A new law protecting charitable donations from creditors in bankruptcy cases represents a coup for churches and other nonprofit organizations, an attorney for a United Methodist agency says.
The new law, dubbed the Religious Liberty and Charitable Donation Protection Act, prevents creditors from claiming charitable contributions that are made by donors who later file for bankruptcy. The legislation was signed by President Clinton on June 19. The law is a “major legislative coup,” said Mary Logan, general counsel for the United Methodist Church’s General Council on Finance and Administration.
Bankruptcy trustees have been going after donations made by debtors to churches, claiming that the donations are fraudulent transfers made in anticipation of bankruptcy, Logan said. The charge of fraud hinges on the belief that the debtor doesn’t receive anything tangible in return for the contribution, she said.
Severe problem for evangelical churches
“The problem has been severe for evangelical churches where tithing is an obligation,” Logan said. “The Mormon church, the Seventh-day Adventists and some other denominations have had hundreds of claims by bankruptcy trustees.”
The claims began in the wake of a 1992 court decision, in which a trustee was allowed to collect thousands of dollars in past tithes from a Minnesota church, according to the office of U.S. Rep. Ron Packard, R-Calif., who pushed the legislation.
“It’s absolutely unbelievable that a place of worship or a charity can be held responsible for a debt they had nothing to do with,” Packard said in a prepared statement.
“Bankruptcy trustees have been aggressive in several geographic areas and have piqued the interest of other bankruptcy trustees to try the same thing,” Logan said.
A deeper issue
Though pleased with the new law, Logan expressed concern about a deeper issue related to the position taken by the bankruptcy trustees.
“The most troubling thing about this for me and, I think, for all church people, should be that the bankruptcy trustees were making the argument that there was nothing received back to the debtor by giving this money, and therefore it was a fraudulent conveyance,” she said. “I am concerned that the bankruptcy trustees making this argument don’t seem to understand what church is all about.”
Increasingly, many judges and lawyers don’t understand the positions that religious organizations and people take on spiritual issues, she said.
While the legislation will not directly benefit a large number of United Methodist churches or individuals, Logan said, it “shows that Congress is still willing to stand up for important religious beliefs.”
Experts predict that a group of bankruptcy trustees will file a legal challenge to the constitutionality of the new statute.