Rewrite the Bankruptcy Laws, Not the Scriptures: Protecting a Bankruptcy Debtor's Right to Tithe
Todd J. Zywicki
George Mason University School of Law; PERC - Property and Environment Research Center
Wisconsin Law Review, December 1998
In June 1998, the Religious Liberty and Charitable Donation Protection Act (the "Act") of 1998 was signed into law. The centerpiece of the Act will protect gratuitous transfers to churches and charities that would otherwise be avoidable as fraudulent transfers. The Act has been roundly criticized by the bankruptcy community. This article explains the state of the law with respect to these transactions prior to the enactment of the Act, the reasons justifying the Act, and explains the relevant provisions of the Act. This article justifies the Act on several grounds. First, it is shown that courts were in error in failing to protect these transfers under established fraudulent transfer principles even prior to the Act. Fraudulent conveyance law has traditionally protected consumption and investment transactions so as to permit reliance with third-parties with whom the debtor deals. This principle applies with equal force to arms'-length transfers made to bona fide religious and charitable organizations that actually rely on the transfer. Second, principles of equity justify protecting these transactions. Fraudulent conveyance law does not avoid transactions made for gambling, fine dining, and vacations; it similarly should not avoid transfers made from religious and charitable motives. Third, current law allows debtors to transfer property to themselves through use of the exemption power, a transaction analogous to a classical fraudulent conveyance "kickback" transaction. An arms'-length transfer to a bona fide religious or charitable organization does not create such a kickback arrangement. Fourth, just as the policies of the tax code yield to the traditional public support for religious and charitable organizations through their tax-exempt status, it is appropriate for bankruptcy and fraudulent conveyance policies also to yield.
Date posted: December 15, 1998
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