According to a recent case decided by the U.S. Bankruptcy Court of the Appellant Panel for the 10th Circuit, a person can give too much. Churches and other charitable organizations can be forced to return a portion of the tithes and gifts given up to two years prior if the contributor later files for bankruptcy. In re Mcgough, Bap No. CO-11-038 filed March 14, 2012. Before Michael, Thurman, and Karlin, Bankruptcy Judges.
Bankruptcy law allows a bankruptcy trustees to avoid and recover certain transfers made by debtors prior to the filing of their bankruptcy petition on the ground that the transfers were either actually or constructively fraudulent. Thus, a trustee may recover, from the charitable organization, any transfer made by the debtor within two years of filing of the bankruptcy petition, if the debtor either: 1) actually intended to defraud creditors in making the transfer (“actual” fraud); or 2) received less than “a reasonably equivalent value” in exchange, and was insolvent when the transfer was made (“constructive”fraud). There are no exceptions to avoidance of a transfer that a trustee establishes was made with actual fraudulent intent. However, a debtor’s constructively fraudulent charitable donation cannot be avoided by the trustee if the transferee establishes that: 1) it is a qualified religious or charitable entity; and 2) the amount of the donation is not more than 15 percent of the debtor’s gross annual income in the year of the transfer.
The 10th Circuit Bankruptcy Court concluded, that: 1) social security benefits are not included in the determination of the Debtors’ “gross annual income;” 2) charitable donations are aggregated annually in determining whether they exceed 15% of annual income; and 3) only that portion of the aggregated transfers that exceeds the 15% threshold may be avoided.
However, part three is not law across the entire United States. In 1999 a different bankruptcy court addressed the safe harbor provision in the context of a debtor’s single contribution of $10,000 to Louisiana State University during a year in which his gross annual income was $43,669. That court concluded that the trustee could avoid the entire $10,000 transfer, as opposed to $3,450, which was the amount by which the donation exceeded 15% of the debtor’s gross annual income. See: Murray v. La. State Univ. Found. (In re Zohdi), 234 B.R. 371 (Bankr. M.D.La. 1999).
In the 10th Circuit case, the Bankruptcy Court avoided only the amount of the Debtors’ annual charitable contributions that exceeded 15% of their gross annual income. Thus the Church only had to return the portion of the contributions that exceeded 15% of the church members gross annual income. However, the social security received by the debtor was not counted as gross annual income to determine the 15% threshold. Thus it would appear that all contributions given by a person who only received social security benefits my be avoid by the trustee and must be turned over to the trustee by the church or charity if that contributor later files bankruptcy.
In refusing to follow the Zohdi case, the 10th Circuit Court stated that in Chapter 13 cases when a debtor’s disposable income is determined the debtors may also deduct their charitable donations “in an amount not to exceed” 15% of their gross income. This provision plainly reduces disposable income in Chapter 13 cases by an amount up to 15% of gross income. As such, Chapter 13 debtors’ post-filing charitable contributions are deductible up to the threshold amount and are considered to be beyond the bankruptcy court’s scrutiny. Similarly interpreting section 548(a)(2) to allow a charitable organization to retain contributions up to 15% of the debtor’s gross annual income harmonizes these two provisions by protecting both pre- and post-petition charitable donations up to a maximum of 15% of an individual debtor’s gross annual income.
As a practicable matter this situation does not arise often in bankruptcy. Generally, a debtor who is having financial problems which ultimately cause him or her to file bankruptcy, does not give contributions that exceed 15% of their annual income. The problem may arise if aggressive trustees start going after social security recipients contributions. If a person is only getting social security and that income is not legally considered “gross annual income” then any amount they give exceeds the 15% threshold and may be avoided by the trustee. This could cause the Churches and Charities much grief if they are required to return contributions received up to two years prior.