Returning Donations to Bankruptcy Trustees

Federal court rules in favor of church in bankruptcy dispute.

Church Law and Tax 1996-11-01


Key point. Some courts have ruled that bankruptcy trustees do have the legal authority to require churches to return contributions made by bankrupt debtors during the year prior to filing a bankruptcy petition.

A federal appeals court ruled that a bankruptcy trustee could not require a church to return $13,000 in contributions that had been made by a member during the year prior to filing a bankruptcy petition. The church and the member both believed in tithing, and the member faithfully tithed up until the time he filed for bankruptcy. The trustee demanded that the church return the $13,000 in contributions made during the previous year. It relied on a provision in the bankruptcy code giving trustees the authority to “avoid” transfers made by debtors within a year of filing for bankruptcy unless they receive property or services of “reasonably equivalent value” in exchange. The church insisted that the member received valuable benefits in exchange for his contributions, but a bankruptcy court disagreed. The case was appealed. A federal appeals court acknowledged that the debtor received valuable benefits in exchange for his contributions to the church, including preaching, teaching, and counseling. But, it concluded that these benefits were provided to members whether or not they tithed, and as a result they were not provided “in exchange” for the debtor’s contributions. Therefore, under the bankruptcy law the trustee had the authority to recover the debtor’s contributions from the church. However, the court further concluded that allowing the trustee to do so would violate the rights of the church and debtor under the Religious Freedom Restoration Act. This Act specifies that the government may not “substantially burden” a person’s religious practices unless a compelling governmental interest exists. The court concluded that the practice of tithing was a religious practice that would be substantially burdened if the trustee could recover the debtor’s tithes since it would discourage persons from tithing to their church if they suspected that they might file for bankruptcy within the next year. Further, the court concluded that there was no compelling governmental interest that would justify the substantial burden on the practice of tithing. This issue is now resolved in the eighth federal circuit, which includes the states of Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota-at least with respect to those churches for which tithing is an important religious practice. The trustee has indicated that he will appeal this decision to the United States Supreme Court. In re Young, 82 F.3d 1407 (8th Cir. 1996). [ Limitations on Charitable Giving]

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