This is the sixth and last post in a series in which I discuss fraudulent transfers. This one deals with defenses against fraudulent transfers avoidance actions.
F. Defenses To Fraudulent Conveyance Avoidance
Aside from the problem of collectability — the recipient of the fraudulent transfer may be an impecunious, judgment-proof person — the trustee may face an insurmountable impediment to a fraudulent transfer avoidance action if the transferee successfully applies the defenses provided in the Bankruptcy Code.
1. The Charitable Donation Defense
The first defense to an avoidance action is found in § 548(a)(2):
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.
Thus, the debtor who regular tithes will not hear that the trustee has filed an avoidance action against the church, provided that either the amount tithed is less than 15% of the debtor’s gross income, or if more, then at the level the debtor consistently makes donations. This comes up most frequently with Mormon clients who are required to contribute at least ten percent of their incomes to the church to remain in good standing. Not being a Mormon myself, I am basing this assertion on the sense I have gotten from Mormon clients, and from the text at http://mormon.org/faq/church-tithing. If you are a Mormon and have a different perspective, I mean no offense and have no axe to grind. In any event, § 548(a)(2) insulates the church from fraudulent transfer avoidance actions.
The types of contributions covered by this defense are just what you might expect, and are listed in §§ 548(d)(3) and (4):
(3) In this section, the term “charitable contribution” means a charitable contribution, as that term is defined in section 170(c) of the Internal Revenue Code of 1986, if that contribution —
(A) is made by a natural person; and
(B) consists of —
(i) a financial instrument (as that term is defined in section 731(c)(2)(C) of the Internal Revenue Code of 1986); or
(4) In this section, the term “qualified religious or charitable entity or organization” means —
(A) an entity described in section 170(c)(1) of the Internal Revenue Code of 1986; or
(B) an entity or organization described in section 170(c)(2) of the Internal Revenue Code of 1986.
This means that only legitimate charities qualify for the defense. “Charities” such as the American Society for the Elimination of the Cuticle will not qualify. And remember, it’s the recipient of the transfer, not the debtor, who must mount the defense.