Crystal Evangelical Free Church, Minneapolis, Minnesota

To

UNITED STATES HOUSE OF REPRESENTATIVES JUDICIARY SUBCOMMITTEE

On COMMERCIAL AND ADMINISTRATIVE LAW

GEORGE W. GEKIS, Chairman

RE:

Hearing On

HR 2604 Religious Liberty and Charitable Donations Protection Act of 1997

HR 2611 Religious Fairness In Bankruptcy Act of 1997

INTRODUCTORY OVERVIEW AND CASE HISTORY

From February 1991 through January 1992, Bruce and Nancy Young, members of the Crystal Evangelical Free Church in Minneapolis, Minnesota, suffered serious financial reverses in their 20 year old family run electrical contracting business. The reversal in finances was due in part to Mr. Young's ill health (he had a heart attack during the year), and the national economic recession. During that year, the Youngs sold several assets which would have been exempt under the Bankruptcy Code, refinanced their house, and attempted to pay off their business debts. In January of 1992, when faced with the impossibility of paying their business creditors, they were counseled to file bankruptcy. The Youngs resisted this idea for as long as they could, but eventually came to the realization that this was their only viable course of action.

During the preceding year the Young family continued to tithe 10% of their gross personal family income to the Crystal Evangelical Free Church, on a weekly basis, as they had for ten previous years. This practice was a

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voluntary outgrowth of their personal religious faith and biblical persuasions. The Youngs revealed these contributions, as was required under law, on the bankruptcy forms. The Bankruptcy Trustee subsequently requested that the church turn over the Young's voluntary tithe contributions to her. The church contested, and litigation was started by the Bankruptcy Trustee in the Spring of 1992.

The Bankruptcy Trustee began a turnover motion under 11 U.S.C. Section 542 (Section 542 of the Bankruptcy Code) against Crystal Evangelical Free Church in May of 1992, demanding the return of the tithes given during a period of one year prior to filing bankruptcy. This action was initiated based on 11 U.S.C. Sec. 548(A)(2) which provides that any transfer of assets within the year prior to the filing of the bankruptcy, where no reasonably equivalent value was made and where the debtor was insolvent on the date such transfer was made, is subject to having the Trustee pull those assets back into the bankruptcy estate. This section of the Bankruptcy Code (Sec. 548) is entitled "Fraudulent Transfers and Obligations." The original counsel for Crystal Evangelical Free Church decided that in fighting the motion brought by Trustee that they would rely strictly on two prior cases in other Bankruptcy Courts involving the same situation, both of which had found that reasonably equivalent value had been returned to a bankruptcy debtor for religious contributions made within a year prior to the filing of the bankruptcy. No Religious Freedom issues were brought out by the original attorneys for the church at the Bankruptcy Court level.

The Trustee brought a motion for summary judgment, and the church's counsel brought a cross-motion for summary judgment. These motions were heard in October of 1992 in the Bankruptcy Court for the District of Minnesota. The Chief Judge issued a ruling in favor of the Bankruptcy Trustee based solely on statutory theory, requiring the church to return the tithe donations. The decision was issued on December 20, 1992, and constituted a precedent-setting ruling in the history of U.S. and European bankruptcy law. The conscientious exercise of the donor's personal religious practice through tithing was deemed by the court to constitute "fraudulent transfer" by virtue of the application of bankruptcy codes never intended to restrict religious freedom.

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Crystal Evangelical Free Church appealed the ruling to the U.S. District Court and secured new legal counsel. In April 1993, the District Court judge affirmed the ruling of the Bankruptcy Court. Appeal was then filed

with the Eighth Circuit Federal Court of Appeals, along with an Amicus brief supported by multiple denominations and organizations representing at least 40 million Americans.

Shortly after the filing of the final Reply brief in September of 1993, The Religious Freedom Restoration Act (RFRA) was passed and signed into law by President Clinton.

The church immediately filed a motion with the Eighth Circuit to file a Supplemental brief arguing that RFRA applied to the case and the motion was granted.

On May 6, 1996, the Eighth Circuit opinion was issued, finding in favor of the Church, on the basis of the Religious Freedom Restoration Act. On September 20, 1996, appeal was made to the Supreme Court of the United States by the Bankruptcy Trustee.

The case was held by the Supreme Court until June 27, 1997, when the Eighth Circuit's favorable opinion for the church was vacated and remanded for rehearing after the Supreme Court struck down state application of RFRA. The case was subsequently heard again before the Eighth Circuit on December 8, 1997. A decision has not yet been rendered at this time.

CENTRAL THESIS

Total cost to the church to date, for this six year defense of the donor's right to practice their religious faith in the form of a tithe and to defend against this precedent-setting misapplication of 400 year old European/American bankruptcy laws, is in excess of $300,000! This procedure has been a severe infringe- ment upon the donor's free exercise of their personal religious freedom and a substantial financial burden upon the church.

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With the Supreme Court having struck down RFRA, the primary protection for religious freedom available to citizens through federal law, thereby rejecting the judgment of Congress and asserting that the judicial branch, not the legislative branch, is exclusively authorized to interpret the

Constitution's guarantee for religious freedom, a specific and proactive response from Congress is imperative. Section 548(A)(2) of the Bankruptcy Code must be amended by providing an exception for religious and charitable donations.

THE DOMINO EFFECT UPON CHURCHES

The term "church" can be used interchangeably with synagogue or temple or any house of worship for the remainder of this testimony.

The case being cited, (RE: Julia A. Christians vs. Crystal Evangelical Free Church) was the first ruling to apply bankruptcy law, intended to prevent fraudulent transfer of funds, in an intrusive manner upon religious tithing and donations where fraud is clearly not evident or intended. It is bad application of good law, and has resulted in a plethora of similar cases in a short time. To date, there are scores of Crystal Evangelical Free Church "type" cases now in the courts, with new ones being placed into the judicial pipeline on an almost daily basis. Many of these cases have reached the level of the Circuit Courts. The Crystal Evangelical Free Church decision, which has now been vacated, is the only Circuit Court opinion in a case of this type which is favorable to individual donors and their churches. With the loss of RFRA, the standing of this important case upon rehearing before the Circuit Court appears fragile at best. Regarding the application of bankruptcy law, the courts are seemingly bent upon eliminating any consideration of the uniqueness of the church or the sanctity of the practice of personal religious freedoms in the form of tithing and religious donations. This alarming trend has developed in only the last six years of our country's 221 year history.

THE BURDEN AND DANGER OF THE MISAPPLICATION OF

CURRENT BANKRUPTCY CODES

An example of the inequity of what is happening is found in the judicial reasoning undergirding the lower court's decisions. The court held

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that any spiritual benefits that donors received as a result of their membership in church did not constitute "reasonably equivalent value" for their donations, and was therefore "fraudulent transfer." This ruling was

made in spite of the court's admission that actual fraudulent transfer was not intended or evident in any way.

Such a convoluted conclusion was rendered by the court because of technical application of current bankruptcy codes which state, "No fraud or other improper conduct is required for conveyance to be set aside as 'fraudulent transfer.' " In other words, there doesn't have to be any fraud for it to be called fraud if the court wants to rule it to be fraudulent. This is how the financial giving of devout believers can simply be declared as "fraudulent transfer" and now garnished from the church by the courts.

Additionally, current code reads, "Only benefits which are tangible or which have some economic value can constitute 'reasonably equivalent value' for alleged fraudulent transfer.'"

If the courts now choose to apply such language in a manner that determines the practice of personal religious faith through the 4000 year old Judeo/Christian injunction of tithing to be "fraudulent transfer"--then the Bankruptcy Code must be rewritten to provide statutory exception for religious and charitable donations. To reduce the practice of religious faith to having no value because the value isn't tangible is patently absurd. However, individuals and churches across the nation are now being subject to this judicial myopia.

THE OMINOUS IMPLICATIONS

The court's rulings have the effect of greatly increasing the scope of fraudulent transfer by applying it for the first time to religious and charitable donations. For over 400 years, "value" for religious and charitable donations was not even an issue until trustees recently sought to use the Bankruptcy Code in a manner and application that tramples religious freedom, while the courts imply commitment to the spiritual well-being of people to be of no value because it is not tangible.

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The result of this trend will be the wholesale depravation of the rights of any devout religious believers who find themselves in bankruptcy, and

could in many cases seriously disrupt the budgets and programs of churches.

An additional consideration is the possible impact outside the bankruptcy setting. The section of the Bankruptcy Code that is being primarily used in the cases against churches is a codification of a portion of the Uniform Fraudulent Conveyance Act and the newer Uniform Fraudulent Transfer Act. the church, even if the person

who owes the money is not in bankruptcy. Even worse, these statutes allow a creditor to go after contributions that were made to a church up to five and six years earlier. This will have a severe intimidating effect upon individuals and churches.

THE ROLE AND PLACE OF THE CHURCH

AND

ITS ENTITLEMENT TO UNIQUE CIVIL TREATMENT

Churches have special claims to make that are peculiar to themselves and that are based upon considerations that do not apply to other organizations.

One reason they are distinguishable is that they embody the activity protected by the First Amendment's initial clauses; the free exercise of religion and its non-establishment in any specific way by government. If one were to look for the most visible, extensive, and enduring collective manifestations of the "free exercise of religion" in this country, where else would one look but to the institutions which inculcate, amplify, and perpetuate religious behavior. The Church is an ongoing community of faith with revered teachings, sacred rites and sacraments, and respected teachers trained in the practice of faith. In that sense, churches are an important and indispensable part of whatever it is the first two clauses of the First Amendment are designed to protect under the rubric of "religion."

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The Supreme Court has historically interpreted the First Amendment to mean that no governmental entity in the land may sponsor, support, prefer or inhibit any religion, or all religion in America. This provision is unique. There is no such restriction upon government with respect to any other activities protected by the First Amendment.

The ministrations of the Church are not without value, and should not be subject to codes with application based on value that is only temporally determined. They are, on the contrary, advantageous not only to their members, but to the society as a whole. That is a sweeping claim reflected intuitively by the First Amendment's religion clauses. It is religion, primarily embodied in the Church, that ministers to people, addressing the

needs of the inner person in all the successive transitions of life; birth, puberty, marriage, emotional crisis, illness, bereavement, dying and eternity. When Americans exercise various aspects of their personal religious faith as taught to them by their church, they are in most cases reflecting their allegiance to the Living God as they understand His call upon their life through the authority of the Holy Bible. Provision must be made for everyone who desires to genuinely follow what they purpose- fully view as their highest calling, irrespective of the intrusion of present Bankruptcy Code.

CONCLUSION

With its own unique, important and limited task and function, and in view of the present judicial trend to intrusively apply strict wording of the present Bankruptcy Codes in a manner devoid of historically recognized intent and purpose, Churches, all houses of worship and charitable organizations deserve the consideration of special protection afforded by an amendment to Section 548(A)(2) of the Bankruptcy Code to provide statutory exception for religious donations. HR 2604, the Religious Liberty and Charitable Donations Protection Act of 1997, offers comprehensive inclusive and appropriate protection.

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