Churches applaud amended federal bankruptcy code to shelter tithes

Friday, September 25, 1998

A federal law enacted this summer alters the bankruptcy code to shelter churchgoers' donations from bankruptcy judges.

Religious organizations such as the Christian Legal Society, a national group that advocates religious liberty, and the Mormon Church have hailed the law — dubbed the Religious Liberty and Charitable Donation Protection Act of 1998 — as a victory for the nation's churches and other places of worship.

Before President Clinton signed the act in early June, the federal bankruptcy code treated a person's tithes made within a year of filing for bankruptcy as a fraudulent transfer recoverable by bankruptcy trustees.

The thinking was that some debtors were shielding money they owed by giving it to churches, and that if they could afford to honor their church pledges, they could afford to repay creditors.

The act amended the code to prevent bankruptcy judges from forcing churches and other tax-exempt, charitable organizations to return donations of up to 15% of a debtor's gross annual income in order to repay creditors.

“This bill amends the bankruptcy code to protect the religious liberty of the many Americans who tithe,” said Sen. Orrin Hatch, R-Utah.

Don LeFevre, spokesman for the Mormon church, called Congress' action “a reaffirmation of the right of the individual citizens to make unconditional charitable contributions.”

Before the action, many court decisions, including one in April from a federal bankruptcy court in Oregon, held that the religious liberty-rights of churches were not violated by the bankruptcy code permitting creditors to recover tithes.

One of the first federal bankruptcy rulings enabling recovery of tithes came in 1992 from the 8th U.S. Circuit Court of Appeals. In Christians v. Crystal Evangelical Free Church, the federal court ruled that the establishment clause of the First Amendment was not subverted when a bankruptcy trustee recouped thousands of dollars in tithes from the Minnesota church.

The federal appeals court concluded in part that the primary effect of the code was not to inhibit religion and that enforcement would not involve an excessive entanglement with religious practice.

The federal bankruptcy court in Oregon this spring also concluded that tithe recovery did not violate churches' religious liberties. The court in In re Gomes barred a Baptist church from keeping tithes received from members who filed for bankruptcy in 1996.

The recovery of tithes may embarrass a debtor, but it does not “burden the debtor's ability” to exercise his or her religion, the federal court concluded.

Steve McFarland, director of the legal and advocacy division of the Christian Legal Society, helped draft the new act that has changed the bankruptcy code. In testimony this summer he told Congress that charitable contributions to religious organizations should be treated specially.

Rep. Ron Packard, R-Calif., a cosponsor of the act, referred to some federal bankruptcy decisions as intrusions on people's ability to practice their religion.

“Many churches and charities survive solely on day-to-day contributions,” Packard said in a statement on the act. “They simply can't afford to cough up hundreds and sometimes thousands in past donations. It's absolutely unbelievable that a place of worship or a charity would be responsible for a debt they had nothing to do with.”

Upon the bill's enactment, McFarland claimed victory for religious organizations.

“The act declares an end to the hunting season on the coffers of innocent churches,” McFarland said. “Charities no longer have to give creditors the donations they received from their sincere, consistent supporters.”

Mary Logan, general counsel for the United Methodist Church, called the act a “major legislative coup” for “evangelical churches where tithing is an obligation.”

Logan said the act would offer relief to the “Mormon church, the Seventh-day Adventists, and some other denominations [that] have had hundreds of claims by bankruptcy trustees.”

The National Bankruptcy Conference, an organization of lawyers and judges who handle bankruptcy cases, has derided the law and suggested a possible lawsuit. Stephen Case, a spokesman for the group, testified before Congress against the act.

“Congress should not slice up our fraudulent-transfer laws with special-interest exceptions, no matter how deserving the special-interest groups may be,” Case said.

Citing federal court decisions as proof, he argued that the separation of church and state would be undermined by changing the bankruptcy code to protect tithes.

As the federal court concluded in the Gomes case, the recovery of contributed tithes and offerings “does not rise to an excessive entanglement, because it merely requires the payment of funds; it does not impinge directly on Church beliefs or ministries.”

The court continued that “such recovery, on an incidental and occasional basis, has only the indirect and unintended effect of limiting the Church's budget.”

McFarland, however, said he was confident that the new act would withstand judicial scrutiny because it “isn't giving churches special treatment.” McFarland said the act doesn't just protect churches, but secular charities as well.