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Trustee May Avoid Debtor's Entire Transfer To Charity if More Than 15 Percent of GAI

Monday, December 30, 2013
By Diane Davis

Dec. 27 --A bankruptcy court incorrectly ruled that if a restricted debtor transfers more than 15 percent of his gross annual income to a qualified religious or charitable organization, the trustee may only avoid the portion exceeding 15 percent, the U.S. Court of Appeals for the Tenth Circuit held Dec. 16, on an issue of first impression in the circuit (Wadsworth v. Word of Life Christian Ctr. (In re McGough), 10th Cir., No. 12-1142, 12/16/13).

Reversing the bankruptcy court's decision and remanding the case, Senior Judge Terence L. O'Brien concluded that the bankruptcy court's result is contrary to the plain language of the “safe harbor” provision in Bankruptcy Code Section 548(a)(2).

The appeals court rejected the appellee The Word of Life Christian Center's argument that the 15 percent limit does not merely act as an “avoidable” threshold but also establishes the amount of the transfer protected from avoidance if that threshold is exceeded. According to the court, the only reasonable reading of the statute is that the amount of the transfer to be avoided is the entire amount. “Nothing in the plain language of the statute indicates that, if the transfer exceeds 15 percent of GAI [gross annual income], only the portion exceeding 15 percent is avoidable,” the court said.

Agreeing with the bankruptcy court in Murray v. Louisiana State Univ. Found. (In re Zohdi), 234 B.R. 371 (Bankr. M.D. La. 1999), the Tenth Circuit found that without language limiting the word “transfer” to that portion of the transfer exceeding 15 percent, the entire transfer is avoidable.

Debtors' Contributions.

Debtors Lisa and Scott McGough filed for Chapter 7 protection Dec. 31, 2009. During 2008, the debtors made 25 contributions to The Word of Life Christian Center totaling 3,478. During 2009, they made seven contributions to the Center totaling $1,280.

Their taxable income for 2008 and 2009 was $6,800 and $7,487, respectively. They also received Social Security benefits in 2008 of $22,036, and in 2009 of $23,164.

Trustee's Adversary Proceeding.

Chapter 7 trustee David Wadsworth filed an adversary proceeding against the Center seeking to recover the contributions made to it by the debtors in 2008 and 2009 under Sections 548(a)(1)(B) and 550. According to the trustee, the contributions must be considered in the aggregate, and because the total contributions made by the debtors to the Center in 2008 and 2009 exceeded 15 percent of their GAI in those years, he could recover them in their entirety.

The bankruptcy court agreed with the trustee in part. For purposes of applying the safe harbor provision of Section 548(a)(2), the court concluded that a debtor's contributions must be considered in their annual aggregate. However, it sided with the Center on the avoidance issue and concluded that if the contributions exceeded 15 percent of a debtor's GAI, only the amount exceeding 15 percent is subject to avoidance. Thus, the trustee's recovery was limited to the amount of the contributions exceeding 15 percent of the debtor's GAI in 2008 and 2009.

The trustee appealed to the Bankruptcy Appellate Panel of the Tenth Circuit, which agreed with the bankruptcy court that only the amount exceeding 15 percent was avoidable.

Arguments on Appeal.

The trustee argued that Section 548(a)(2) is unambiguous and clearly provides a safe harbor from the trustee's avoidance power only if the “transfer” does not exceed 15 percent of GAI. Thus, if the transfer exceeds 15 percent of GAI, then the “transfer” is subject to avoidance, he contended.

The Center, however, argued that Section 548(a)(2) fails to explicitly state that if the amount of the debtor's aggregate contributions over the course of a year exceeds 15 percent of the debtor's GAI, then the entire amount of the contributions is subject to avoidance. According to the Center, by using the phrase “in any case in which,” the statute broadens the scope of the circumstances under which transfers are protected to include those portions of transfers which do not exceed 15 percent of GAI.

Safe Harbor Provision Added.

Section 548(a)(1)(B), the appeals court said, allows a trustee to avoid any transfer of property by a debtor made within two years before the date of the filing of the bankruptcy if the debtor: “(1) received less than a reasonably equivalent value in exchange for the transfer and (2) was insolvent on the date the transfer was made or became insolvent as a result of the transfer.” Section 550 allows the trustee to recover transfers of property avoided under Section 548 for the benefit of the bankruptcy estate, the court said.

In 1998, Congress passed the Religious Liberty and Charitable Donation Protection Act (RLCDPA),Pub. L. No. 105-183, § 3, 112 Stat. 517 (1998), which added a safe harbor provision in Section 548(a)(2) exempting transfers of charitable contributions to qualified religious or charitable organizations from Section 548(a)(1)(B) so long as: “(1) the amount of that contribution does not exceed 15 percent of the gross annual income of the debtor for the year in which the transfer of the contribution is made or (2) even if the contribution exceeds 15 percent of GAI, the transfer was consistent with the practices of the debtor in making charitable contributions.”

Plain Language of Statute.

The court rejected the Center's interpretation of the statute, saying that the phrase “in any case in which” is a legalism that is often used in place of “if” or “when.” According to the court, it is often used in statutory language where the Center's amount-indicating meaning would make no sense. Substituting “if” for the phrase “in any case in which” resolves any claimed ambiguity, the court said.

Because there is no language limiting the amount of the transfer to be avoided, the only reasonable reading of the statute is that the amount of the transfer to be avoided is the entire amount, the court said. “Nothing in the plain language of the statute indicates that, if the transfer exceeds 15 percent of GAI, only the portion exceeding 15 percent is avoidable,” the court said.

Follow Similar Case.

The court agreed with In re Zohdi, which decided the plain language of the statute subjected the entire transfer to avoidance if the transfer exceeded 15 percent of the debtor's GAI. Without language limiting the word “transfer” to that portion of the transfer exceeding 15 percent, the entire transfer is avoidable, the court said.
 

Absurdity Doctrine Doesn't Apply.

The court also found that the absurdity doctrine did not apply in this case. The absurdity doctrine, the court said, is an exception to the rule that the plain and ordinary meaning of a statute controls. Under this doctrine, “interpretation of a statute which would produce absurd results are to be avoided if alternative interpretations consistent with the legislative purpose are available,” the court said. However, the rule is a “tool to be used to carry out Congress' intent--not to override it,” the court said.

According to the court, the statute establishes a bright-line rule that donations not exceeding 15 percent of GAI are protected and donations exceeding 15 percent are not. This interpretation of Section 548(a)(2)(A) does not undermine the purposes of RLCDPA, the court said. It allows debtors to make donations to religious and charitable organizations up to 15 percent of their GAI and, to the extent the donations do not exceed that amount, they may be kept by the organization, the court said. “If the Center is unhappy with the result in this case, its remedy lies with Congress, not this court,” the court said.

The key flaw in the Center's absurdity argument, the court said, is that it ignores the other protection built-in to Section 548(a)(2) -- even if the debtor's contribution exceeds 15 percent of his GAI, the entire amount is protected if it is consistent with his past charitable giving practices. This is an important provision, the court said.

Judges Jerome A. Holmes and Scott M. Matheson, Jr., joined the opinion.

David V. Wadsworth of Denver, represented the plaintiff/appellant, pro se; Lee Katherine Goldstein and Scott T. Rodgers of Fairfield and Woods, P.C., of Denver, represented the defendant/appellee.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

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