Wolkowitz v. Breath of Life Seventh Day Adventist Church et al

OCR transcription for search; preserved printed pages are authoritative

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FEB 17 2009
FEB 1'7 2009
GLERK U8. BANKRUPTCY COURT
CENTRAL DISTRICT OF one CENTRA y, i WyeF oF cach
> ] f Deputy cere

UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA

LOS ANGELES DIVISION
) Case No.: 06-15173
In re: ) Adversary No,: 07-01466
)
Nathan Levi Lewis and Robin Lynn Lewis, ) Chapter 7
)
Debtors. ) MEMORANDUM OPINION
; )
Edward M. Wolkowitz, Chapter 7 Trustee, ) Date: May 16; 2008
ae ) Time: 9:00 a.m.
Plaintiff, ) Place: Courtroom 1375
v ) 255 E. Temple Street
‘ ) Los Angeles, CA 90012
Breath of Life Seventh Day Adventist
Church, )
)

Defendant,

The Chapter 7 Trustee initiated an adversary proceeding under 11 U.S.C. § 548(a)(2),!
seeking to avoid Debtors’ transfers of charitable contributions to the Defendant as constructively

fraudulent transfers. The Court granted judgment for the Defendant.

I) FACTS

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

1 Unless otherwise indicated, all code, chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. §§
101-1532, in effect on 10/13/06, when the case was commenced.

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“Debtors”) filed a joint voluntary Chapter 7 petition. The following is a summary of Debtors’

assets and liabilities:

e Schedule A. Real Property $0
e Schedule B. Personal Property $89,168.00
e Schedule C. Property Claimed as Exempt $27,500.00
e Amended Schedule D. Creditors Holding Secured Claims $294,498.28
¢ Schedule E. Creditors Holding Unsecured Priority Claims $183,702.66
e 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”).” 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

7 Because neither party produced evidence that Debtors made charitable contributions to any other qualified
religious or charitable entity, the Court will base its § $48(a)(2) analysis only on the transfers made to the
Defendant.

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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.

ID DISCUSSION
A) Constructive Fraud

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).? 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

3 See Religious Liberty and Charitable Donation Protection Act of 1998, Pub. L. No, 105-183, 112 Stat. 518 (1998).

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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 $19,380° 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.° 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

4 The actual amount of donations given to the Church in 2005 was $18,380.

5See, e.g., U.S. v. Crystal Evangelical Free Church (In re Young), 82 F.3d 1407, 1414 (8th Cir. 1996) (“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.”) (citation omitted); Cooper v. Ashley Commce’ns, Inc. (In re Morris Comme’ns NC, inc),
914 F.2d 458, 466 (4th Cir, 1990) (“Section 548(a)(2)(A) and (8), which is the statute on which the Trustee bases
his action, enables the bankruptcy Trustee to avoid any transfer of property by the bankrupt within one year of the
filing of the bankruptcy petition if the debtor received less than a ‘measurably equivalent value’ and was

insolvent on the date of such transfer or became insolvent as a result of such transfer. The burden of establishing
these conditions rests on the trustee.”) (citations omitted); Brandt v. nVidia Corp. (In re 3DFX Interactive, Inc.), 389
B.R. 842, 863 (Bankr. N.D, Cal. 2008) (Under “Bankruptcy Code § 548, the Trustee has the burden of proving the
elements of a fraudulent transfer by a preponderance of the evidence.”) (citing Whitehouse v. Six Corp,, 40 Cal.
App. 4th 527, 534 (1995)) (other citation omitted); Hawkins v. Garcia (In re Sneed), No. 07-1094, 2008 WL
1782375, at *4 (Bankr. E.D. Cal. Apr. 18, 2008) (“[TJhe Trustee bears the burden to prove each element of his claim
for relief: the Trustee must show that the Debtor did not receive ‘reasonably equivalent value.””) (citing 5 Alan N.
Resnick & Henry J. Sommer, Collier on Bankruptcy § 548.10 (15th ed, rev. 2007)) (other citation omitted); 5 Alan
N. Resnick & Henry J. Sommer, Collier on Bankruptcy J 548.10 (15th ed. rev. 2008).

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intended to incur, or believed they would incur, debts that would be beyond their ability to pay as
such debts matured.

1) Reasonably equivalent value was not exchanged

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.°

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.” In addition, Dr.

8

Lewis stated in his deposition that “the tithe belongs to God. It is not mine.”” Defendant did not

argue that Debtors received anything in exchange for the Transfers. Thus, this Court determines

§ Prior to the enactment of the RLCDPA, some courts found that there was no reasonably equivalent value in
exchange when donating to a church. See In re Young, 82 F.3d at 1414-15; Weinman v. Word of Life Christian Cir.
(in re Bloch), 207 B.R. 944, 948 (D. Colo, 1997); Morris v, Midway S. Baptist Church (In re Newman), 203 B.R.
468, 473-74 (D. Kan. 1996). Other courts have found that there was reasonably equivalent value in exchange when
donating to a church. Ellenberg v. Chapel Hill Harvester Church, Inc. (In re Moses), 39 B.R. 815, 819 (Bankr, N.D.
Ga. 1986); Wilson v. Upreach Ministries (In re Missionary Baptist Found, inc.), 24 B.R. 973, 979 (Bankr. N.D.
Tex. 1982). Post-RLCDPA, some courts have found that there was no reasonably equivalent value in exchange
when donating to a church. Geltzer v. Universal Church, Nos. CV-04-2061, CV-04-2062, 2005 WL 6124844, at *2
(E.D.N.Y, Feb, 22, 2005) (mem. and order) (“The Debtor's donations were not for ‘fair consideration’ because, by
definition, they were not ‘in exchange’ for any service provided by the charity nor were given ‘to secure a present
advance or antecedent debt.’ The undisputed evidence reveals that membership in the Church was not contingent on
tithing.” (citations omitted); Liebersohn v, First Baptist Church of Collingdale (In re C.F. Foods, Inc.), No. CIV.A.
01-2849, 2001 WL 1632272, at *1 (E.D. Penn, Dec. 20, 2001) (mem.} (concluding that there was no reasonably
equivalent value in exchange for the transfer where the defendants admitted in their answer that they received the
payments for less than reasonably equivalent value.); Liebersohn v. Campus Crusade for Christ, Inc, (In re CF.
Foods, L.P.), 280 B.R. 103, 111 (Bankr. E.D, Penn, 2002) (finding that there was no reasonably equivalent value in
exchange for the transfer “because, in its answer to the trustee's interrogatories, Campus Crusade admitted that the
Transfers were not in return for ‘the delivery of goods, services or loans of money or other reasonably equivalent
value delivered by [Campus Crusade] to the Debtor.’”); Jacobson v. Church of Manalapan, Inc, (In re Jackson), 249
BR. 373, 376 (Bankr. D.N.J. 2000) (determining that there was no reasonably equivalent value in exchange for the
transfer where it was conceded that the debtor received no ‘value’ as defined by Code section 548(d)(2)(A) in
exchange for the transfer.). One court post-RLCDPA has found there was reasonably equivalent value in exchange
when donating to a church. Hovis v. Ducate (In re Ducate), 369 B.R. 251, 265-66 (Bankr. D.S.C. 2007) (finding
that a debtor received reasonably equivalent value in exchange for transfers made into a household account, which
account was used to pay expenses, including charitable contributions to a church, where the defendant produced the
evidence of the transfers and where the plaintiff did not refute the evidence.)

7 (Def.’s Br. 1).

§ (Nathan Lewis Dep, 39:20-21, Oct. 5, 2007).

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that there was no reasonably equivalent value in exchange for the Transfers.

2) Debtors insolvent — balance sheet test

Under the balance sheet test” 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....”"° Section 101(32) defines “insolvent” to generally mean the

[F}inancial 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 $495,110.96"! was greater than their
nonexempt assets of $61,668.00,!? 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,”
other than the exchange of one vehicle for another leased vehicle.!* 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.

® Sierra Steel, Inc. v. Totten Tubes, Inc. (In re Sierra Steel, Inc.), 96 B.R. 275, 277 (B.A.P. 9th Cir. 1989) (“[U]nder
this ‘balance sheet’ test a debtor is insolvent when its liabilities exceed its assets.”).

11 U.S.C. § 548(a)(1)(B)GID (2006).

' Schedule D $294,498.28 + Schedule E $183,702.66 + Schedule F $16,910.00 = $495,110.94.

2 Schedule A $0.00 + Schedule B $89,168.00 — Schedule C $27,500.00 = $61,668.00.

'3 (Nathan Lewis Dep. 71:11-14, Oct. 5, 2007).

44 (Nathan Lewis Dep. 69:1-71:19, Oct. 5, 2007).

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B) Safe Harbor — 11 U.S.C. § 548(2)(2)

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.

1) Gross annual! income

The Court’s task is to determine Debtors’ GAI. The Bankruptcy Code does not define

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the term “gross annual income,” and there is no reported case defining “gross annual income”
within the meaning of § 548(a)(2).
(a) Plain meaning of the term “gross annual income”

The plain language of a statute is the starting point for its interpretation.’ “If the intent
of Congress is clear, that is the end of the matter; for the court .. . must give effect to the
unambiguously expressed intent of Congress.”!® “A fundamental canon of statutory construction
is that, unless otherwise defined, words will be interpreted as taking their ordinary,
contemporary, common meaning,”!”

Webster’s Third New International Dictionary of the English Language Unabridged
defines “gross” as M49 make, earn, or bring in (an overall total) exclusive of deductions (as taxes,

9, 18 ex
oar

expenses). . annual” as “occurring, appearing, made, done, or acted upon every year or

once a year ...”;'? and “income” as “a gain or recurrent benefit that is [usually] measured in
money and for a given period of time, derives from capital, labor, or a combination of both...

9 Asa result, the plain meaning of “gross annual income” for a business would be money

received on a yearly basis, without deducting any costs for the operation of the business.

'5 4m, Tobacco Co. v. Patterson, 456 U.S. 63, 68 (1982) ("As in all cases involving statutory construction, ‘our
starting point must be the language employed by Congress,’ and we assume ‘that the legislative purpose is expressed
by the ordinary meaning of the words used.’ Thus ‘[absent] a clearly expressed legislative intention to the contrary,
that language must ordinarily be regarded as conclusive.’”) (citations omitted); Consumer Prod. Safety Comm'n v.
GTE Sylvania, inc., 447 U.S. 102, 108 (1980) (“We begin with the familiar canon of statutory construction that the
starting point for interpreting a statute is the language of the statute itself. Absent a clearly expressed legislative
intention to the contrary, that language must ordinarily be regarded as conclusive.”); Reiter v. Sonotone Corp., 442
U.S. 330, 337 (1979) (“As is true in every case involving the construction of a statute, our starting point must be the
language employed by Congress.”); Mala? vy. Riddell, 383 U.S. 569, 571-72 (1966) (“As we have often said, ‘the
words of statutes -- including revenue acts -- should be interpreted where possible in their ordinary, everyday
senses.’ Departure from a literal reading of statutory language may, on occasion, be indicated by releyant internal
evidence of the statute itself and necessary in order to effect the legislative purpose.”) (citations omitted); Richards
v. U.S, 369 U.S. 1, 9 (1962) (“[T]he legislative purpose is expressed by the ordinary meaning of the words used.”).
'® Chevron U.S.A, Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984) (citation omitted).

1? Berrin y. U.S., 444 U.S. 37, 42 (1979) (citation omitted).

'* Webster's Third New International Dictionary of the English Language Unabridged 1002 (1986).
'° Webster's Third New International Dictionary of the English Language Unabridged 88 (1986).
20 Webster’s Third New International Dictionary of the English Language Unabridged 1143 (1986).

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1 (b) Other places in the Bankruptcy Code where “income” is used are helpful in
5 defining “gross annual income” in § 548(a)(2)
3 In addition to looking at the plain meaning of GAI, this Court may look to other sections
4 || of the Bankruptcy Code where the word “income” is used, as their definitions or interpretations
may be helpful in defining GAT in § 548(a)(2). The Supreme Court of the United States has
6
observed that
7
8 The correct rule of interpretation is, that if diverse statutes
relate to the same thing, they ought all to be taken into
9 consideration in construing any one of them... . Ifa thing
contained in a subsequent statute, be within the reason of a
10 former statute, it shall be taken to be within the meaning of
u that statute ... ; and if it can be gathered from a subsequent
statute in pari materia, what meaning the legislature
12 attached to the words of a former statute, they will amount
to a legislative declaration of its meaning, and will govern
13 the construction of the first statute.”
i4 Section 101(10A) states
15
The term “current monthly income” - (A) means the
16 average monthly income from all sources that the debtor
v7 receives (or in a joint case the debtor and the debtor’s
spouse receive) without regard to whether such income is
18 taxable income, derived during the 6-month period ending
on - (i) the last day of the calendar month immediately
19 preceding the date of the commencement of the case if the
20 debtor files the schedule of current income required by
section 521(a)(1)(B)(ii); or (ii) the date on which current
21 income is determined by the court for purposes of this title
if the debtor does not file the schedule of current income
22 required by section 521(a)(1)(B)ii); and (B) includes any
3 amount paid by any entity other than the debtor (or in a
joint case the debtor and the debtor’s spouse), on a regular
24 basis for the household expenses of the debtor or the
25
26 ||?! Branch v. Smith, $38 U.S. 254, 281 (2003) (quoting U.S. v. Freeman, 44 U.S, 556, 564-65 (1845)). See also Gen,
Dynamics Land Sys., Inc. v. Cline, 540 U.S. 581, 596 (2004) (“Statutory language must be read in context [since] 2
27 phrase ‘gathers meaning from the words around it.”’) (quoting Jones v. U. S., $27 U.S, 373, 389 (1999)); Motion
Picture Ass'n of Am., Inc. v. FCC, 309 F.3d 796, 801-02 (D.C. Cir. 2002) (“Statutory provisions in pari materia
28 {| normally are construed together to discern their meaning") (citations omitted).
9

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debtor’s dependents (and in a joint case the debtor’s spouse
if not otherwise a dependent), but excludes benefits
received under the Social Security Act, payments to victims
of war crimes or crimes against humanity on account of
their status as victims of such crimes, and payments to
victims of international terrorism (as defined in section
2331 of title 18) or domestic terrorism (as defined in section
2331 of title 18) on account of their status as victims of
such terrorism.

The bankruptcy court for the District of Montana has noted that “income” is not defined
in the Code and that both § 101(10A) and the Internal Revenue Code distinguish between

“income from all sources” and “taxable income,” so the Internal Revenue Code provides

guidance in defining “income.””

In Blausey v. United States Trustee, the United States Court of Appeals for the Ninth
Circuit stated that

The phrase “without regard to whether such income is
taxable income” in 11 U.S.C. § 101(10A)(A) reflects
Congress’ judgment that the Internal Revenue Code’s
method of determining taxable income does not apply to the
Bankruptcy Code’s calculation of {current monthly
income],

Similarly, in Drummond v. Wiegand (In re Wiegand)” the Ninth Circuit Bankruptcy Appellate

Panel (“BAP”) held

"1 re Featherston, Nos. 07-60296-13 and 07-60441-13, 2007 WL 2898703, at *11 (Bankr, D. Mont. Sept. 28,
2007) (“Paragraph A of § 101(10A) [sic] sets out its general rule that all ‘income’ received by the debtor(s) should
be included in calculating current monthly income. There is no definition of ‘income’ in the Bankruptcy Code.
However, because § 101(10A)(A) [sic] distinguishes between ‘income from all sources’ and ‘taxable income,’ it
appears to reflect the distinction in the Internal Revenue Code between ‘gross income,’ and ‘taxable income.’
Accordingly, the Internal Revenue Code should provide general guidance for determining ‘income’ used in §
101{10A)(A) [sic]. That guidance includes a long list of items that constitute ‘income,’ such as compensation for
services, business earings, gains on dealing in property, interest, rents, royalties, dividends, alimony and
maintenance, pensions, prizes and awards, and unemployment compensation”) (citing Eugene R. Wedoff, Means
Testing in the New § 707(b), 79 Am, Bankr. L. J. 231, 244-45 (2005)) (bracketed material in original).

3 No. 07-15955, 2009 WL 153241, at *7 (9th Cir. Jan. 23, 2009).

74326 B.R. 238 (B.A.P. 9th Cir. 2008).

10

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1 a chapter 13 debtor engaged in business may not deduct
ordinary and necessary business expenses from gross
2 receipts for the purpose of calculating current monthly
3 income as defined under § 101(10A). Rather, such
deductions are authorized under § 1325(b)(2)(B) and,

4 therefore, are to be subtracted from current monthly income

5 when calculating disposable income pursuant to §

1325(b)(2)."°

6

The Ninth Circuit Court of Appeals and the Ninth Circuit BAP pointed out that because

7

g § 101(10A) contains the phrase “without regard to whether such income is taxable income,”

9 || Congress intended that Internal Revenue Code concepts not apply when determining a debtor’s
10 !/ current monthly income. Since § 548 does not contain similar exclusionary language, this Court
i is not restricted from using the Internal Revenue Code in defining “gross annual income” for
12
B purposes of § 548(a)(2).

14 Section 101(51B)** uses the term “gross income” in the definition of “single asset real
15 ||estate.” In In re Club Golf Partners, L.P.”’ the bankruptcy court for the Eastern District of
16 || Texas adopted the Internal Revenue Code term “gross income” in defining gross income under §
17 . as .
101(513) and stated that “Congress used the Revenue Code term ‘gross income’ in this portion
18
19 of the definition. Thus, it is irrelevant whether, prior to the Petition Date, the Debtor has had net
20 income or losses; the focus is on all revenues received... . 7
21
22
25 Drummond vy. Wiegand (In re Wiegand), 386 B.R. 238, 239 (B.A.P, 9th Cir. 2008) (citation omitted),
23 || Section 101(51B) provides
The term “single asset real estate” means real property constituting a
24 single property or project, other than residential real property with
fewer than 4 residential units, which generates substantially all of the
25 gross income of a debtor who is not a family farmer and on which no
substantial business is being conducted by a debtor other than the
26 business of operating the real property and activities incidental. 11
ULS.C, § 101(51B} (2006) (emphasis added).
27 ||?" No, 07-40096-BTR-11, 2007 WL 1176010 (Bankr. E.D. Tex. Feb. 15, 2007).
28 78 In re Club Golf Partners, L.P., No. 07-40096-BTR-11, 2007 WL 1176010, at *5 (Bankr. E.D, Tex. Feb, 15,
2007).
11

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1 The term “gross income” also appears in §§ 101(18),”° (19A),”° and (20)”? in the
2 || definitions of “family farmer,” “family fisherman,” and “farmer,” respectively. The Seventh
3
Circuit Court of Appeals held that in defining the term “farmer,” “gross income” should be
4
5 equated to gross income in the Internal Revenue Code. 2
6 This Court finds the reasoning of the opinions using the Internal Revenue Code to define
7 II 29 oes «ac tn acat
Section 101(18) provides in pertinent part
8 The term “family farmer” means - (A) individual or individual and
spouse engaged in a farming operation whose aggregate debts do not
9 exceed $3,237,000 and not less than 50 percent of whose aggregate
noncontingent, liquidated debts (excluding a debt for the principal
10 residence of such individual or such individual and spouse unless such
debt arises out of a farming operation), on the date the case is filed,
11 arise out of a farming operation owned or operated by such individual
or such individual and spouse, and such individual or such individual
12 and spouse receive from such farming operation more than 50 percent
of such individual's or such individual and spouse’s gross income
13 for— (i) the taxable year preceding; or (ii) each of the 2d and 3d
taxable years preceding; .. . 11 U.S.C. § 101(18) (2006) (emphasis
14 added).
* Section 101(19A) provides in pertinent part
15 The term “family fisherman” means —- (A) an individual or individual
and spouse engaged in a commercial fishing operation— (i) whose
16 aggregate debts do not exceed $1,500,000 and not less than 80 percent
of whose aggregate noncontingent, liquidated debts (excluding a debt
17 for the principal residence of such individual or such individual and
spouse, unless such debt arises out of a commercial fishing operation),
18 on the date the case is filed, arise out of a commercial fishing operation
owned or operated by such individual or such individual and spouse;
19 and (ii) who receive from such commercial fishing operation more than
80 percent of such individual’s or such individual’s and spouse’s gross
20 income for the taxable year preceding the taxable year in which the
case conceming such individual or such individual and spouse was
21 filed; ... 11 U.S.C. § 101(19A) (2006) (emphasis added).
1 Section 101(20) provides in pertinent part
22 The term “farmer” means (except when such term appears in the term
“family farmer”) person that received more than 80 percent of such
23 person’s gross income during the taxable year of such person
immediately preceding the taxable year of such person during which
24 the case under this title concerning such person was commenced from a
farming operation owned or operated by such person. 11 U.S.C. §
25 101(20) (2006) (emphasis added).
2 See In re Wagner, 808 F.2d 542, 549 (7th Cir. 1986) (“The way to make section 101(17) work best is to make it
26 || work simply. That is most easily done by deeming the statute to incorporate the definition of gross income in
federal income tax law. Then everyone will know where he stands. Given the arbitrary nature of the statutory
27 || definition of farmer, no higher value than certainty can be served by the interpretation of the words gross income;
and the interpretation that best serves that value is the one that equates gross income in the Bankruptcy Code to
28 || gross income in the tax code.”).
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“sross income” persuasive for the present case. Using the canon that similar terms should be
defined similarly in the same statute™ (here, the Bankruptcy Code) and looking to the cases that
have used the Internal Revenue Code to define “gross income” in other places in the Bankruptcy
Code, this Court determines “gross income” as defined in the Internal Revenue Code should
likewise be used to define “gross annual income” in § 548(a)(2), since the only difference
between the terms is the temporal modifier, “annual.”

The Internal Revenue Code in 26 U.S.C. § 61 defines “gross income” generally as

[Ajll income from whatever source derived, including (but
not limited to) the following items:

(1) Compensation for services, including fees,
commissions, fringe benefits, and similar items;

(2) Gross income derived from business;

(3) Gains derived from dealings in property;

(4) Interest;

(5) Rents;

(6) Royalties;

(7) Dividends;

(8) Alimony and separate maintenance payments;

(9) Annuities;

(10) Income from life insurance and endowment contracts;
(11) Pensions;

(12) Income from discharge of indebtedness;

(13) Distributive share of partnership gross income;

(14) Income in respect of a decedent; and

(15) Income from an interest in an estate or trust.

As a result, “gross income,” and likewise “gross annual income,” should not be defined as
subtracting any costs or expenses. “Where statutory language is plain, ‘the sole function of the

courts - at least where the disposition required by the text is not absurd - is to enforce it

3 See Woodford v. Ngo, 548 U.S. 81, 107 (2006) (“Consistent with this presumption, if we have already provided a
definitive interpretation of the language in one statute, and Congress then uses nearly identical language in another
statute, we will give the language in the latter statute an identical interpretation unless there is a clear indication in
the text or legislative history that we should not do so.”) (citation omitted).

13

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according to its terms.”””’ It is not absurd to choose the tax definition of gross income because,
among other things, this definition would permit higher earners to give more money to charitable
organizations.

(c) Other places in the Bankruptcy Code where “income” is used are helpful to
show how “gross annual income” of § 548(a)(2) should not be defined

Just as looking to other sections of the Bankruptcy Code aids this Court in determining
the definition of GAI, there are other places in the Bankruptcy Code that show how GAI in §
548(a)(2) should not be defined. For example, the term “disposable income” under Chapters 12
and 13°° is defined so as to deduct the expenses of operating a business. Consequently, if
Congress intended to have “gross income” reflect a deduction for operating expenses, it could
have used “disposable income” instead in § 548. “When Congress includes language in one part
of a statute and excludes it from another part of the same statute, it is presumed the Congress
acted purposely in the disparate inclusion or exclusion.”** This Court will not use the definitions
of “disposable income” because this term is defined in the Code, and if Congress desired to use
this definition in § 548(a)(2), it could have utilized this term. Instead, Congress chose to use the
term “gross annual income.”

(d) Congress’ election to use “gross annual income” versus “disposable income”
shows this Court that “gross annual income” should not deduct business
expenses

This Court’s refusal to apply the definition of “disposable income” is buttressed by the

fact that this term was in existence before the enactment of the RLCDPA in 1998. When

4 Maney v. Kagenveama (In re Kagenveama), 541 F.3d 868, 872 (9th Cir. 2008) (citing Lamie v. U.S. Tr., 540 U.S.
526, 534 (2004)).

39 See 11 U.S.C. §§ 1222, 1225(b\(2)(B), 1229(d\(1), 1322(b)(H, 1325(b)(1)(B), 1329(a)(4)(B Mii) (2006).

6 Kagenveama, 541 F.3d at 874 (citing Barnhart v. Sigmon Coal Co., 534 U.S. 438, 439-40 (2002) and Camacho v.

Bridgeport Fin, Inc., 430 F.3d 1078, 1081 (9th Cir, 2005)).

14

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Congress added § 548(a)(2) pursuant to the RLCDPA, it was aware of the term “disposable
income” and chose not to use this term in § 548(a)(2); instead “gross annual income” was used.
In addition, Congress also amended § 1325 to deduct from disposable income “charitable
contributions that do not exceed 15 percent of the debtor’s gross income.” Congress could have
easily used the term “disposable income”; however, it chose to use “gross income” in both §
1325(b)(2)(A)(ii) and § 548(a)(2). As a result, because “disposable income” was defined as
income less reasonably necessary expenses to live and continue to operate a business, “gross
annual income” must mean something different. If Congress wanted to have business gross
income reflect deductions for operation of a business, it would have used the term “disposable
income” in § 548(a)(2), referring to § 1325(b), which was already in the Code when the
RLCDPA was passed, It decided not to do so.

Congress had another opportunity to use the term “disposable income” for purposes of §
548(a)(2) when the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act
(“BAPCPA”) was enacted. BAPCPA amended several provisions of § 548 (ie., §§ 548(a)(1),
348(a)(1 (Biv), 548(d)(2), and 548(e)). BAPCPA also modified § 1325(b)(2)’s definition of
“disposable income.”?’ However, subsection (B) of § 1325(b)(2) remains unchanged. “Under
BAPCPA, the phrase current monthly income was introduced into § 1325(b)(2), but the
reduction of business expenses remained intact... . [BJusiness expense deductions under §
1325(b)(2)(B) continue to be a factor in arriving at a debtor's disposable income under
BAPCPA.””® If it were the intent of Congress to use the definition of “disposable income,” the

term “disposable income” would have been employed in § 548 instead of “gross annual income.”

* See 11 U.S.C. § 1325(b)(2) (2006).
** Drummond v, Wiegand (In re Wiegand), 386 B.R. 238, 242 (B.A.P. 9th Cir, 2008).

15

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However, Congress elected to utilize the term “gross annual income.” Congress could have
specified that “gross annual income” would require the deduction of business expenses, similar
to how “disposable income” requires the deduction of business expenses, Section 548(a)(2) does
not specify any deductions of any kind. As a consequence, in determining a debtor’s “gross
annual income” under § 548(a)(2), business expenses should not be deducted from gross receipts.
(e) Policy dictates not deducting business expenses from “gross annual income”

Not only does the plain meaning and comparison to other sections of the Code convince
this Court that GAI should be defined as all income without deductions, but also the policy
behind the RLCDPA further persuades the Court that GAI should be given a meaning that would
insulate greater amounts of charitable contributions from the avoidance powers of a bankruptcy
trustee. The legislative history of the RLCDPA states that the act “protects religious and
charitable organizations from having to turn over to bankruptcy trustees donations these
organizations received from individuals who subsequently file for bankruptcy relief. In addition,
the bill protects the rights of debtors to continue to make religious and charitable contributions
after they file for bankruptcy relief."*’ This Court’s interpretation of “gross annual income”
furthers this policy by allowing a higher earner to give more money to charitable organizations
without fear of that organization surrendering the money in an avoidance action in the event that
the higher earner files for bankruptcy.

(f) State law should not be followed in defining “gross annual income” in §
548(a)(2)

The Trustee would like the Court to follow the definition of “gross income” as used in

California homestead exemption cases. The Trustee cites to the Shelley v. Kendall (In re

39 HR. Rep. No. 105-556, at 1 (1998), reprinted in F Alan N, Resnick & Henry J. Sommer Collier on Bankruptcy
App. Pt. 41(0)(ii(A), at App. Pt. 41-259-60 (15th ed. rev. 2008).

16

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1 || Shelley) decision where the Ninth Circuit BAP defined gross income to determine the amount
2 || of a California homestead exemption. The BAP analyzed a United States Supreme Court case”
3
and determined that a retail store debtor’s gross annual income for purpose of a California
4
5 homestead statute was the gross receipts less cost of inventory and operating expenses.”
6 || Another case cited by the Trustee was Jn re Bush,” where a bankruptcy court had to determine
7 || the amount of the debtor’s homestead exemption and held that the gross income for a sole
8 proprietorship debtor, whether the debtor’s business was service-oriented or a retail store, was
9
the gross receipts less “expenditures required for the operation of the business ... Maal
10
1 All of these cases cited by the Trustee involve the interpretation of “gross income” in
12 || California Code of Civil Procedure § 704.730 for the purpose of determining a debtor’s
13 || homestead exemption. This Court declines to adopt this definition of “gross income” because
14 : . : . . ge
the rationale behind the homestead exemption differs from that of charitable contributions made
15
6 prepetition by a debtor that files for bankruptcy. The homestead exemption policy of saving a
17 || debtor's home equity does not apply in a charitable contribution case.
18 In addition to differing policy rationales, this Court has no need to look to state law for a
19 {I definition when, as discussed above, there are cases construing almost the same term in the same
20
federal statute (the Bankruptcy Code). A federal court should follow federal law when
21
22
23 |} 184 BR. 356 (B.A.P. 9th Cir. 1995).
4! Shelley v, Kendall (In re Shelley), 184 B.R. 356, 359 (B.A.P, 9th Cir. 1995) (“Income has been defined by the
24 || United States Supreme Court as ‘undeniable accessions to wealth, clearly realized, and over which the taxpayers
have complete dominion.””) (citing Comm’r v. Glenshaw Glass Co., 348 U.S, 426, 431 (1955).
25 || Jd (“Implicit in this concept where income is derived from a business, is the dedication of the revenues of the
business producing the gross receipts to a payment of the costs and expenses which debtors must pay to sustain and
26 operate the business. Simply acquiring an inventory is not enough. Costs such as rent, payroll, and other expenses
are necessary to transform inventory into income. Whatever remains of these obligations, if anything, may then be
27 | subject to debtor’s personal use.”).
43 346 B.R. 207 (Bankr, S.D. Cal. 2006).
28 |i" Inve Bush, 346 BR, 207, 210 (Bankr. $.D. Cal. 2006).
17

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interpreting a term in a federal statute. Furthermore, if the Court were to use the definition of
“gross income” from the California homestead statute, then GAI would be subject to varying
definitions depending upon where the debtor is located because homestead law varies by state.

(g) “Gross annual income” for purpose of § 548(a)(2) is all income without
deduction of business expenses

This Court holds that where a debtor has a sole proprietorship business, the “gross annual
income” of the debtor, for purpose of charitable contributions in § 548(a)(2), shall be the
business’ gross receipts, without subtracting the cost of goods or operating expenses.

According to Debtors’ 2005 income tax return, the gross receipts from Dr. Lewis’
business were $325,920. Debtors had no other income for 2005 listed on the tax return. Using
the definition of gross income from the Internal Revenue Code - - as adopted by other federal
courts construing provisions of the Bankruptcy Code - - Debtors’ “gross annual income” for
2005 was $325,920. The total amount of charitable contributions made by Debtors to Defendant
in 2005 was $18,380, which is 6% of $325,920, Asa result, the contributions made in 2005
“[do] not exceed 15 percent of the gross annual income of the debtor for the year in which the
transfer of the contribution is made.” Thus, the 2005 Transfers are not avoidable under §
548(a)(2)(A).

2) Consistent practice

Assuming arguendo that Debtors’ 2005 GAT is $95,645 - - which would make Debtors’
2005 contributions 19% of the $95,645 figure (thereby exceeding

15%) - - Debtors’ contributions in 2005 nevertheless were “consistent with the practices of the
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311 ULS.C. § 548(a)(2KA) (2006).

18

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debtor in making charitable contributions.”*°

For the transfers made in 2005, the Trustee argued in his trial brief that these transfers
were 20% of Debtors’ GAI because Debtors’ 2005 tax return shows $95,645 in business income,
and donation receipts show they gave $19,380 to the Church in 2005.7 The Trustee’s brief also
stated that in 2004 Debtors reported income of $56,407 on their tax return, and donation receipts
show they gave $6,700 that year to the Church, or approximately 12% of business income.”® The
Trustee noted that at the time of the trial, 2006 income tax returns had yet to be filed by
Debtors.” The Trustee looked to Debtors’ Statement of Financial Affairs to state that Debtors
business income for 2006 up to the filing date was $105,092.71, and donation receipts for that
same period show they gave $12,990 to the Church, or approximately 12% of business income,””
The Trustee argued in his trial brief that since Debtors’ donations for 2004 and 2006 totaled 12%
of Debtors’ GAI for each year and Debtors’ donations for 2005 totaled 20% of Debtors’ GAl, the
donations in 2005 were not consistent with Debtors’ practice of contributing 12% in 2004 and
2006, so the 2005 Transfers should be avoided.

In its trial brief Defendant pointed to Dr. Lewis’s deposition, where he stated that as a
child he was taught to always give a portion of his earnings to the church and that he made it his

goal to tithe in the amount of $1,000 per month and to give an additional $500 per month as an

4611 U.S.C. § 548(a)(2)(B) (2006).

47 The actual amount of donations given to the Church in 2005 was $18,380, which is 19% of $95,645,

48 Debtors’ 2004 tax return shows gross receipts in the amount of $242,372, and donation receipts reflect Debtors

gave $6,700 to the Church in 2004. Based on the proposition that GAI should not deduct business expenses, the
ercentage of charitable contributions given to the Church in 2004 was only 3% of Debtors’ 2004 GAI.

9 Since the record does not include a copy of Debtors’ 2006 tax return, the Court is unable to calculate the
percentage of charitable contributions given to the Church in 2006 based on Debtors’ 2006 GAI.

° Calculating the sum of the amounts given to the Church in 2006 up to the filing date, the amount of donations
given to the Church in 2006 up to the filing date was $13,990, which is 13% of $105,092.71, Since the Court js
unable to calculate the percentage of charitable contributions given to the Church for the entire year, the Court will
use the figures up to the filing date for purposes of this § 548(a}(2) analysis.

19

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offering. It further stated that some months he did not meet this goal, other months he exceeded
it, especially at Christmas time. Defendant’s trial brief also stated that each year, Dr. Lewis
aspired to contribute $18,000, that in 2004 Debtors reported $17,648 in gifts to charity on their
2004 tax return,”! and in 2005 Debtors reported $17,950 in gifts to charity on their tax return,**
Defendant argued that the amounts Debtors actually contributed to charity, as evidenced by their
deposition testimony, their income tax returns, and receipts of contribution, were consistent with
their stated goal.

The Bankruptcy Code does not define “consistent.” Webster’s Third New International
Dictionary of the English Language Unabridged defines “consistent” to mean “marked by
harmony, regularity, or steady continuity throughout : showing no significant change,
unevenness, or contradiction... 753

In Jackson v. Church of Manapalan, Inc. (In re Jackson)”™* the bankruptcy court for the
District of New Jersey discussed the word “consistent” in the context of § 548, stating that there
are factors to consider to determine whether a debtor’s practice in giving charitable contributions
is consistent, to wit: the amount of the transfer versus past transfers, and the percentage of the
debtor’s income each year that is devoted to charitable contributions. °* The court also looked to

Webster’s New Collegiate Dictionary’s definition of “consistent.”**

>! Looking at the donation receipts from the Church that show $6,700 was donated to the Church in 2004, it appears
that the tax return amount of $17,648 for 2004 included other charitable contributions, perhaps to other
organizations, evidence of which is not in the record.

*2 Looking at the donation receipts from the Church that show $18,380 was donated in 2005, it appears that the tax
return amount of $17,950 for 2005 did not include all of the contributions made by Debtors to the Church.

53 Webster’s Third New International Dictionary of the English Language Unabridged 484 (1986).

44949 B.R. 373 (Bankr. D.N.J. 2000).

*3S¢e Jackson v. Church of Manalapan, Inc. (In re Jackson), 249 B.R. 373, 377 (Bankr. D.N_J. 2000).

57d. (“Interpretation of the phrase clearly requires, however, a comparison of the amount of the transfer in question
with the amounts of the debtor's past transfers. Where a debtor's income has changed it is also appropriate

to compare the transfer as a percentage of the debtor's income with past transfers as such percentages. The degree of
variation which is permitted within the meaning of the term ‘consistent’ will undoubtedly be difficult in certain

20

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Debtors’ donation practices went from 12% of annual income in 2004 to 19% of annual
income in 2005 and then back to 13% of annual income in 2006. However, the word
“consistent” is a fluid term and is not rigid. Section 548(a)(2) could have used the term
“conforming” or “identical” or “same,” but it uses the word “consistent,” Dr. Lewis consistently
had the practice of giving charitable donations. Looking at the actual amounts, they did not
differ greatly from year to year. The total amount of contributions in 2005 was $18,380, whereas
the total amount of contributions in 2006 was $18,790, a difference of only $410. In addition,
12% and 13% are not inexorably inconsistent with 19%. This Court finds that the 2005
Transfers were consistent with Debtors’ practice in making charitable contributions. The 2005
Transfers may not be avoided pursuant to § 548(a)(2)(B).

It) CONCLUSION

Using the Internal Revenue Code’s definition of “gross income,” the 2005 Transfers were
below 15% of Debtors’ GAI. Even assuming that the transfers exceeded 15% of Debtors’ GAI,
the contributions made in 2005 were consistent with the practices of Debtors in making

charitable contributions. Therefore, the 2005 Transfers may not be avoided under § 548(a)(2)(A)

or (B).

Dated: oN ‘1/p 9 CU WV Cole

ALAN M. AHART
United States Bankruptcy Judge

cases, The term ‘consistent’ is defined by Webster's New Collegiate Dictionary as ‘marked by harmonious
regularity or steady continuity: free from irregularity, variation or contradiction.’”).

21