Can Donations from a Bankrupt Donor Cost Your Church?
As I was speaking at one of our conferences recently, I was reminded, again, how much pastors and ministry leaders rely upon tithes and offerings to fund the vision God has placed in their hearts. Every gift, donation, and penny given allows a church or ministry to operate and fulfill its God-ordained purpose.
However, as I speak with pastors and ministry leaders, I have noticed a common question that seems to linger in their minds, “How secure are the donations my church receives?” Perhaps many of you reading this article have asked yourself a similar question.
While there are various situations and circumstances that could leave your church’s tithes and offerings vulnerable, I want to use this post to talk about one specific circumstance: donations received from a donor who files for bankruptcy.
For instance, if a church member or donor files for bankruptcy, can a bankruptcy trustee legally come after the donations that person gave your church?
This is the very situation a church in Wisconsin is facing.
Church sued for $756,000 from donor’s creditors
Earlier this year, it was reported that True Life Church of Waukesha, Wisconsin was sued for $756,000 by a donor’s unsecured creditors. The donor, Robert J. Lauby, donated this money to his church directly from his online business that sold various nutritional and dietary supplements.
Lauby started his business in the mid-1990s, and as interest in health and fitness grew, so did his company. By 2009, Laurie’s company was operating out of a large facility, and at one point, his company’s annual sales hit $36 million.
Lauby, a long time member of True Life Church, said, “I contributed to the church based on my own success.” He believed that donating directly through his company was the most simplistic way to do so for accounting and tax purposes, and as a result of his success, Lauby donated $756,000 through his company during the four years prior to filing for bankruptcy.
This, in turn, left True Life Church susceptible to certain bankruptcy laws when Laurie’s business filed for bankruptcy under Chapter 11 in January 2015, and most recently a receivership on January 30, 2017.
Although the outcome of this case is still to be determined, it serves as a stark reminder that all churches and ministries should be somewhat aware that such instances can occur. For this reason, the remainder of this article will examine, in brief, the relationship between bankruptcy law and your church or ministry.
We will review the authority that bankruptcy trustees have to recover donations a debtor gives your church or ministry. Then we will take a look at what protections are afforded to churches and charitable organizations in such instances.
Please note that this article is not intended to serve as legal advice. Should you ever find your church or ministry facing such circumstances, we advise that you seek qualified legal counsel.
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What authority do bankruptcy trustees have to recover donations to your church?
In the past, courts have allowed trustees to recover donations made to a church by a bankrupt donor. Section 548(a) of the Bankruptcy Code allows a bankruptcy trustee to recover two types of “fraudulent transfers” made by the debtor (donor) within two years of filing for bankruptcy.
In short, there are two factors to consider under section 548(a):
- Was there an intent to defraud by the bankrupt donor? (See section 548(a)(1)(A))
- Was there a transfer of cash or property by the bankrupt donor for less than a reasonable equivalent value? (See section 548(a)(1)(B)(i))
In the past, while many bankruptcy trustees would contact churches and other charitable organizations demanding they return the donations made by the debtor(s), many churches and donors were fighting against such practices.
As I am sure you can imagine, many churches had already used the debtor’s contributions for ministry needs well before being contacted by the bankruptcy trustee. As a result, the churches that were ordered to return such donations likely had a difficult time doing so.
Hence, what does this mean for you? Does this mean if one of your donors files for bankruptcy, then the donations he/she gave to your church are susceptible to bankruptcy trustees and the courts?
Well, not exactly. There is some protection for churches and other charitable organizations that face such situations.
(Recommended reading: "Why Bylaws Are Important, And How to Make Yours Better")
The Religious Freedom and Charitable Donation Protection Act
In 1998, Congress passed the Religious Freedom and Charitable Donation Protection Act to protect churches and other tax-exempt organizations from having to turn over donations from a bankrupt donor to a bankruptcy trustee. This Act amended section 548(a)(2) of the Bankruptcy Code to read as follows:
"(2) A transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not be considered to be a transfer covered under paragraph (1)(B) in any case in which—
(A) 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
(B) 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." (Emphasis added.)
In a nutshell, here is what it is saying:
- as long as the donations from the bankrupt donor amount to 15% or less of his/her gross annual income for the year that the donations were made, then the bankruptcy trustee cannot recover those donations, and
- the donations made by the bankrupt donor must be consistent with his/her normal giving practices if the donations exceed 15% of the donor’s gross annual income.
It is important to note that the Religious Freedom and Charitable Donation Protection Act does not extend to the donations made by a bankrupt donor when there is a direct and overt intent to defraud.
Now, some of you may be asking, “What happens if the bankrupt donor makes donations to my church that exceeds 15% of his/her annual income? Is the entire amount liable or just the amount that exceeds 15%?”
To help answer this question, we can look to a recent ruling from a federal appeals court.
What happens when a debtor’s donations exceed the 15% threshold?
In 2012, a United States Bankruptcy Appellate Panel for the Tenth Circuit affirmed a bankruptcy court’s decision that if a bankruptcy debtor donates more than 15% of gross annual income to his/her church, then the bankruptcy trustee can only recover the donations that exceeded 15% of his/her gross annual income.
However, in 2013, the United States Court of Appeals for the Tenth Circuit reversed this decision and ruled that donations in excess of 15% of a debtor’s gross annual income are entirely recoverable by the bankruptcy trustee.
In this particular case, a married couple donated more than 15% of their gross annual income to a church during the year prior to the couple filing for bankruptcy. The bankruptcy trustee attempted to recover all of their donations from the church.
Donations in excess of 15% of a debtor’s gross annual income are entirely recoverable by the bankruptcy trustee.
The church’s argument relied on the statute’s legislative history, House Report No. 105-556, which states,
"The 15 percent safe harbor is necessary to protect the tithing practices of certain religious faiths. It is intended to apply to transfers that a debtor makes on an aggregate basis during the . . . reachback period preceding the filing of the debtor's bankruptcy case. Thus, the safe harbor protects annual aggregate contributions up to 15 percent of the debtor's gross annual income."
The court did not see it this way and rejected this argument.
This particular ruling is relevant to every church. Should one of your church members file for bankruptcy protection and his/her donations exceed 15% of his/her gross annual income in the year prior to filing for bankruptcy, then all of his/her donations may be recoverable by a bankruptcy trustee.
Therefore, if one of your church members files for bankruptcy, what are some immediate steps that you can take to determine whether or not his/her donations (from the previous year to filing for bankruptcy) are protected under the Religious Freedom and Charitable Donation Protection Act?
We will take a look at that next.
How to determine if your donations received are protected
No one ever wants to file for bankruptcy, but the fact remains that it does happen. Consequently, that means a member of your church may have to file for bankruptcy one day.
Should that ever happen, below are some questions you can ask yourself to determine if the Religious Freedom and Charitable Donation Protection Act applies to the situation.
1. Did the bankrupt donor give, either cash or noncash donations, to your church within the year prior to him/her filing for bankruptcy?
- If no, then you can stop here because there is nothing for the bankruptcy trustee to recover. However, if yes, then ask yourself the next question.
2. Did the bankrupt donor have an intent to defraud his/her creditors?
A key indicator in determining the answer to this question is if the donor gave a large donation that is not in line with his/her normal giving practices and the timing of that particular donation. If the bankrupt donor gave a “larger than normal” donation to your church shortly before filing for bankruptcy protection, then there is a good chance there was an intent to defraud.
- If you are able to answer “yes” to this intent to defraud question, then the donations from the bankrupt donor for the year prior to filing are not protected by the Religious Freedom and Charitable Donation Protection Act.
- If you can answer “no” to this question, then ask yourself the next question.
3. Did the bankrupt donor receive something with a “reasonable equivalent value” for the donation he/she made to your church?
To help you answer this question, it is important to note that something of a “reasonable equivalent value” does not include “intangible religious services,” such as the worship experience, preaching, teaching, counseling, etc., that he/she receives from your church.
- If you can answer “yes” to this question, then the donor’s contributions cannot be recovered by a bankruptcy trustee.
- If you answer “no” to this question, then consider the next question.
4. Do the donations from the prior year of the donor filing for bankruptcy amount to 15% or less of his/her total gross income?
- If you can answer “yes” to this question, then those donations are protected by the Religious Freedom and Charitable Donation Protection Act.
- If the donor’s gifts to your church exceed 15% of his/her gross income, then ask yourself the following question.
5. Are the donations from the previous year in line with the normal giving practices of the donor in question?
- If you can answer “yes” to this question, then those donations are protected by the Religious Freedom and Charitable Donation Protection Act.
- If your answer is “no,” then the donations given to your church in the previous year by the donor filing for bankruptcy are not protected by the Religious Freedom and Charitable Donation Protection Act.
Now that we know what authority bankruptcy trustees have to recover donations given to your church by a bankrupt donor and the protections afforded to your church in such situations, I want to address two more questions before concluding this blog article.
What should your church do to protect itself?
I believe there are two things your church can do to protect itself should such a situation ever arise.
- Set up a “give-back” fund: This is a type of fund that you establish in order to create a financial cushion for the church in the event that one of your tithing members files for bankruptcy. Since the financial status and flexibility differs for every church, it is important for you and your board to determine a percentage to set aside that works for your church.
- Be wise concerning givers: Especially the flamboyant givers. These are givers who try to attract the attention of the pastor and other church leaders by their exuberant giving. In my humble opinion, I recommend that pastors be wise about how they accept money from such givers. There may come times when you will need to exercise the discipline of telling some givers that you believe their commitment to future giving or the amount they recently gave was not logical and that they may have been moved too much by the emotion of the moment. This requires discipline and trust in God, that He will always be faithful to provide, even if every once in a while you turn away someone's giving.
Can a bankrupt donor continue to tithe to your church?
In short, when a donor files for bankruptcy, it does not mean that he/she must stop donating or tithing to your church. Donors who file for bankruptcy are allowed to continue tithing to your church, however, there are a few things to consider.
Under Chapter 7 and Chapter 13, when an individual files for bankruptcy he/she must submit a payment plan to the court projecting income and expenses. As an expense, the debtor can include charitable contributions, including tithes to your church.
In the past, courts have denied such plans, however, the Religious Freedom and Charitable Donation Protection Act clarified that bankruptcy courts can no longer dismiss cases on such grounds by amending section 707(b) of the Bankruptcy Code to read as follows:
"In making a determination whether to dismiss a case under this section, the court may not take into consideration whether a debtor has made, or continues to make, charitable contributions . . . to any qualified religious or charitable entity or organization (as that term is defined in section 548(d)(4))."
Keep in mind that the bankrupt donor may not give more than 15% of his/her gross annual income and the donation must remain consistent with his/her normal giving practice.
Leading a church in the 21st century
That was a lot of information we just covered regarding the donations your church receives from a bankrupt donor and the implications they can have on your church. If you need to take a few deep breaths then go ahead, I will give some time.
I am sure it is no secret to you that leading a church today is a lot different from how our fathers and grandfathers led their churches. There seem to be new rules, regulations, and tax laws around every corner. This is where we want to help you.
We understand the world of church compliance and tax law, and we want to be able to use what we know to serve you so you can concentrate more on the part of ministry that matters most to you. I invite you to attend one of our Ultimate Church Structure Conferences. This is a one-day conference for both churches and ministries.
Please click on the link below, find a city where we will be near you, and come meet and join us for a day of empowerment and impartation as we pour into you and your ministry.
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- Wadsworth v. Word of Life Christian Ctr. (In re McGough), 467 B.R. 220 (B.A.P. 10th Cir. 2012)
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