Bill Would Prevent Seizure of Tithes in Bankruptcy Cases

Should bill collectors be allowed to dip into church offering plates for money owed to them by individual worshipers who have declared bankruptcy?

Bankruptcy trustees have been trying to do just that in growing numbers in a trend that began with a Minnesota court ruling in 1991 that ordered a church to return $13,400 donated by a couple who later declared bankruptcy.

Now, however, Congress has responded to alarms from religious groups nationwide and has passed legislation to ban efforts by creditors to perform what churches see as a raid on their treasuries and a threat to religious freedom.

Known as the Religious Liberty and Charitable Donation Protection Act, the bill, sponsored by Sen. Charles Grassley (R-Iowa) and Rep. Ron Packard (R-Oceanside), won final congressional approval recently and now awaits President Clinton’s signature. It is separate from an overall revision of the bankruptcy code that is currently pending in Congress. White House officials have indicated that Clinton will sign the bill.

The law is designed to prevent cases like the one that enmeshed the Rev. Richard Steel of Cedar Bayou Baptist Church in Baytown, Texas.

*

Steel’s church was sued several years ago for $23,000 by an air-conditioning contractor in nearby Houston trying to collect on a debt owed, not by the church, but by a longtime member and deacon who had declared bankruptcy.

The contractor was laying claim to all the deacon’s tithes and offerings put into the collection plate during the previous four years, plus interest.

“I thought somebody was playing a practical joke on us,” Steel said. “I had never heard of a church being sued for the return of its tithes.”

Once the reality set in, Steel said, he wondered if the time wasn’t too far off when churches would have to run credit checks on all donors before accepting their money.

As it turns out, the Texas and Minnesota churches were not alone. More than 100 similar lawsuits have been filed against churches in Idaho, Kansas, Kentucky, Maryland, Massachusetts, Michigan, North Carolina, Oregon, Pennsylvania and Washington.

No similar Chapter 7 cases have surfaced in California. But a Sacramento bankruptcy court in October ruled that a bankrupt family filing under a different bankruptcy code section, Chapter 13, did not have unlimited discretion to donate money to its church. In a Chapter 7 case, the debts accumulated by a bankrupt person are discharged entirely. In a Chapter 13 case, creditors are paid back a percentage of the debt over time based upon the bankrupt person’s disposable income.

*

The Catholic League for Religious and Civil Rights, the Church of Jesus Christ of Latter-day Saints and the National Council of Churches all joined the battle to block the bankruptcy cases.

If the trend were not reversed, the churches warned, other nonprofit organizations from the Boy Scouts to the United Way would become targets, and suits seeking the return of charitable contributions would become the most common adversary proceeding in federal bankruptcy courts.

Moreover, the churches argued, for many believers, giving a tithe is a commandment from God. For courts to prevent this, they said, is tantamount to usurping their right to worship as they choose.

“It’s a gross violation of religious liberty and the autonomy of churches for a secular trustee in bankruptcy to essentially undo an accomplished act of religious worship,” said Forest Montgomery, counsel in the Washington office of the National Assn. of Evangelicals. “Tithing is more than a financial transaction. It is part and parcel of worship.”

On a more practical level, many churches live from hand to mouth, the church groups argued. Their ability to pay expenses, from salaries to utility bills, is sometimes heavily dependent on the weekly offering. The funds that bankruptcy trustees were seeking to have returned often had long since been spent. In other cases, it would cost churches more to go to court than it would to simply pay the creditor.

Not willing to concede the moral high ground, attorneys and bankruptcy trustees acting on behalf of creditors insisted that their cause was no less righteous.

“It is morally right to pay your creditor,” said attorney Paul Nimmons, who represents the Houston air-conditioning contractor, Gregory-Edwards Inc. “If you’re able to pay your creditors, then go ahead and give gifts to the church or anybody else,” he said. “But I cannot see that the church or anyone else has a right to receive money that morally does not belong to them.”

Until several years ago it was virtually unheard of for a creditor to target churches or other charitable institutions to recover bad debts. But the line was crossed in 1991, apparently for the first time, when creditors moved to recoup $13,400 from the Crystal Evangelical Free Church in New Hope, Minn. The money represented the offerings made by a family during a one-year period preceding its bankruptcy.

As news of early creditor victories in the Crystal case spread, it was like a dollar sign from heaven for bankruptcy trustees. Suddenly they and their lawyers saw a new way to collect--forgive the debtors but not their churches.

“Churches and synagogues are deep pockets. It’s similar to going after banks. If you sue them and win, you’ll be able to recover,” said Penelope Parmes, president of the Los Angeles Bankruptcy Bar Assn. and a partner in the law office of Snell & Wilmer in Irvine.

Dan Green, the Pocatello attorney representing an Idaho bankruptcy trustee who brought 101 cases, said that once bankruptcy courts began allowing creditors to collect from churches, trustees had a fiduciary duty to go after the money.

Although the move to seek refund of church contributions is relatively new, the legal basis for going after tithes and offerings dates back 400 years to the reign of England’s Queen Elizabeth I.

Under bankruptcy law, it is illegal to transfer property with the intent of diverting it from creditors. That is known as “actual fraud.”

But even if a debtor has the best of intentions and no ulterior motive in giving away money or property, a donation can still be considered a “constructive fraud.” All a creditor needs to show is that the debtor transferred the property without receiving “reasonable equivalent value” or “fair consideration” in return.

And that’s the rub, Steel said. If his bankrupt church deacon had spent money on fine dining, gambling or prostitutes, he might have a guilty conscience, but the courts would reason that he received something tangible for his money.

Not so when the money goes to the church. Bankruptcy courts have held that tithes and offerings are given without receiving something of equivalent value. That means, these courts have held, that the tithes amounted to a fraudulent transfer of property. Under the new law, however, tithes and other contributions will be sheltered from the reach of creditors.