Background. A member of your church suffers a business setback that prompts him to file for bankruptcy. Several weeks later, your church receives an official letter from the bankruptcy trustee, demanding that the church return all contributions the member made within a year of filing his bankruptcy petition. How would you respond? This is an important and practical question that every church treasurer should be prepared to answer. A recent court ruling provides helpful guidance.

A recent case. Bruce was a devoted church member and a faithful giver. Mounting debts caused him to file for bankruptcy in 1992. His church received a letter from a bankruptcy trustee demanding a return of the $13,000 in contributions Bruce made to the church during the year preceding his bankruptcy filing. The church refused to comply, and a bankruptcy court ordered it to do so. The court relied on a provision in the bankruptcy code giving bankruptcy trustees the authority to “avoid” or cancel transfers of money or property by a bankrupt debtor, made within one year of the filing of a bankruptcy petition, unless the debtor received “in exchange” goods or services of “reasonably equivalent value.” The purpose of this provision is to prevent unscrupulous persons from giving away their assets to friends and relatives, filing for bankruptcy and having their debts discharged, and then having their assets returned to them. You are free to transfer property within a year of filing for bankruptcy, but unless you receive in exchange goods or services of reasonably equivalent value, a bankruptcy trustee can cancel your transfer and order the property returned to the bankruptcy court.

The church insisted that Bruce did receive services of “reasonably equivalent value” in exchange for his contributions, including worship, teaching, and counsel. Therefore, the bankruptcy trustee could not cancel the contributions and insist that the church return them. The court disagreed. It conceded that Bruce received valuable benefits from the church, but it insisted that these benefits were not provided “in exchange” for Bruce’s contributions. Quite to the contrary, the church would have provided these benefits to Bruce whether or not he contributed anything. As a result, the church failed to establish that Bruce received anything of reasonably equivalent value in exchange for his contributions to the church. This meant that the bankruptcy trustee could recover the $13,000 in contributions Bruce had made during the year prior to his bankruptcy petition.

The church appealed, and a federal appeals court ruled in favor of the church. It agreed that the church failed to prove that it provided anything of reasonably equivalent value in exchange for Bruce’s contributions. It noted that “church services were available to all regardless of whether any contributions were made,” that Bruce’s contributions were “in no way linked to the availability of church services,” and that there had been “no exchange of contributions for church services.” As a result, the bankruptcy trustee could order the church to return Bruce’s contributions since he had received nothing in exchange for his contributions.

However, the court concluded that allowing the trustee to recover Bruce’s contributions from the church would violate the federal Religious Freedom Restoration Act. This Act provides that the government “shall not substantially burden a person’s exercise of religion” unless it “demonstrates that application of the burden to the person (1) is in furtherance of a compelling governmental interest, and (2) is the least restrictive means of furthering that compelling governmental interest.” The court concluded that the bankruptcy trustee’s recovery of Bruce’s contributions would “substantially burden” the exercise of religion of both Bruce and his church, since both believed in the principle of tithing. It further concluded that there was no “compelling governmental interest” that would justify this burden, and therefore the Act would be violated if the trustee were permitted to recover Bruce’s contributions.

Relevance to church treasurers. What is the relevance of this case to church treasurers? Given the increasing number of persons who are filing for bankruptcy, it is likely that many churches in the future will receive letters from bankruptcy trustees demanding a return of contributions made by bankrupt debtors. Church treasurers need to be prepared to respond to these demands. The comments listed below will help.

1. Your church is in Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, or South Dakota, and considers tithing to be an important religious practice.

You are covered by the federal appeals court decision summarized in this article. This issue has been resolved for churches in your state. Bankruptcy trustees are prohibited by the Religious Freedom Restoration Act from requiring churches to return contributions paid by bankrupt debtors.

2. Your church is in Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, or South Dakota, but does not consider tithing to be an important religious practice.

You are not covered by the federal appeals court decision summarized in this article. Since tithing is not an important practice, there would be no “substantial burden” on the exercise of religion, and therefore the Religious Freedom Restoration Act would not be violated. Bankruptcy trustees would not be barred by the appeals court’s decision from insisting that churches return the contributions of bankrupt debtors (made within a year of filing a bankruptcy petition).

3. Your church is not in Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, or South Dakota, and considers tithing to be an important religious practice.

You are not covered by the federal appeals court decision summarized in this article. However, the decision may still be of some relevance. While it is not binding, it will be given some weight since it is a federal appellate decision. If you are contacted by a bankruptcy trustee who demands that you return the contributions of a bankrupt church member, you should retain an attorney who can inform the bankruptcy trustee about the ruling discussed in this article. Many trustees would defer to this decision (even though it is not binding upon them) rather than pursue litigation. Others may not.

Lower level federal courts in some states have addressed this issue and reached conflicting results. Most of these rulings occurred before the Religious Freedom Restoration Act was enacted, and so they are of limited significance.

4. Your church is not in Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, or South Dakota, and does not consider tithing to be an important religious practice.

You are not covered by the federal appeals court decision summarized in this article. Since tithing is not an important practice, there would be no “substantial burden” on the exercise of religion, and therefore the Religious Freedom Restoration Act would not be violated. Bankruptcy trustees would not be barred by the appeals court’s decision from insisting that churches return the contributions of bankrupt debtors (made within a year of filing a bankruptcy petition).

This article originally appeared in Church Treasurer Alert, November 1996.