Federal court says church must return funds of bankrupt parishioners

Wednesday, April 29, 1998

A federal bankruptcy court in Oregon has ruled that the First Amendment does not prevent creditors from recovering tithes and pledges that churches received from people who later declared bankruptcy.

The United States Bankruptcy Court of Oregon ruled last week that a Baptist church in Oregon cannot keep tithes from Daniel and Laurie Ann Gomes, who filed for bankruptcy in 1996. The church had asked the court to bar the bankruptcy trustee from recovering the tithes, alleging that the recovery would infringe on the church's religious-liberty rights as well as the family's. The trustee tried to recover $6,124 that the Gomes tithed to the church 10 months before filing for bankruptcy.

The court, however, found that federal bankruptcy law — which allows a trustee to recover tithes and return them to creditors — does not substantially burden either the church's or the family's right to practice religion.

“The Trustee's efforts to avoid (annul) the transfers (tithes) have neither restricted the Gomes … tithing practices nor done anything to shake the Gomes' belief that they should tithe,” Judge Dunn wrote. “The recovery of prepetition tithes 'may embarrass the debtor, but it does not burden the debtor's ability to engage in the exercise of religion by making postpetition tithes,' ” he continued, quoting a 1997 American Bankruptcy Law Journal article.

Dunn noted that being “subject on occasion to the recovery by a bankruptcy trustee of a limited portion of an insolvent debtor's tithed funds does not constitute the type of substantial burden on religion” that would force the government to show a “compelling interest” in the law. The Gomeses — members of the church since the late '70s — had consistently contributed 10% of their gross income to the church. Federal bankruptcy law allowed the trustee to go after the tithes they made within the year they filed bankruptcy.

The church also argued that the trustee's attempts to recover from the Gomeses' tithings subverted the separation of church and state.

The U.S. Supreme Court in 1971 set out a three-part test to determine when a government law or action subverts the First Amendment's principle of separation of church and state. If the government law or action does not have a secular purpose, and its effect advances or inhibits religion, and it fosters “an excessive entanglement with religion,” then the law or action violates the establishment clause.

Dunn said the power of a bankruptcy trustee to recover tithes from religious organizations did not violate the separation of church and state.

“The subject statutes are neutral with respect to religion and generally applicable according to their terms,” Dunn wrote. “In enforcing his bankruptcy avoidance powers, the Trustee does not discriminate against religion in general or the Church in particular. The stipulated facts reflect that the Trustee regularly exercises his avoidance powers to recover from a wide variety of individuals and entities, including religious institutions and secular charities without regard to the religious or secular nature of such entity's religious creed or affiliation.”

Church attorneys, however, argued in the suit that the trustee's authority under the federal bankruptcy laws amounted to a “government action that audits church ledgers and retroactively seizes private contributions made to a church,” in violation of the establishment clause.

Such recovery on “an incidental and occasional basis” does not amount to such an entanglement between church and state to offend the establishment clause, Dunn concluded.

Jim Henderson, senior counsel for the American Center for Law and Justice, a national religious liberty firm, said his organization represented at least a dozen religious organizations in efforts to keep funds from being recovered by bankruptcy trustees.

“The right to teach about the role of finances and financial accountability and the importance of financially supporting the work of ministry is a very valuable right and one that is clearly a species of the free exercise of religion,” Henderson said. “If this decision is not reversed, it will create a real injury for insolvent debtors and their recipients here and across the country.”

Henderson also criticized the court's claim that the burden placed on the church in returning funds is insignificant.

“I think the court's logic defies reality,” he said. “Churches and synagogues are not in the business of making sure their members are not on the precipice of bankruptcy before cashing their checks.”

Two bills are pending in Congress that would amend bankruptcy law to provide greater protection for religious donations.

The House version — the Religious Fairness in Bankruptcy Act — is pending a vote in the Subcommittee on Commercial and Administrative Law.

The Senate bill-the Religious Liberty and Charitable Donation Protection Act of 1998-has already cleared a Senate committee and awaits a floor vote. Introduced by Senator Orrin Hatch, R-Utah, the bill amends federal bankruptcy law to bar a trustee from recovering tithes and religious contributions.

“I think amending the bankruptcy code to protect churches and synagogues from surprise recaptures of religious contributions is consistent with the best-regarded principles of the constitutional freedom of association and of the freedom of religion,” Henderson said.