In re Lewis
| Decision Date | 17 February 2009 |
| Docket Number | Bankruptcy No. 06-15173.,Adversary No. 07-01466. |
| Citation | 401 B.R. 431 |
| Court | U.S. Bankruptcy Court — Central District of California |
| Parties | In re Nathan Levi LEWIS and Robin Lynn Lewis, Debtors. Edward M. Wolkowitz, Chapter 7 Trustee, Plaintiff, Breath of Life Seventh Day Adventist Church, Defendant. |
Mark M. Sharf, Encino, CA, for Debtors.
Carmela Pagay, Diamant & Wolkowitz Robinson, Douglas D. Kappler, Robinson Diamant & Wolkowitz, Los Angeles, CA, for Trustee.
The Chapter 7 Trustee initiated an adversary proceeding under 11 U.S.C. § 548(a)(2),1 seeking to avoid Debtors' transfers of charitable contributions to the Defendant as constructively fraudulent transfers. The Court granted judgment for the Defendant.
Nathan Levi Lewis ("Dr. Lewis") was a doctor with his own medical practice. On October 13, 2006 Dr. Lewis and his wife, Robin Lynn Lewis ("Mrs. Lewis"), (together "Debtors") filed a joint voluntary Chapter 7 petition. The following is a summary of Debtors' assets and liabilities:
• Schedule A. Real Property $ 0
• Schedule B. Personal Property $ 89,168.00
• Schedule C. Property Claimed as
Exempt $ 27,500.00
• Amended Schedule D. Creditors
Holding Secured Claims $294,498.28
• Schedule E. Creditors Holding
Unsecured Priority Claims $183,702.66
• Schedule F. Creditors Holding
Unsecured Nonpriority Claims $ 16,910.00
The Trustee commenced an adversary proceeding against Breath of Life Seventh Day Adventist Church ("Defendant" or "Church"), seeking to avoid contributions Dr. Lewis made to the Church in 2005 and 2006 as constructively fraudulent transfers ("Transfers").2 The causes of action were under §§ 544(b), 548(a), and 550(a). Dr. Lewis made contributions to the Church as follows:
Post Date Amount of Payment
1/10/2004 $ 1,000
2/14/2004 $ 900
7/17/2004 $ 1,300
10/2/2004 $ 2,000
11/27/2004 $ 1,500
Total for 2004 $ 6,700
2/19/2005 $ 1,800
3/26/2005 $ 2,500
4/2/2005 $ 2,500
6/18/2005 $ 1,500
7/16/2005 $ 1,630
7/23/2005 $ 1,550
10/8/2005 $ 500
10/15/2005 $ 1,500
12/17/2005 $ 4,000
12/31/2005 $ 900
Total for 2005 $18,380
1/21/2006 $ 1,540
3/11/2006 $ 2,000
4/15/2006 $ 2,000
5/13/2006 $ 350
5/27/2006 $ 1,500
6/24/2006 $ 1,600
7/15/2006 $ 2,450
8/19/2006 $ 1,000
9/30/2006 $ 1,550
Total for 2006 up
to petition date $13,990
11/18/2006 $ 1,000
12/16/2006 $ 2,800
12/30/2006 $ 1,000
Total for 2006 $18,790
At trial the Trustee asserted that Debtors' gross annual income ("GAI") was the gross receipts from Dr. Lewis' business minus the cost of goods and operating expenses. The Trustee pointed to Debtors' 2005 tax return to argue that Debtors' GAI was $95,645 at the time the 2005 Transfers were made. Defendant countered that Debtors' 2005 GAI was $291,397: the gross receipts of Dr. Lewis' medical practice of $325,920 reduced only by cost of goods sold.
The Religious Liberty and Charitable Donation Protection Act of 1998 ("RLCDPA") amended several provisions of the Bankruptcy Code, including §§ 544(b), 548(a)(2), 707(b), and 1325(b)(2)(A).3 The RLCDPA modified the Bankruptcy Code to protect certain contributions to qualified religious or charitable organizations by debtors under both Chapter 7 and Chapter 13. Subparagraph (A) of § 548(a)(2) prevents the trustee from avoiding as constructively fraudulent a charitable contribution to a qualified religious or charitable organization if the amount of the contribution was not more than 15% of the debtor's GAI. Subparagraph (B) prevents the trustee from avoiding a charitable contribution to a qualified organization that exceeded 15% of the debtor's GAI, if the contribution was consistent with the debtor's practices of making charitable contributions.
Although the amended complaint listed the contributions made in 2006, the Trustee's trial brief indicated that he was no longer pursuing these transfers, as the brief requested recovery of only $19,3804 plus interest, instead of the original $32,370 as stated in the amended complaint. In addition, although the amended complaint included causes of action under §§ 544 and 548, the Trustee's trial brief stated that he was claiming under § 548; there were no arguments made by the Trustee under § 544.
The Trustee had the burden of proving there was a constructively fraudulent transfer under § 548.5 To avoid a transfer as constructively fraudulent, the Trustee must have shown that Debtors received less than a reasonably equivalent value in exchange for such transfer and were either (1) insolvent on the date of such transfer or became insolvent as a result of the transfer, (2) engaged in business or a transaction, or were about to engage in business or a transaction, for which any property remaining with Debtors was an unreasonably small capital, or (3) Debtors intended to incur, or believed they would incur, debts that would be beyond their ability to pay as such debts matured.
The Transfers were contributions to the Defendant, a church, as tithes and offerings. Some courts have found that there is no reasonably equivalent value in exchange when donating to a church.6
In the instant case, Defendant argued that Debtors believed "10% of their gross income belongs to God and another 5% should be given as an offering to the church."7 In addition, Dr. Lewis stated in his deposition that 8 Defendant did not argue that Debtors received anything in exchange for the Transfers. Thus, this Court determines that there was no reasonably equivalent value in exchange for the Transfers.
Under the balance sheet test9 the Trustee also must have shown that Debtors were "insolvent on the date that such transfer was made ... or became insolvent as a result of such transfer...."10 Section 101(32) defines "insolvent" to generally mean the
[Financial condition such that the sum of [an] entity's debts is greater than all of such entity's property, at a fair valuation, exclusive of—(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity's creditors; and (ii) property that may be exempted from property of the estate under section 522 of this title....
In this case, because the amount of debt of $495,110.9611 was greater than their nonexempt assets of $61,668.00,12 it appears Debtors were insolvent at the time of the Transfers. In his deposition Dr. Lewis stated that the personal property listed on Schedule B "represent pretty much the same personal property that [Debtors] have held over the last several years,"13 other than the exchange of one vehicle for another leased vehicle.14 In addition, there was no evidence that Debtors owned any real property when the transfers occurred. Thus, this Court finds that Debtors were insolvent at the time the Transfers were made.
This Court concludes that the Trustee met his burden of proving constructive fraud. The burden then shifted to Defendant to show that the safe harbor provisions of § 548(a)(2) apply.
11 U.S.C. § 548(a)(2) provides that
A transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not be considered to be a transfer covered under paragraph (1)(B) in any case in which—(A) the amount of that contribution does not exceed 15 percent of the gross annual income of the debtor for the year in which the transfer of the contribution is made; or (B) the contribution made by a debtor exceeded the percentage amount of gross annual income specified in subparagraph (A), if the transfer was consistent with the practices of the debtor in making charitable contributions.
There is no dispute that the Transfers were "charitable contribution[s]" or that the Church was a "qualified religious or charitable entity or organization."
The issues are whether the Transfers exceeded Debtors' GAI, and if they did whether the Transfers were consistent with Debtors' practice of giving charitable contributions. The Trustee argued that Debtors' contributions for 2005 were 20% of Dr. Lewis' business income for that same year, exceeding the 15% limitation. He further argued that donations for 2004 and 2006 consisted of 12% of Debtors' GAI for each year, so the donations in 2005 were not consistent with Debtors' practice of contributing 12% in 2004 and 2006. The Trustee conceded that since the transfers in 2006 were 12% of Debtors' GAI, these transfers were protected under § 548(a)(2)(A) because they did not exceed 15% of Debtors' GAI. The Church argued that the amount of Debtors' contributions fell below 15% of their GAI, and even if Debtors' contributions exceeded 15% of their GAI, the contributions were consistent with Debtors' practices of making charitable contributions.
The Court's task is to determine Debtors' GAI. The Bankruptcy Code does not define the term "gross annual income," and there is no reported case defining "gross annual income" within the meaning of § 548(a)(2).
The plain language of a statute is the starting point for its interpretation.15 "If...
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