Lawrence A. Reicher, Drafting Glitches in the Religious Liberty and Charitable Donation Protection Act of 1998: Amend Sec. 548(a)(2) of the Bankruptcy Code

• Publication year: 2011

DRAFTING GLITCHES IN THE RELIGIOUS LIBERTY AND CHARITABLE DONATION PROTECTION ACT OF 1998: AMEND Sec. 548(A)(2) OF THE BANKRUPTCY CODE

INTRODUCTION

The U.S. Constitution mandates that Congress shall make no law establishing a religion or prohibiting exercise of religion,¹and it empowers Congress to develop a uniform system of bankruptcy throughout the states.²

While these provisos seem unrelated, they have come into conflict over how an individual's religious right to tithe is affected by bankruptcy proceedings.³

Specifically, courts have often forced religious institutions to return tithes given to them by congregation members who filed for bankruptcy soon after making the donation.⁴Recent amendments to the Bankruptcy Code ("Code") have added confusion as to the amount of donation that is safe from recovery in bankruptcy proceedings.

Congress passed legislation on several occasions that would resolve the conflict between the religious organizations' desire to keep tithes given by debtors and general principles of fairness to creditors that are essential to bankruptcy proceedings; the most recent attempt was the Religious Liberty and

Charitable Donation Protection Act of 1998 ("RLCDPA").⁵Prior to passage of RLCDPA, which contains explicit provisions on charitable and religious donations, courts and Congress evaluated several schemas for analyzing the intersection between religious rights and bankruptcy.⁶Many bankruptcy courts evaluated tithing under fraudulent transfer statutes determining if the debtor received a return of "reasonably equivalent value" for the tithe.⁷While courts were sympathetic to debtors' First Amendment arguments in support of allowing debtor tithing, there was no easy statutory way to permit the transfer of funds. Courts had no way to assess the value of a debtor's religious beliefs to determine if he had received reasonably equivalent monetary value. The only available analysis was to scrutinize the monetary benefit of the contribution, and see if the debtor received a monetarily reasonably equivalent value for the donation.⁸But under this analysis, tithes and other donations to religious causes were often, though not always,⁹found to be fraudulent transfers that were not protected from the bankrupt estate. Thus, religious organizations were often forced to return donations given to them by debtors.¹⁰

The Religious Freedom Restoration Act ("RFRA") of 1993 addressed this problem, though indirectly. RFRA directed courts to apply "strict scrutiny" to state and federal laws and regulations that placed a burden on religion.¹¹In short, this meant that if a statute or regulation could be construed to be restrictive of religious freedom, belief, or practice, the government would have to show it had a compelling interest in the restriction and that it had tailored the statute narrowly to minimize the impact on religion.¹²The bankruptcy courts were split in their reception of RFRA: some were concerned with its constitutionality,¹³while others welcomed it as a statutory basis to defend religious freedom.¹⁴These latter courts saw RFRA as a palpable way to allow religious institutions to keep debtors' donations.

However, after the Supreme Court's decision in City of Boerne v. Flores,¹⁵the constitutionality of RFRA was generally questioned, and bankruptcy courts were hesitant to rule on its applicability to the Code, which is federal law.¹⁶

Some courts called RFRA wholly unconstitutional; ¹⁷most insisted that RFRA still remained binding on Congress.¹⁸

In response, Congress passed the Religious Liberty and Charitable Donation Protection Act of 1998 ("RLCDPA").¹⁹RLCDPA attempted to protect tithes given to religious institutions by individual debtors preceding bankruptcy from attack by trustees attempting to recover them as fraudulent transfers.²⁰RLCDPA was to be applied alongside RFRA, if it was still good federal law,²¹or independently if RFRA proved unconstitutional.²²Congress's zeal to protect the rights of American tithe-givers in their religious practice led to swift passage of RLCDPA, which passed unanimously in the Senate and overwhelmingly in the House of Representatives.²³But in their haste to protect these religious donations, Congress made drafting glitches that should be solved simply by legislative amendments, rather than judicial interpretation.²⁴

Section I (A-B) of this Comment will illuminate this conflict by exploring the plain meaning of RLCDPA, specifically its amendments to Sec. 548(a)(2) of the Code, using both general canons of statutory construction and the Dictionary Act of the Code. Section I (C) will analyze the Act's plain meaning under the lens of its legislative intent within RLCDPA that amended

Sec. 548(a)(2) of the Code.²⁵Section I (D) will address the two leading cases on this issue-In re Zohdi ("Zodhi")²⁶and Universal Church v. Geltzer ("Geltzer").²⁷Finally, the Conclusion of this Comment will offer simple and necessary alternative amendments to Sec. 548(a)(2) to unequivocally state its statutory purpose and meaning.

I. INTERPRETING RLCDPA

A. Passage of RLCDPA

On June 19, 1998, President Bill Clinton signed RLCDPA into law.²⁸The President issued a brief statement expressing his strong support of the new law and explaining the purpose he believed it served.²⁹President Clinton's statement stressed the importance of community: protecting religious and charitable groups safeguards important facets of communities by shielding "donations made in good faith by our citizens to their churches and charitable institutions."³⁰True to these comments, RLCDPA, on its face, meant to protect religious and charitable organizations from recovery actions brought by bankruptcy trustees.

President Clinton's statement pertained to RLCDPA as a whole, which amended five sections of the Code.³¹Section 548(a)(2), as amended by RLCDPA in 1998 states, in whole, that:

A transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not be considered to be a transfer covered under paragraph (1)(B) in any case which-(A) the amount of that contribution does not exceed 15% of the gross annual income of the debtor for the year in which the transfer of the contribution is made; or (B) the contribution made by a debtor exceeded the percentage amount of gross annual income specified in subparagraph (A), if the transfer was consistent with the practices of the debtor in making charitable contributions.³²

More generally, Sec. 548 of the Code allows a bankruptcy trustee to recover (that is, bring back into the estate) fraudulent transfers in a defined period (now two years) preceding bankruptcy.³³These transfers include ones for which the debtor's estate did not receive reasonably equivalent value. The amendments to the Code added by RLCDPA carve out an exception to the reasonably equivalent value analysis for gifts meeting the criteria indicated above.

However, the criteria Congress set for avoiding such transfers are unclear. Section 548(a)(2)(A) facially is ambiguous because it refers to all transfers and contributions strictly in their singular forms. It reads:

[A] transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not be considered to be a transfer covered under paragraph (1)(B) in any case which-(A) the amount of that contribution does not exceed 15% of the gross annual income of the debtor for the year in which the transfer of the contribution.³⁴

This language is vague as to whether (1) it is the amount of an individual contribution that cannot exceed 15 percent of the debtor's gross annual income ("individual donation"), or (2) whether the cumulative value of all of the debtor's contributions in a year cannot be greater than 15 percent of his gross annual income to be protected ("aggregation"), notwithstanding prior practice of consistently more generous giving.³⁵If Sec. 548(a)(2)(A) applies to individual donations, then a debtor could conceivably give all of his income, in individual transfers of less than 15 percent, to charities or religious organizations; if

Sec. 548(a)(2)(A) applies in the aggregate, then a debtor's total giving could not exceed 15 percent of his gross annual income, and all donations in excess of this would be recoverable by the trustee. To resolve the discrepancy, it is first necessary to understand common principles of statutory interpretation and then, more specifically, rules pertaining to the Code.

B. Canons of Construction and Analysis

Canons of statutory construction commonly used to aid courts in their interpretation of statutory language are well established. A key canon, simply stated, is that "the plain meaning of legislation should be conclusive except in the 'rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.'"³⁶The Supreme Court has affirmed this generally understood maxim with regards to the Code.³⁷Still, some have challenged bankruptcy provisions, including other parts of Sec. 548,³⁸under the so-called "absurdity doctrine."³⁹When a court invokes the absurdity doctrine, it is explicitly going against the plain meaning of a statute to reach a result it perceives to be reasonable.

For a statutory construction to create an "absurd" result, the outcome must not be merely "personally disagreeable, mischievous, or objectionable."⁴⁰

Rather, the outcome must be "unthinkable, or bizarre, or demonstrably at odds with the intentions of its drafters."⁴¹"Laws enacted with good intention, when put to the test, frequently, and to the surprise of the lawmaker himself, turn out to be mischievous, absurd or otherwise objectionable. But in such case the remedy lies with the lawmaking authority, and not with the courts."⁴²Thus, even if a statute does not "conform to the dictates of common sense,"⁴³a court must interpret it literally because it is the legislature's job to correct a miswritten statute...