Too Much Charity?

As we look back at the holiday season and reflect on the spirit of giving, the question arises; can there ever be too much charity? The answer, according to the bankruptcy code, is yes.

The bankruptcy code authorizes a bankruptcy trustee to avoid a debtor’s prepetition transfer of property if the transfer is: (1) actually fraudulent, i.e., made with the intent to hinder, delay or defraud creditors or (2) constructively fraudulent, i.e., the debtor is insolvent and did not receive reasonable equivalent value in exchange for the transfer. What if, however, the actually or constructively fraudulent transfer is made to a qualified religious or charitable entity? The answer to this question depends on whether the transfer is actually fraudulent or constructively fraudulent. If the transfer is actually fraudulent, there is no protection for the religious or charitable entity and the transfer is subject to avoidance by the bankruptcy trustee. Constructively fraudulent transfers, however, are insulated from a bankruptcy trustee’s attack if the transfer does not exceed 15% of the gross annual income of the debtor for the year in which contribution is made, or if the transfer was consistent with the debtor’s past practices. See, 11 U.S.C. § 548(a)(2).

In the recent case of Wadsworth v. The Word of Life Christian Ctr. (In re McGough), 467 B.R. 220 (B.A.P. 10^th Cir. 2012), the court was asked to interpret whether §548(a)(2) protects only the transfers which exceed 15% of the gross annual income or whether all of the contributions during the year in which the 15% threshold was exceeded are subject to avoidance. In Wadsworth, the bankruptcy court disagreed with the bankruptcy trustee and held that only the portion of the aggregated transfers exceeding the 15% threshold could be avoided. The bankruptcy court declined to follow the only previously reported decision on this issue, In re Zohdi, 234 B.R. 371 (Bankr. M.D. La. 1999), which supported the trustee’s position. The trustee appealed the bankruptcy court’s decision, but the Tenth Circuit Bankruptcy Appellate Panel (BAP) affirmed.

The BAP noted that §548(a)(2) was susceptible to different interpretations. Therefore, the court found the provision ambiguous and turned to legislative history. The BAP focused on the House Report, which states: “The safe harbor protects annual aggregate contributions up to 15% of the debtor’s annual income.” Therefore, the BAP held that the trustee could only avoid transfers in excess of the 15% safe harbor.

This article was submitted by Marc P. Barmat, Furr and Cohen, P.A., One Boca Place, Suite337 West, 2255 Glades Road, Boca Raton, FL 33431; mbarmat@furrcohen.com