Wadsworth v. The Word of Life Christian Center (In re McGough)
- No. 12-1142 (10th Cir. December 16, 2013).
- In a case of first impression at the circuit level, the Tenth Circuit held that, where the contribution exceeds 15% of the debtor’s gross annual income, the “charitable contribution” exception to the fraudulent transfer statute requires avoidance of the entire transfer under § 548(a)(2)—not merely that portion of the transfer exceeding the 15% threshold.
- Procedural context:
- Chapter 7 trustee filed an adversary proceeding to avoid various transfers made by the debtors to the Word of Life Christian Center (the Center) in the two years prior to the bankruptcy filing. The Center asserted in response that the transfers were charitable contributions that fell within the safe harbor of § 548(a)(2). The bankruptcy court ruled that the transfers should be considered in their annual aggregate for purposes of § 548(a)(2), but ruled that only that portion of the transfers that exceeded 15% of the debtor’s gross annual income could be avoided as fraudulent transfers under § 548. The Bankruptcy Appellate Panel affirmed. On appeal, the Tenth Circuit reversed, concluding that the plain language of § 548(a)(2) compelled avoidance of the entire balance of the transfers.
- In the two years preceding their chapter 7 filing, husband and wife debtors made approximately twenty five contributions to the World of Life Christian Center. The chapter 7 trustee sought to avoid and recover the contributions from the Center as fraudulent transfers pursuant to §§ 548(a)(1) and 550. The Center answered, in response, that the transfers were charitable contributions protected by the safe harbor provisions of § 548(a)(2), and that only that portion of the contributions that exceeded the 15% threshold was subject to avoidance. In rejecting the Center’s arguments, the Tenth Circuit concluded that the plain language of § 548(a)(2) required avoidance of the entire balance of the transfers. In particular, the Tenth Circuit noted that, since § 548(a)(2) ‘clearly provides a safe harbor from the trustee’s avoidance power only if the ‘transfer’ does not exceed 15% of [gross annual income]…the converse must also be true—if the ‘transfer’ exceeds 15% of [gross annual income], then the ‘transfer’—meaning the entire transfer—is subject to avoidance.”
- O’Brien, Holmes, and Matheson.
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