In re Hodge

• Decision Date: 26 September 1996
• Docket Number: Bankruptcy No. 95-01294. Adv. No. 95-6204.
• Citation: 200 BR 884
• Parties: In re Sean M. HODGE and Debra A. Hodge, husband and wife, Debtors. L.D. FITZGERALD, Trustee, Plaintiff, v. MAGIC VALLEY EVANGELICAL FREE CHURCH, INC., an Idaho corporation, Defendant.
• Court: U.S. Bankruptcy Court — District of Idaho

200 B.R. 884 (1996)

In re Sean M. HODGE and Debra A. Hodge, husband and wife, Debtors L.D. FITZGERALD, Trustee, Plaintiff, v. MAGIC VALLEY EVANGELICAL FREE CHURCH, INC., an Idaho corporation, Defendant.

Bankruptcy No. 95-01294. Adv. No. 95-6204.

United States Bankruptcy Court, D. Idaho.

September 26, 1996.

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Daniel Green, Racine Olson Nye Cooper & Budge, Pocatello, Idaho, for Plaintiff.

Benjamin W. Bull, The American Center for Law and Justice, Phoenix, Arizona, and Emil F. Pike, Jr., Twin Falls, Idaho, for Defendant.

MEMORANDUM OF DECISION

JIM D. PAPPAS, Chief Judge.

Introduction.

This adversary proceeding raises difficult and important issues of statutory and Constitutional law. It was commenced by L.D. Fitzgerald ("Plaintiff"), the Chapter 7 Trustee of the bankruptcy estate of Debtors Sean and Debra Hodge, to avoid what he alleges were fraudulent transfers made by Debtors to Magic Valley Evangelical Free Church, Inc. ("Defendant"). The matter is before the Court on Plaintiff's Motion for Summary Judgment, and Defendant's Motion to Dismiss or for Summary Judgment. These motions were argued to the Court on March 27, 1996.

Undisputed Material Facts.

From the record, the following undisputed material facts appear. Defendant was founded in 1983 and is a non-profit religious corporation.¹ Debtors have been members of the Defendant-church since 1986, and have regularly and consistently made periodic cash payments from their limited income to Defendant, referred to as "tithing", since 1988.² Plaintiff does not dispute that the practice of tithing is central to Debtors' particular religious beliefs, nor that tithing is a central religious doctrine of Defendant.³ Further, Plaintiff does not dispute that Debtors are sincere in their religious faith.

Although Debtors and Defendant regard tithing as a biblical obligation, and while it is encouraged by Defendant, tithing is not a condition of membership in the church.⁴ Defendant uses tithes to provide a variety of services and benefits to its members and others, spiritual and otherwise.⁵ Debtors have personally benefited from some of these services.⁶ Individual members, however, may receive these services regardless of whether or how much they tithe.⁷

On May 5, 1995, Debtors filed a joint Chapter 7 bankruptcy petition. During the four years preceding the filing of their Chapter 7 petition, Debtors had paid over a total of $7,259.00 in tithes to Defendant as follows:

                Dates                         Tithes
                May 5, 1991 to May 5, 1992   $  286.00
                May 6, 1992 to May 5, 1993    1,637.00
                May 6, 1993 to May 5, 1994    2,415.00
                May 6, 1994 to May 5, 1995    2,789.00
                                             _________
                                  Total:     $7,259.008
                

It is a portion of these payments Plaintiff seeks to recover from Defendant.

Arguments of the Parties.

Plaintiff filed this adversary proceeding on October 27, 1995, in order to avoid and recover Debtors' contributions to Defendant as fraudulent conveyances within the meaning of 11 U.S.C. § 548(a)(2) and, through 11 U.S.C. § 544(b), Idaho Code §§ 55-913 and 55-914. In simple terms, Plaintiff contends Debtors' tithes to Defendant were made while they were insolvent, and that Debtors received less than reasonably equivalent value in exchange for their contributions. Therefore, Plaintiff argues, the payments should be recovered and distributed to Debtors' creditors in the bankruptcy proceedings.

Defendant argues that the transfers do not satisfy the requirements of the avoidance statutes. Alternatively, if the Court concludes that the transfers are avoidable, Defendant asserts that the state and federal avoidance statutes as applied here run afoul of the protections provided by the Religious Freedom Restoration Act of 1993, 42 U.S.C. § 2000bb et seq. ("RFRA"), and the Free Exercise Clause and the Establishment Clause of the First Amendment of the U.S. Constitution, and therefore are unenforceable against Defendant. Plaintiff contends that application of the avoidance provisions do not violate either the First Amendment or RFRA. If RFRA does apply here, Plaintiff argues that RFRA is unconstitutional.

Both sides seek entry of a summary judgment.

Status of Proceedings.

Because the constitutional validity of certain state and federal statutes are at issue in this action, the Court invited the United States and the State of Idaho to intervene and be heard pursuant to 28 U.S.C. § 2403(a) and F.R.C.P. 24(c), as incorporated by F.R.B.P. 7024. On May 20, 1996, the Attorney General for the State of Idaho filed its brief in this action, and on June 14, 1996, the United States Attorney for the District of Idaho filed a brief. The governmental entities support the constitutionality of Idaho Code §§ 55-913 and 55-914, and 11 U.S.C. § 548(a)(2) and RFRA, respectively. At the conclusion of the briefing, the Court took the issues raised by the pending motions under advisement.

Overview.

Obviously, several important issues have been raised in this litigation. Initially, the Court must determine whether Debtors' tithes are avoidable transfers as defined by the Bankruptcy Code and the Idaho Code. If the Court concludes that the contributions may be avoided by Plaintiff, the Court must then decide whether application of the avoidance laws in this instance violates the protections against governmental interference in religious practices embodied by Congress in RFRA. Plaintiff, however, contends that RFRA is unconstitutional. Accordingly, if RFRA would otherwise constitute a defense to avoidance, the Court must also determine whether RFRA is constitutionally infirm.

If RFRA is constitutionally sound, Defendant prevails and is entitled to summary judgment, and analysis of Defendant's First Amendment arguments is unnecessary. However, if RFRA is unconstitutional, then, and only then, must the Court address whether the application of Bankruptcy Code Section 548, and Idaho Code §§ 55-913 and 55-914, is prohibited under the First Amendment.

Standard of Review.

Summary judgment is appropriate only if, viewing the evidence in light most favorably to the non-moving party, no genuine issues of material fact remain and the moving party is entitled to judgment as a matter of law. F.R.B.P. 7056; F.R.C.P. 56(c); State Farm Mutual Auto. Ins. Co. v. Davis, 7 F.3d 180, 182 (9th Cir.1993). The moving party bears the initial burden of identifying those portions of the record which demonstrate the absence of any genuine issue of material fact and that would allow judgment as a matter of law. Hopkins v. Andaya, 958 F.2d 881, 884 (9th Cir.1992). Once the moving party has met this burden, the non-moving party may not simply rest upon the allegations or denials of the party's pleadings; rather, the non-movant must set forth specific facts, by affidavits or otherwise, showing that there is a genuine issue for trial. Id. at 884-85.

While Defendant moves to dismiss the action for failure to state a claim, and only alternatively seeks entry of a summary judgment, since Defendant has asked the Court to consider matters outside the pleadings, its motion is properly treated as one for summary judgment. See F.R.C.P. 12(b), as incorporated by F.R.B.P. 7012(b).

Discussion.

A. Avoidable Transfers under the Bankruptcy Code and Idaho Code.

Section 548(a) of the Bankruptcy Code ("Code") provides a bankruptcy trustee with a federal statutory power to avoid and recover fraudulent transfers.⁹ Section 544(b) of the Code allows the trustee to avoid any transfers of a debtor's property which would be avoidable under state law. Plaintiff invokes both of these powers in this action.

Section 548(a) applies only to those transfers made by a debtor within one year of the filing of a bankruptcy petition. Section 548(a)(2) of the Code provides in pertinent part that:

(a) The trustee may avoid any transfer of an interest of the debtor in property . . . that was made . . . on or within one year before date of the filing of the petition, if the debtor . . .

. . . .

(2)(A) received less than a reasonably equivalent value in exchange for such transfer . . . and

(B)(i) was insolvent on the date that such transfer was made. . . .

11 U.S.C. § 548(a)(2).

Plaintiff invokes Section 544(b)¹⁰ of the Bankruptcy Code to reach Debtors' conveyances to Defendant made within four years of Debtors' bankruptcy, a right granted to creditors by applicable state law. See Idaho Code § 55-918(2). Specifically, Plaintiff seeks to apply Idaho Code §§ 55-913, 55-914, the state law analog of Section 548(a)(2). Idaho Code § 55-913, as to both present and future creditors, provides in pertinent part that:

(1) A transfer made . . . by a debtor is fraudulent as to a creditor, whether the creditor\'s claim arose before or after the transfer was made . . . if the debtor made the transfer . . . :

. . . .

(b) Without receiving a reasonably equivalent value in exchange for the transfer . . . and the debtor:

. . . .

2. intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.

Idaho Code § 55-913(1)(b)(2). With respect to present creditors, Idaho Code § 55-914 provides in relevant part that:

(1) A transfer made . . . by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made . . . if the debtor made the transfer without receiving a reasonably equivalent value in exchange for the transfer . . . and the debtor was insolvent at that time. . . .

Idaho Code § 55-914(1).

Idaho's avoidable transfer statutes are similar in form and substance to the Code's provision. Both allow a transfer made within the time prescribed to be avoided when the debtor did not receive a reasonably equivalent value in exchange for the transfer and while the debtor was insolvent. See BFP v. Imperial Savings & Loan...