In a case of first impression at the circuit level, the Tenth Circuit Court of Appeals has held a debtor’s entire religious tithing is avoidable if it exceeds 15% of the debtor’s gross annual income, and the court did so based on its perception of the plain language of the Religious Liberty and Charitable Donation Protection Act which codified the “safe harbor” provisions of sec. 548(a)(2).[1]  Wadsworth v. The Word of Life Christian Center (In re McGough), 2013 WL 6570853 (10thCir. 2013). 

In McGough, in each of the two years prior to their bankruptcy filing, the debtors, through numerous payments each year, contributed more than 15% of their gross annual income to their church.  No single payment exceeded the 15% threshold, but the total payments each year did.  The bankruptcy trustee asserted that the term “contribution” in sec. 548(a)(2)(A) should be read to apply to the aggregate of all religious contributions made during the year, and sought to avoid the contributions in their entirety because they exceeded the threshold.  In defense the church brought forward two arguments:  (1) the term “contribution” in the statute applies to each contribution individually and not to all contributions in the aggregate and, since no single contribution exceeded 15% of the debtors’ gross annual income, none of the contributions was avoidable and (2) if the term “contribution” under the statute was read as applying to the entire years’ contributions in the aggregate, the trustee could avoid only the amount that exceeded 15% of the debtors’ gross annual income.

The bankruptcy court held that, for purposes of applying the safe harbor provisions of the statute, the contributions made in any year must be considered in the aggregate.  However, the bankruptcy court decided that the statute empowered the trustee to recover only the amount of the aggregate contributions that exceeded 15% of the debtor’s gross annual income.  The BAP affirmed the bankruptcy court, and the trustee perfected an appeal to the Tenth Circuit on the issue of whether section 548(a)(2)(A)’s safe harbor protected the debtors’ contributions up to the 15% threshold.[2]

Determining that the plain language of the safe harbor provisions of section 548(a)(2)(A) mandated a contrary finding, the Tenth Circuit reversed, and held that a trustee may avoid the entirety of a debtor’s religious contributions if they exceed the 15% threshold of the sum total of all contributions made during the year in question, unless the transfer is consistent with the debtor’s practice.[3]  The Tenth Circuit based its conclusion on the plain language of section 548(a)(2)(A):

A transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not be [avoidable by the Trustee under sec. 548(a)(1)(B)] in any case in which

  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. the contribution made by a debtor exceeded the percentage amount of gross annual income specified in subparagraph (A), if the transfer was consistent with the practices of the debtor in making charitable contributions.

The court stated that its interpretation of the statute begins “where all such inquiries must begin: with the language of the statute itself.”  Ransom v. FIA Card Servs., N.A., 131 S. Ct. 716, 723 (2011).  Noting that “courts must presume that a legislature says in a statute what it means and means in a statute what it says,” and when the words of a statute are not ambiguous, resort to legislative history for interpretation of the statute is unnecessary.   The church argued the phrase “in any case in which” should be interpreted as equivalent to the phrase “to the extent,” with a result that the statute should be interpreted as protecting contributions up to the 15% level and exposing only those above that threshold to the trustee’s avoidance powers.  The court rejected this argument, noting that the phrase “in any case in which” is used synonymously with “if” or “when”  in several federal statutes.  Because the statute contains no language limiting the amount of the transfer to be avoided to amounts above the 15% threshold, the court held that in those instances where the contribution exceeds 15% of the debtor’s gross annual income, the trustee may avoid the entire contribution. 

The church also raised the absurdity doctrine, contending that allowing the trustee to recover the entire transfer if the threshold is exceeded but nothing if the threshold is not met lead to a result not intended by Congress.  The Tenth Circuit noted that the absurdity doctrine is an exception to the rule that the plain meaning of a statute controls, and is used when an interpretation of a statute on its plain language would lead to a result not intended by its drafters.  However, the court stated that there is a “heavy presumption” meant what it said when it used plain and clear language, and the absurdity exception is to be applied only when the court is convinced that Congress could not have intended such a result:

[w]e cannot reject an application of the plain meaning of the words of a statute on the ground that we are confident that Congress would have wanted a different result.  Instead, we can apply the doctrine only when it would have been unthinkable for Congress to have intended the result commanded by the words of the statute—that is, when the result would have been so bizarre that Congress could not have intended it.

The court saw no absurdity, and instead determined that Congress intended to create a bright-line rule under which donations not exceeding 15% of gross annual income are protected but donations exceeding that limit are not.  The court stated that the bright-line rule was not absurd if viewed as a policy protecting excess contributions if they are consistent with prior practice but allowing recovering of the entire fraudulently transferred donation where it exceeds the threshold and was inconsistent with the debtor’s prior practice.