in this extended range of congressional authority, "there must be a congruence between the means used and the ends to be achieved. The appropriateness of remedial measures must be considered in light of the evil presented." (Id. at 2169). And it was this lack of "congruence" that convinced Justice Kennedy and a majority of the court that RFRA went too far. In the opinion of the court, there was simply insufficient evidence of present-day legislative religious discrimination to justify the broad scope of RFRA's application: "RFRA is so out of proportion to a supposed remedial or preventive object that it cannot be understood as responsive, or designed to prevent, unconstitutional behavior." (Id.)

Notwithstanding the length and breadth of the constitutional analysis in Boerne, the court left open the question of RFRA's constitutionality with respect to federal laws. And instead of ruling on the issues raised in the Eighth Circuit's In re Young decision, it vacated and remanded that decision for consideration in light of the court's opinion in Boerne.

RFRA Redux

The Eighth Circuit responded to the Supreme Court's call in Young v. Crystal Evangelical Free Church (In re Young), 141 F.3d 854 (8th Cir. 1998). By a 2-1 decision, the court held that RFRA was a constitutional exercise of Congressional power with respect to federal legislation. The Eighth Circuit held that RFRA violated neither the separation of powers doctrine5 nor the Establishment Clause of the First Amendment.6 The court therefore concluded by reinstating its earlier decision and again reversing the district court. At least one district court is of the same opinion; see In re Hodge, 220 B.R. 386 (D. Id. 1998).

Not all courts have shared the Eighth Circuit's positive view of the post-Boerne viability of RFRA. Two other courts of appeal have simply assumed that RFRA continues to be constitutional without deciding the issue. See, e.g., Alamo v. Clay, 137 F. 3d 1366 (D.C. Cir. 1998) and U.S. v. Grant, 117 F.3d 785 (5th Cir. 1997).7 Several bankruptcy courts have reached the opposite conclusion; see In re Saunders, 215 B.R. 800 (Bankr. D. Mass. 1997), In re Rivera, 214 B.R. 101 (Bankr. S.D.N.Y. 1997), and In re Andrade, 213 B.R. 765 (Bankr. E.D. Calif. 1997).8 While the broad question of the constitutionality of RFRA with respect to federal statutes must await Supreme Court resolution, Congress and the president have acted to address the narrower issue of charitable contributions under several provisions of the Bankruptcy Code.

Congressional Response

The issue of the constitutionality of RFRA with respect to fraudulent conveyance actions may have been mooted with President Clinton's signature in June on the Religious Liberty and Charitable Donation Protection Act of 1998 (P.L. 105-183, S. 1244). Perhaps of even greater significance, S. 1244 also purports to resolve a long-festering dispute about the confirmability of a chapter 13 plan providing for tithes or other charitable contributions while furnishing less than 100 percent payment to creditors.

Fraudulent Conveyance Issues

Congress has acted directly to prevent bankruptcy trustees from seeking to avoid transfers to churches and other charitable organizations for constructively fraudulent transfers. S. 1244 amends Code §548(a) to provide that a trustee's fraudulent transfer powers may not be used to avoid a "transfer of a charitable contribution to a qualified religious or charitable entity or organization." This elimination of a trustee's jurisdiction is not absolute. A contribution in excess of 15 percent of the debtor's gross annual income for the year in which the contribution was made may still be avoided. But even this relatively generous safe harbor can be expanded if the charitable contributions greater than 15 percent for the year in question were consistent with the debtor's previous charitable contribution practices. S. 1244 does not define "gross income" for safe harbor purposes. However, Congress did incorporate several other definitions from the Internal Revenue Code (IRC) into S. 1244, so it would seem reasonable to conclude that the IRC's definition of "gross income" would be applicable in the fraudulent conveyance context.9

Most states have adopted either the Uniform Fraudulent Conveyance Act (UFCA) or the more recent Uniform Fraudulent Transfer Act (UFTA).10 Each arguably provides unsecured creditors with a means of recovery from charitable donees similar to the trustee's authority under §548. From its enactment in 1978, §544(b) of the Code had granted the trustee the power of any actual unsecured creditor to avoid transfers under any applicable state law.11 The most important application of §544(b) was to add state fraudulent conveyance laws (the UFCA or the UFTA) to the trustee's quiver of avoidance arrows. The amendment of only §548 to protect tithers would have left the back door open to avoidance of the same donations through §544(b). Thus S. 1244 also amended §544(b):

(1) Except as provided in paragraph (2), the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under §502 of this title or that is not allowable only under §502(e) of this title.

(2) Paragraph (1) shall not apply to a transfer of a charitable contribution (as that term is defined in §548(d)(3)) that is not covered under §548(a)(1)(B), by reason of §548(a)(2). Any claim by any person12 to recover a transferred contribution described in the preceding sentence under federal or state law in a federal or state court shall be preempted by the commencement of this case.13

Congress has successfully eliminated the ability of trustees to avoid charitable contributions, including religiously motivated donations, as constructively fraudulent conveyances. Intentionally fraudulent transfers remain avoidable.14 All transfers within the scope of the UFCA or the UFTA also remain avoidable by individual creditors in state fora.15 This remaining source of attack is largely ephemeral, however, because a donor's bankruptcy filing will preempt such an action.16

Chapter 13 Issues

Section 1325(a)(4) of the Code as originally enacted in 1978 required only that a chapter 13 plan be in the "best interests" of unsecured creditors.17 A confirmable plan needed to provide for payments to unsecured creditors equal to what they would have received in a chapter 7 liquidation. In 1984, Congress amended §1325 to require in addition that "all of the debtor's projected disposable income...be applied to make payments under the plan." Section 1325(b)(1)(B). Section 1325(b)(2) went on to define the expense side of "disposable income" to include only those expenditures necessary "for the maintenance or support of the debtor or a dependent of the debtor." §1325(b)(2)(A).

Combined with its high level of popular and legislative support, P.L. 105-183 will probably remain part of the Code for years to come.

Courts generally took a dim view of plans that included payments to churches or other religious or charitable organizations. In most courts' opinions, such payments were not "reasonably necessary" for the limited purposes of §1325. See, e.g., In re Saunders, 214 B.R. 524 (Bankr. D. Mass. 1997). The district court in Waguespack v. Rodriguez, 220 B.R. 31, 34 (W.D. La. 1998), succinctly summarized the prevailing view: "[w]hile tithing may be reasonably necessary for maintenance of the debtor's spiritual welfare, it is arguably neither indispensable to or necessary for the maintenance of his or her physical well-being."18

A few decisions upheld a limited right to make charitable contributions under the rubric of "discretionary spending." See, e.g., In re Andrade, 213 B.R. 765 (Bankr. E.D. Calif. 1997). An even smaller minority concluded that the Constitution protected religiously motivated tithing even in the context of a chapter 13 plan. See, e.g., In re Green, 73 B.R. 893 (Bankr. W.D. Mich. 1988).

P.L. 105-183 purports to moot this intractable question for most debtors by amending §1325(b) to modify the definition of "disposable income" to read as follows:

(2) For purposes of this subsection, "disposable income" means income which is received by the debtor and which is not reasonably necessary to be expended—

(A) for the maintenance or support of the debtor or a dependent of the debtor, including charitable contributions (that meet the definition of "charitable contribution" under §548(d)(3)) to a qualified religious or charitable entity or organization...in an amount not to exceed 15 percent of the gross income of the debtor for the year in which the contributions are made. (New matter in italics.)

The 15 percent charitable window was presumably designed to give literal tithers (those who give a tenth) a cushion for additional gifts. It is unlikely that there are many individuals who would want to propose a chapter 13 plan to provide for more.

Constitutional Issues

P.L. 105-183 may be read to seek indirectly (and broadly) what RFRA sought more directly (but narrowly). Do Congress's "charitable" bankruptcy amendments accomplish what a specific "religious" amendment could not? Although the Supreme Court's Free Exercise and Establishment jurisprudence may accurately be described as confused,19 there seems to be little reason not to expect S. 1244 to survive constitutional muster.

A line of cases at the beginning of 1970 supported the proposition that reasonable measures to achieve legitimate secular goals are not unconstitutional merely because they benefit religious groups. In Walz v. Tax Comm'n of New York City, 397 U.S. 664 (1970) the court sustained a property tax exemption that applied to properties owned by religious organizations together with real estate owned by a wide array of other non-profit organizations. According to Justice Harlan, "[a]s long as the breadth of exemption includes groups that pursue cultural, moral, or spiritual improvement in multifarious secular ways...I can see no lack of neutrality in extending the benefit of the exemption to organized religious groups." 397 U.S. at 898-899. The court in Mueller v. Allen, 463 U.S. 388 (1983), likewise upheld a state income tax deduction for the cost of tuition, transportation, and non-religious textbooks. Even though the deduction had the effect of aiding religiously based schools indirectly through the parents of students, it aided non-sectarian schools in the same manner and had an overriding secular purpose. An exemption from a state sales tax only for certain religious publications went too far, according to Texas Monthly Inc. v. Bullock, 489 U.S. 1 (1989). Writing for a divided court, Justice Brennan distinguished Walz by holding only that a tax subsidy exclusively for religious organizations was unconstitutional. He specifically noted that "government policies with secular objectives may...incidentally benefit religion." 489 U.S. at 10.20

Tying the amendments to the Code to the IRC lends additional support to their constitutionality. The Supreme Court has never had occasion to rule directly on the First Amendment implications of deductibility of religious contributions. Nevertheless, the long history of such deductions21 makes it unlikely the court would decide to hold those to religious organizations unconstitutional at this time. The breadth of exemption from fraudulent conveyance attacks afforded by S. 1244 should be sufficient to meet the constitutional standards of Walz, Mueller and Texas Monthly. The limited legislative history surrounding this bill indicates that protection for all charitable organizations was added to insure constitutionality.22 The court has held that charitable donations are in the public interest. Bob Jones University v. U.S., 461 U.S. 574 (1983). S. 1244 therefore also demonstrates a sufficient secular purpose to justify its constitutionality.


With dramatic simplicity, Congress and the president have resolved several issues that have been roiling in the bankruptcy and appellate courts for over a decade. P.L. 105-183 not only blocks trustees from seeking to recover most religious contributions as fraudulent conveyances, it also makes much easier the confirmation of a chapter 13 plan including charitable contributions. The financial repercussions of the amendments to §§544 and 548 will probably be minimal. However, considering the amount of ink spilled analyzing the financial impact of bankruptcy reform this past term, it is ironic that Congress so easily opened the door to substantial payments to non-creditors under chapter 13. Empirical studies will be necessary to assess the ultimate impact of the changes to §1325 on creditors.

Attacks on the constitutionality of P.L. 105-183 will probably fail. The Supreme Court has held that charitable contributions, including those to religious organizations, are in the public interest. The incorporation of longstanding provisions of the IRC into the Bankruptcy Code simply increases the barriers to constitutional attack. S. 1244 in many ways simplifies the administration of bankruptcy cases. Combined with its high level of popular and legislative support, P.L. 105-183 will probably remain part of the Code for years to come.


1 Pryor, C. Scott, "Tension Between the Trustee and the Tithe," XV ABI Journal, 4 (May 1996). Return to article

2 Christians v. Crystal Evangelical Free Church (In re Young), 82 F.3d 1407 (8th Cir. 1996), vacated and remanded, U.S., 117 S.Ct. 2502 (1997). Return to article

3 "Legislation that alters the meaning of the Free Exercise Clause cannot be said to be enforcing the clause. Congress does not enforce a constitutional right by changing what the right is." 117 S.Ct. 2164. Return to article

4 Limiting legislative authority strictly to enforce the Fourteenth Amendment would have put the court in the untenable position of questioning the constitutionality of the Voting Rights Act of 1965, which arguably went beyond the text of the amendment in banning the practices of a number of states that limited the political participation the amendment was intended to allow. Return to article

5 "Congress has plenary authority in all cases in which it has substantive legislative jurisdiction [e.g., bankruptcy under Art. I, §8, cl. 18], so long as the exercise of that authority does not offend some other constitutional restriction." 141 F.3d 859 (quoting INS v. Chadha, 462 U.S. 919, 941, 103 S.Ct. 2764, 2778). Return to article

6 "RFRA fulfills each of the elements presented in the Lemon test [Lemon v. Kurtzman, 403 U.S. 602, 91 S.Ct. 2105, 29 L.Ed. 745 (1971)], and we conclude that Congress did not violate the Establishment Clause in enacting RFRA." Id. at 863. Return to article

7 One bankruptcy court has done so as well. Hartvig v. Tri-City Baptist Temple of Milwaukie Inc. (In re Gomes), 219 B.R. 286 (Bankr. D. Ore. 1998); see, also, Gunning v. Runyon, 3 F.Supp.3d 1423 (S.D. Fla. 1998). Return to article

8 See, also, Nieuwenhuis v. Delavan-Darien School District, 996 F.Supp 855 (E.D. Wis. 1998) (RFRA unconstitutional with respect to the federal Individuals With Disabilities Act, 20 U.S.C. §§1400 et seq.) Return to article

9 IRC §61. Return to article

10 Thirty-six states have adopted the UFTA, while five (plus the Virgin Islands) still retain the UFCA. Return to article

11 "The trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under §502 of this title or that is not allowable only under §502(e) of this title." §544(b). Return to article

12 Section 101(41) generally excludes governmental units from the definition of "person." S. 1244 thus appears not to preempt governmentally instituted avoidance actions commenced pre-petition. It remains unclear whether a successful governmental entity could retain the proceeds of its action or if they would be deemed property of the estate. Cf. §541(A)(3) and (4) with §544(b)(2). Return to article

13 S. 1244 §3(b)(1) and (2). (new matter in italics). Return to article

14 Section 48(a)(1) was not amended. Return to article

15 The ability of state court receivers to recover charitable or religious donations should also remain unaffected. Return to article

16 Section 544(b)(2) probably also precludes even state court fraudulent conveyance claims that have been reduced to judgment. See §101(5)'s broad definition of "claim." The ability of a trustee to "recover" any recovery by such a judgment creditor for the benefit of the estate presents an interesting question. Return to article

17 The 1984 amendments added what is now §1325(b), which contains the "disposable net income" requirement. Return to article

18 The spiritual/physical dichotomy traces its ancestry to John Locke's A Letter Concerning Toleration and forms part of the foundation of all forms of the modern liberal-democratic state. Its fundamental incoherence is documented by Stanley Fish in Mission Impossible: Settling the Just Bounds Between Church and State, 97 Col. L. Rev. 2255 (1997). Return to article

19 Rosenberger v. Rectors and Visitors of the University of Virginia, 515 U.S. 819, 861 (Thomas, J., concurring). Return to article

20 See, also, Board of Education v. Mergens, 496 U.S. 226 (1990) (upholding the Equal Access Act) and Lamb's Chapel v. Center Moriches Union Free Sch. Dist., 508 U.S. 384 (1983) Return to article

21 The War Revenue Act of 1917 (40 Stat. 330 (1917)) was the first to provide for a deduction of charitable contributions for individual taxpayers. Return to article

22 105 Cong. Rec. S.4,769 (daily ed. May 13, 1998) (remarks of Sen. Grassley, R-IA). Return to article

Journal Date: 
Tuesday, December 1, 1998