Court: United States Bankruptcy Court, D. Colorado; July 7, 2011; Us Bankruptcy; United States Bankruptcy Court
The Court addresses two motions for partial summary judgment filed by David S. Wadsworth, Chapter 7 Trustee, and Word of Life Christian Center regarding donations made by debtors Lisa and Scott McGough during their Chapter 7 bankruptcy. The Court has subject matter jurisdiction under 28 U.S.C. 1334(b) and (e), determining this case a core proceeding per 28 U.S.C. 157(b)(2)(A), (E), and (H).
The background reveals that the McGoughs filed for bankruptcy on December 31, 2009, with minimal gross earned income and significant social security benefits in both 2008 and 2009. They made charitable donations to the Defendant totaling $3,478 in 2008 and $1,280 in 2009. The Trustee seeks to avoid these contributions under 11 U.S.C. 548, while the Defendant argues that the Religious Liberty and Charitable Donation Protection Act of 1997 (RLCDPA) protects these transfers as they do not exceed 15% of the debtors' gross annual income.
Key issues for the Court include whether social security payments count towards gross annual income under 548(a)(2), whether the 15% threshold applies to individual transfers or their annual aggregate, and whether only the amount exceeding 15% is voidable if the total exceeds this threshold.
The Court notes the ambiguity in the statute regarding the definition of gross annual income, specifically whether it includes social security benefits, and highlights that the Bankruptcy Code does not define this term. It also points out that social security benefits are excluded when calculating current monthly income.
The Internal Revenue Code (IRC) stipulates that social security benefits are included in Gross Adjusted Income (GAI) only if the debtor’s modified adjusted gross income plus half of the social security benefits received exceeds a specified base amount. The Seventh Circuit and the Bankruptcy Court in the Central District of California have adopted this IRC definition of GAI. In contrast, the defendant argues for the inclusion of social security benefits in GAI, citing In re Koenegstein, which allows such inclusion if strict adherence to the IRC results in an absurd outcome under the Bankruptcy Code. However, Koenegstein is not directly relevant as it pertains to Chapter 12 farmers, and the defendant fails to demonstrate how applying the IRC would lead to an absurd result. The defendant also references In re Olguin, which relates to Current Monthly Income (CMI) rather than GAI and does not support their argument since the debtors are not third parties redirecting funds.
Regarding transfers, the case Universal Church v. Geltzer emphasizes that transfers should be analyzed collectively. This aligns with the interpretation of Section 102(7) of the Bankruptcy Code and the House Report on the RLCDPA, which indicates that the singular "transfer" should be understood as plural. The defendant's reliance on the Zohdi opinion, which suggests a 15% cap applies to individual transfers, is flawed as that court did not rule on this matter, and its comments were merely dicta.
On the issue of voidable amounts, the Zohdi court held that a straightforward reading of the statute necessitates voiding the entire amount of a charitable donation, indicating that Congress would have used clearer language if it intended only the excess over 15% to be voidable. Conversely, the RLCDPA was designed to prevent courts from allowing avoidance actions for funds contributed by debtors to churches, with the House Report indicating that contributions up to 15% of gross annual income are protected, suggesting Congress intended to separate the avoidance amount from that threshold.
Zohdi differs from the current case as it involved a single large transaction rather than multiple smaller donations. The Zohdi Court interpreted 11 U.S.C. § 548(a)(2) to not require an aggregate analysis, allowing a debtor to exhaust their estate through multiple donations below the 15% threshold without consequence—a result that seems contrary to Congressional intent. This interpretation raises concerns about the undue burden on charities, as voiding contributions above the threshold would necessitate thorough financial investigations of donors.
In the case at hand, social security payments are excluded from Gross Annual Income (GAI) for the purposes of § 548(a)(2), and the 15% threshold is applied to aggregate transfers. The Debtors’ contributions in both 2008 and 2009 exceeded this threshold, entitling the Trustee to avoid $2,614.95 in contributions.
The court ordered that the Plaintiffs’ motion for partial summary judgment is granted for contributions exceeding 15%, while denied for those below the threshold. Similarly, the Defendant's motion is granted for retaining contributions that do not exceed 15%, but denied for those that do. The trial scheduled for September 15, 2011, has been vacated.
