Lead Opinion
The Crystal Evangelical Free Church (hereinafter the church) appeals from a final order entered in the District Court for the
BACKGROUND FACTS
The facts are not disputed. The debtors are active members of the church. For several years, as part of their religious belief and practice, the debtors voluntarily contributed certain funds as tithes to the church; they did not receive money or tangible property in exchange for their contributions. Tithing is a spiritual and financial practice. Believers traditionally give a tithe, or tenth, of their income to a religious organization such as a church. See Lev. 27:1, 30,32 (New International Version) (“The Lord said to Moses.... A tithe of everything from the land, whether grain from the soil or fruit from the trees, belongs to the Lord; it is holy to the Lord.... The entire tithe of the herd and flock — every tenth animal that passes under the shepherd’s rod — will be holy to the Lord.”). The church teaches that Christians should offer regular contributions to support the work and message of the church. However, the church does not insist on a particular amount or require payment of membership or attendance fees. Members and non-members are welcome at worship services and other church services whether they tithe or not. It is not disputed that the debtors are sincere in their religious faith.
In February 1992 the debtors filed a joint Chapter 7 bankruptcy petition. During the year preceding the filing of their Chapter 7 petition, and at a time when they were insolvent, they contributed a total of $13,-450.00 to the church. The trustee filed this adversary proceeding against the church in order to recover those contributions as “fraudulent transfers” under 11 U.S.C. § 548(a)(2)(A).
DECISION OF THE BANKRUPTCY COURT
The bankruptcy court granted the trustee’s motion for summary judgment and denied the church’s motion. The bankruptcy court held that the debtors’ contributions to the church were avoidable transfers under § 548(a)(2)(A) because the debtors did not receive “reasonably equivalent value” “in exchange for” their contributions.
The bankruptcy court also concluded that the contributions were not economically beneficial to the debtors.
The bankruptcy court also determined that, even assuming the debtors received value, that value had not been received “in exchange for” their contributions because no exchange took place. Id. at 895-96. As noted by the bankruptcy court, the church made available worship services and religious programs to all members, including the debtors, without in any way linking those services to financial contributions. Id. at 894 (noting that debtors could not have received property in exchange for their contributions for purposes of § 548(a) and at the same time treated those contributions as charitable deductions under 26 U.S.C. § 170(c)(4)). See Hernandez v. Commissioner,
DECISION OF THE DISTRICT COURT
. On appeal, the district court affirmed the bankruptcy court’s statutory interpretation and analysis of § 548(a)(2)(A) and agreed that the debtors did not receive “reasonably equivalent value” for their contributions to the church.
On appeal in the district court, the church argued for the first time that applying § 548(a) would violate the free exercise and establishment clause of the first amendment. The district court exercised its discretion to consider the constitutional arguments and rejected them. The district court first held that the church had standing to raise the constitutional rights of the debtors in addition to its own. Id. at 950-51 (debtors could not effectively assert their free exercise rights because they are not parties in this
The district court also held that § 548(a) did not unfairly discriminate against religious contributions, id. at 954, and that the debtors’ “hybrid” right to free speech and free exercise was not impaired because limiting the amount an individual may contribute to a cause or organization only marginally restricts the contributor’s ability to communicate that particular message. Id. The district court noted that § 548(a)(2)(A) was narrowly drawn and content-neutral, protected an important governmental interest in maximizing the debtors’ estate, and did not violate the doctrine of separation of church and state. Id. at 954.
Finally, the district court held that § 548(a) did not violate the establishment clause. Id. at 955. The district court applied the Lemon v. Kurtzman,
CERTIFICATION OF CONSTITUTIONAL QUESTION
On November 13, 1993, after the district court had filed its decision and while this appeal was pending, President Clinton signed the Religious Freedom Restoration Act (RFRA), 42 U.S.C. § 2000bb.
While preparing for oral argument, this court recognized, albeit belatedly, that certification under 28 U.S.C. § 2403(a) was required because the appeal questioned the constitutionality of a provision of the bankruptcy code affecting the public interest and the United States was not a party. Accordingly, we removed the case from the argument calendar and certified the appeal to the Attorney General and invited the United States to intervene in the appeal on the question of constitutionality of 11 U.S.C. § 548(a) if it so desired. See 28 U.S.C. § 2403(a); Fed.R.App.P. 44; Fed.R.Civ.P. 24(c). The parties had not requested the bankruptcy court, the district court or this court to notify the Attorney General, and the district court and the bankruptcy court had not realized that 28 U.S.C. § 2403 requires notification of the Attorney General whether or not it is requested by the parties. Nonetheless, “[fjailure to notify the Attorney General is not a jurisdictional defect, and belated notice satisfies any requirement.” Tonya K v. Board of Education,
(2) is the least restrictive means of furthering that compelling governmental interest.
STANDARD OF REVIEW
We review the grant of summary judgment de novo. The question before the district court, and this court on appeal, is whether the record, when viewed in the light most favorable to the non-moving party, shows that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The moving party bears the initial burden of identifying “those portions of ‘the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,’ which it believes demonstrate the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett,
In the present case, there are no genuine issues of material fact in dispute because the parties stipulated to the relevant facts and because the issues raise only questions of law.
The church’s principal argument on appeal is that requiring the church to return these contributions violates the free exercise clause of the first amendment. The church relied on Smith in its main brief but also raised a RFRA compelling governmental interest argument in its supplemental brief. The church also argues that the district court erred in applying 11 U.S.C. § 548 to these contributions and in finding that the debtors did not receive “reasonably equivalent value” “in exchange” for their contributions to the church. We will discuss the statutory arguments first.
“FRAUDULENT” TRANSFERS UNDER 11 U.S.C. § 548(a)(2)
The section of the bankruptcy code under which the trustee recovered the contributions at issue, 11 U.S.C. § 548, is captioned “fraudulent transfers and obligations.” As a preliminary matter, the church argues that this caption is not merely “unfortunate” but significant because the purpose of the section is to avoid transfers made with fraudulent intent or at least under circumstances under
The term “fraudulent” in the caption of 11 U.S.C. § 548 is inapposite and, at least with respect to § 548(a)(2), can certainly be misleading. In re Newman,
In order to find a fraudulent transfer, or, more accurately, an avoidable transfer, has occurred under 11 U.S.C. § 548(a)(2), the trustee must prove by a preponderance of the evidence that (1) there was a transfer of an interest of the debtor in property, (2) the transfer was made within one year before the date of the filing of the petition, (3) the debtor was insolvent on the date the transfer was made, and (4) the debtor received less than a reasonable equivalent value in exchange for the transfer.
On appeal the church argues the district court erroneously defined “value” to include only tangible property and ignored how the debtors valued what they received from the church. The church argues that “value” includes indirect economic benefits and that the debtors received “value” in the form of tax deductions for charitable contributions, church membership and spiritual counseling, and, more concretely, access to church facilities because contributions from the debtors and others helped pay for the church’s operating expenses. The church also argues that the district court erred in concluding that the contributions were not made “in exchange for” the indirect economic benefits the debtors received in the form of church services. The church argues a nexus existed between the contributions and those benefits because the debtors made the contributions during the same time period they received the benefits.
Title 11 U.S.C. § 548(d)(2)(A) defines ‘Value” as “property, or satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or the relative of the debtor.” In the present case it was undisputed that the church did not satisfy or secure a present or antecedent debt of the debtors; the only issue was whether the debtors received some sort of “property” or “property right,” and therefore ‘Value,” from the church. The bankruptcy court decided
Unlike the bankruptcy court, however, the district court did not define “value” only in terms of tangible property or marketable financial value. The district court correctly examined “all aspects of the transaction and carefully measure[d] the value of all benefits and burdens to the debtor, direct or indirect,” including “indirect economic benefits.”
In any event, in the present case, whether the debtors received any economic benefit from the church services is beside the point. Even assuming that the debtors received “reasonably equivalent value,”
FREE EXERCISE OF RELIGION
Having concluded that the debtors’ contributions were avoidable transfers and recoverable by the trustee under bankruptcy law, we turn now to the church’s first amendment arguments. The parties’ arguments on the merits are related and, to a certain degree, repetitive. Because we hold that requiring the church to return the debtors’ contributions violates the RFRA, we do not reach the merits of the constitutional issues.
As noted above, even though the church did not raise any constitutional arguments in the bankruptcy court and raised them for the first time on appeal in the district court, the district court exercised its discretion to consider the constitutional arguments on appeal. The trustee argues that this is not the kind of extraordinary case that warrants an exception to the general rule that a reviewing court should not consider issues raised for the first time on appeal. E.g., United States Trustee v. Harris,
STANDING
The trustee also argues the church lacks standing to raise the free exercise rights of the debtors, who were not parties in the adversary proceeding in bankruptcy court or on appeal in the district court (or on appeal in this court). We hold that the church has standing to raise the free exercise rights of the debtors. See In re Newman,
RETROACTIVE APPLICATION OF RFRA
Although the RFRA was enacted after the district court’s decision, the RFRA provides that it “applies to all Federal and State law, and the implementation of that law, whether statutory or otherwise, and whether adopted before or after November 16, 1993.” RFRA § 6(a), 42 U.S.C. § 2000bb-3(a). The RFRA defines the term “government” broadly to include “a branch, department, agency, instrumentality, and official (or other person acting under color of law) of the United States, a State, or a subdivision of a State.”
RFRA
On the merits the church argues that requiring the return of these contributions unfairly discriminates against religion in general and, more specifically, against religions (and the members of those religions) that believe in tithing. The church argues that exempting a personal residence or tools of a trade or household goods, see 11 U.S.C. § 522(d), but not religious contributions discriminates against religion. The church also argues that requiring the return of contributions discriminates against religions on the basis of the way in which they are supported. Some religions, like the church, emphasize tithing; others rely upon personal services, contributions from the public, fees for services, donations, or membership dues. The church also argues that, even among those religions that rely upon donations, religions like the church that encourage tithing at the traditional level of 10% are much more attractive to a trustee looking for potential assets than other religions. Brief for Appellant at 13 (table listing average % of household income donated to charity by denomination as 1.3 to 3.8%, much less than 10%). For the reasons discussed below, we hold that the recovery of the contributions substantially burdens the debtors’ free exercise of their religion and is not in furtherance of a compelling governmental interest and therefore violates the RFRA. In light of this holding and because the RFRA is more protective of the right of free exercise than Smith, see, e.g., Flores v. City of Boerne,
In Smith the Supreme Court held that the first amendment’s free exercise clause does not bar application of a facially neutral law of general application to religiously motivated conduct.
Concerned that Smith did not adequately protect free exercise rights, in 1993 Congress passed the RFRA expressly in response to Smith. Congress intended “to restore the compelling [governmental] interest test” as set forth in Sherbert v. Verner and Wisconsin v. Yoder,
The threshold inquiry under the RFRA is whether the governmental action in question “substantially burdens” a person’s religious practice. This is a question of law which we review de novo. Hamilton v. Schriro,
For purposes of analysis, we can assume that the recovery of these contributions would substantially burden the debtors’ free exercise of religion. Even though the church encourages but does not compel tithing, the debtors consider tithing to be an important expression of their sincerely held religious beliefs. In other words, in the present case, tithing is religiously motivated, but not religiously compelled, practice. Permitting the government to recover these contributions would effectively prevent the debtors from tithing, at least for the year immediately preceding the filing of the bankruptcy petitions. We do not think it is relevant that the debtors can continue to tithe or that there are other ways in which. the debtors can express their religious beliefs that are not affected by the governmental action. It is sufficient that the governmental action in question meaningfully curtails, albeit retroactively, a religious practice of more than minimal significance in a way that is not merely
The next question is whether there is a compelling governmental interest. Once the individual has shown that the governmental action substantially burdens his or her free exercise right, the government must demonstrate that the substantial burden is in furtherance of a compelling governmental interest and is the least restrictive means of furthering that compelling governmental interest. 42 U.S.C. § 2000bb-1(a), (b). These are questions of law which we review de novo. Hamilton v. Schriro,
In the present case the question is whether the bankruptcy code in general and § 548(a)(2)(A) in particular constitute a compelling governmental interest. The trustee argues the bankruptcy code in general, and § 548(a)(2)(A) in particular, furthers the compelling governmental interests in allowing debtors to get a fresh start while at the same time protecting the interests of creditors by maximizing the debtor’s estate. The bankruptcy cases decided under the RFRA are split. In In re Neuman,
In comparison, the bankruptcy court in In re Tessier,
We agree with In re Tessier that the interests advanced by the bankruptcy system are not compelling under the RFRA. Although we would not necessarily interpret compelling governmental interests as narrowly as the Tessier court did, we agree that bankruptcy is not comparable to national security or public safety. We also agree that allowing debtors to get a fresh start or protecting the interests of creditors is not comparable to the collection of revenue through the tax system or the fiscal integrity of the social security system, which have been recognized as compelling governmental interests in the face of a religious exercise claim. See, e.g., Droz v. Commissioner,
Because we hold that allowing debtors a fresh start and protecting the interests of creditors are not compelling governmental interests under the RFRA, we need not reach the question of whether the governmental action is the least restrictive means of furthering the compelling governmental interest.
In sum, we hold that because the substantial burden on the debtors’ free exercise of religion is not furthered by a compelling governmental interest, the RFRA provides a defense against the order of the district court permitting the trustee to avoid the debtors’ contributions to the church under . 11 U.S.C. § 548(a)(2)(A). The trustee is not entitled to recover $13,450 from the church.
Accordingly, the order of the district court is reversed.
Notes
. 11 U.S.C. § 548(a) provides in part:
(a) The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
(2)(A) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(B)(i) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation.
. The Religious Freedom Restoration Act, 42 U.S.C. § 2000bb, provides in part:
(a) IN GENERAL — Government shall not substantially burden a person's exercise of religion even if the burden results from a rule of general applicability, except as provided in subsection (b).
(b) EXCEPTION — Government may substantially burden a person’s exercise of religion only if it demonstrates that application of the burden to the person—
(1) is in furtherance of a compelling governmental interest; and
. Amicus briefs were filed in support of the church on behalf of the Christian Legal Society, the National Association of Evangelicals, Americans United for Separation of Church and State, Concerned Women for America, the Baptist Joint Committee on Public Affairs, the Southern Baptist Convention, the General Conference of Seventh-Day Adventists, and the Evangelical Lutheran Church in America; the Church of Jesus Christ of Latter-Day Saints; and United States Senator Orrin G. Hatch.
. Finding that the church services had some economic benefit and that the debtors made the contributions in exchange for those services would call into doubt treating those contributions as deductible charitable contributions. See Hernandez v. Commissioner,
For purposes of analysis, we have also assumed that the contributions and the church services were reasonably equivalent and thus need not take up the constitutionally suspect and difficult task of attempting to value the church services.
. In fact, as one would expect, given the religious context, the absence of any nexus between tithing and the availability of religious services is typical of the case law in this area. See, e.g., In re Tessier,
Dissenting Opinion
dissenting.
While I agree with the majority’s holding that the debtors did not receive reasonably equivalent value in exchange for the debtor’s financial contributions to the church, I cannot agree with the decision on the merits under RFRA
The first step in RFRA analysis requires the plaintiff to establish that the challenged government action “substantially burdens” their free exercise of religion. If there is no substantial burden, the inquiry ends and the challenger’s petition must fail. In re Newman,
I agree with the majority that RFRA does not compel the church to show that tithing is “required” by the church in order to prove a substantial burden. It is enough if the allegedly impinged conduct is motivated by a sincerely held religious belief. Sasnett v. Sullivan,
As stated by the majority, the governmental action must “significantly inhibit or constrain conduct or expression that manifests some central tenet of a [person’s] individual [religious] beliefs; must meaningfully curtail a [person’s] ability to express adherence to his or her faith; or must deny a [person] reasonable opportunities to engage in those activities that are fundamental to a [person’s] religion.” Op. at 1418. Although it is undisputed that the debtors sincerely believe in tithing and that tithing is central to the religion they practice, I would conclude that the trustee’s action of recovering monies tithed during the year the debtors were insolvent does not substantially burden the free exercise of their religion.
In coming to this conclusion, I note that the act of tithing by the debtors in the year preceding their filing for Chapter 7 protection was in fact executed, i.e., regardless of the eventual outcome, they were given the opportunity to practice their religion as they chose during the year they were insolvent. There was no “constraint of conduct or expression” respecting a central tenet of their belief, nor a curtailment of their ability to “express adherence ” to their faith, nor were they denied reasonable opportunities to “engage in those activities” that were fundamental to their religion. They engaged in the conduct and activity of tithing and fully expressed adherence in their sincere belief in tithing to the church. Unfortunately, the
The trustee’s act of recovering the tithes from the church under 11 U.S.C. § 548(a)(2) does not change the fact that the debtors did all they could in the way of expressing and practicing their religious beliefs. I agree with the court in In re Newman, which reasoned:
there is no evidence that section 548(a) prevents the debtors or any other church member from tithing. Indeed, the present record certainly does not suggest that section 548 prevented these debtors from tithing. Equally important, the church has no records which might show that other members did not tithe because of section 548 since no one ever checks to see if members actually do tithe. The funds the trustee seeks to recover have already been tithed to the defendant. The debtors, in all likelihood, continue to tithe to the defendant. The debtors fulfilled their religious obligation by tithing in the year prior to their bankruptcy filing. The statute, by its own operation, does nothing to prevent the debtors’ fulfillment of their personally held religious obligation to tithe and, therefore, does not place a “substantial burden” on the debtors’ practice of their religion.
In re Newman,
Further evidence of the lack of substantial burden is the uncontroverted fact that tithing is not required to fully participate in church services. As noted by the majority, the parties have stipulated that church services were available to all persons regardless of whether any contributions were made. The fact that the debtors’ purely voluntary tithes were ordered retroactively recovered by the trustee does not change the fact that the debtors can attend church services, participate in church programs, and worship and believe as they choose. They can continue to tithe as has been their custom, assuming no additional bankruptcy filings. Given these facts, I cannot conclude the debtor’s free exercise of religion was substantially burdened.
In my view, the church’s failure to demonstrate a substantial burden would end the inquiry and would require affirmance. Yet even if section 548 worked a substantial burden on the debtors’ religious practice, I would conclude that the statute serves a compelling governmental interest and is the least restrictive means of achieving said interest.
Although stated in dicta, I agree with the district court’s view that the bankruptcy code and § 548(a)(2)(A) furthers the compelling governmental interest in allowing debtors to get a fresh start while at the same time protecting the interests of creditors by maximizing the debtor’s estate. In re Young,
It can be fairly said that our nation’s economy depends extensively on the availability of credit to individuals and businesses. Bankruptcy is an extraordinary remedy for
The majority may be correct when it admonishes that today’s decision may not, by itself, undermine the integrity of the bankruptcy system as a whole. But I share the majority’s apprehension that credit transactions involving persons with views similar to the current debtors may hereinafter involve a more probing and delicate inquiry. Given today’s holding, are cautious potential creditors (including government or government-sponsored creditors) now expected to question applicants in depth regarding the highly personal activity of religious giving? And what if said application is denied on the grounds that the applicant’s religious giving makes extending credit an unwarranted risk? Pragmatic issues aside, it is enough that all of society has a compelling interest in maintaining the balance between debtors and creditors in its current state.
Finally, I would find that section 548(a)(2) is the least restrictive means of furthering the above-articulated compelling interest. Like the present action, In re Newman also involved a trustee’s attempted recovery of tithed funds under 11 U.S.C. § 548(a)(2). In finding that section 548(a)(2) passes the least restrictive means test, the court noted:
The portion of the statute at issue in this case only allows for recovery those transfers of the debtor’s property which occurred within one year of the bankruptcy filing, occurred while the debtor was insolvent, and that were not given in exchange for reasonably equivalent value. Clearly, the statute was drawn in such a way as to balance the ability of the debtor to dispose of property with the need to protect unsecured creditors. For example, if in this ease the debtors had not been insolvent on the dates that the transfers to the defendant took place, then the transfers would not be recoverable. Only when all of the requirements of § 548(a)(2) are met is the trustee able to recover the transfer.
In re Newman,
The statute contains four specific elements, all of which are satisfied by the trustee in this case. The statute is narrowly tailored, and the trustee closely followed the proper procedures set forth in the Bankruptcy Code for avoiding and recovering the donations, and took no action against these debtors which would not be taken against any other transferee in the same factual situation.
In conclusion, I would hold that the trustee has satisfied the requirements of RFRA and would affirm the district court.
. I understand that the constitutionality of RFRA is not before us as this case is currently postured. That notwithstanding, I feel compelled to note the unusual specter of employing the analytical framework of RFRA, where the author of the majority opinion has indicated his belief that RFRA is unconstitutional. Hamilton v. Schriro,
Given the statute’s dubious constitutionality, I believe we should have requested supplementary briefing and hearing, along with certification to the Attorney General, on the constitutionality of RFRA.
. I also share the majority’s concern as to whether courts can constitutionally determine "the parameters of religious belief, what beliefs are important or fundamental, and whether a particular practice is of only minimal religious significance...” Op. at 1418.
. It cannot be denied that the work of religious organizations may be more important now than ever before. Contributing, financially or otherwise, to further the mission of a religious organization is a laudatory practice. That being said, religious contributions cannot be considered beyond reproach or regulation in all circumstances. United States v. Lee,