First Amendment Doesn't Shield Church

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First Amendment Doesn't Shield Church That Profited From Ponzi Scheme
Shannon P. Duffy
The Legal Intelligencer

January 4, 2002




Religious organizations that innocently profited from a Ponzi scheme are not
shielded by the Religious Freedom Restoration Act or the First Amendment when
a bankruptcy trustee demands they return all payments they received within
the previous four years, a federal judge has ruled.

In Liebersohn v. First Baptist Church of Collingdale, Senior U.S. District
Judge Clarence C. Newcomer of the Eastern District of Pennsylvania rejected
arguments that two sections of the Bankruptcy Code and the Pennsylvania
Uniform Fraudulent Transfer Act infringe on the religious freedom of several
churches.

A lawyer for the churches argued that requiring them to pay back the money
would "curtail significantly their religious activities and divert their
supporters' regular donations to return those donations to the trustee."

Attorney Thomas S. MacIntyre also argued that because religious organizations
cannot ensure the financial viability of their donors, the only way for them
to avoid liability under §§ 548 and 544(b) of the Bankruptcy Code is to stop
raising funds, or to raise funds but refuse to use them for four years.

But Newcomer found that the churches are subject to the laws because they are
"not directed at any religious practice or at any religion, nor do they
prohibit any activity."

Instead, Newcomer said, the laws "apply equally to any entity."

The case stems from a Ponzi scheme perpetrated by David Burry, who raised $25
million from investors after he formed C.F. Foods, a wholesale company that
distributed candy from manufacturers to retailers.

To attract investors, Burry, who later pleaded guilty to criminal charges,
falsified sales records, balance sheets, income statements and accounts
receivable listings. The investors were paid back through a pyramid scheme in
which proceeds from new investors were given to old investors, creating an
illusion of legitimate profit-making.

Between 1996 and 1999, C.F. Foods transferred significant sums to several
churches. The First Baptist Church of Collingdale, Pa., received three
payments totaling $35,000, the First Baptist Church of Ogden received six
payments totaling $32,200, and Morning Cheer Inc., the parent corporation of
Sandy Cove Ministries, received two payments totaling $34,000.

In May 1999, two banks filed an involuntary petition under Chapter 7 of the
Bankruptcy Code against C.F. Foods.

Trustee Arthur P. Liebersohn later filed complaints against the churches,
demanding the return of any money they had received in the four previous
years.

The complaints alleged that C.F. Foods' payments were made while the company
was already insolvent and for "less than reasonably equivalent value."

In their answers, the churches acknowledged that they received the payments
and that they were for less than reasonably equivalent value.

But the churches also listed a slew of affirmative defenses, including that
the Bankruptcy Code provisions violate the Religious Freedom Restoration Act
of 1993 and impermissibly infringe on their First Amendment religious liberty
rights.

The cases were transferred from Bankruptcy Court to U.S. District Court when
Newcomer granted a motion by the churches for withdrawal of reference.

Newcomer found that the U.S. Supreme Court held in 1997 that the RFRA exceeds
Congress' enforcement powers under § 5 of the 14th Amendment.

But MacIntyre argued that the RFRA is still applicable to §§ 548 and 544(b)
of the Bankruptcy Code and that application of those sections to the churches
would violate the RFRA.

Newcomer disagreed, saying that even if the RFRA is valid in some contexts,
it did not provide the churches with a defense.

The first inquiry under the RFRA, he said, is whether the statute in question
"substantially burdens" a person's religious practice by requiring the
adherent to refrain from engaging in a practice important to his or her
religion or by forcing the adherent to choose between following a particular
religious practice or accepting the statute's benefits.

And a "substantial burden" exists, Newcomer found, only if the challenged law
significantly inhibits or constrains "conduct or expression that manifests
some central tenet" of an individual's beliefs or "meaningfully" curtails the
individual's ability to express adherence to his or her faith; or if it
denies an individual "reasonable opportunities to engage in those activities
that are fundamental to that individual's religion."

MacIntyre argued that if religious institutions cannot obtain donations, they
will "find it difficult to erect buildings, buy vans and support
missionaries."

Newcomer disagreed, saying, "These arguments are unsupported by any evidence
and are simply counsel's assertions."

And even if the claim were true, Newcomer said, the churches "fail to
demonstrate that any of their asserted burdens would inhibit or constrain one
of their central tenets, restrict their ability to express adherence to their
faith or deny them reasonable opportunities to engage in religious
activities."

Nothing in the Bankruptcy Code "prevents a debtor from donating, or prevents
a religious organization from accepting donations," Newcomer wrote.

MacIntyre also argued that Congress exceeded its power when it enacted the
Bankruptcy Code because the Constitution does not allow Congress to permit a
trustee to "undo every charitable donation made by C.F. Foods within four
years of its bankruptcy petition."

Newcomer disagreed and found that §§ 544(b) and 548 are "necessary and proper
legislative exercises of congressional authority under the Bankruptcy
Clause."

Turning to the churches' First Amendment argument, Newcomer found that for
years, the U.S. Supreme Court "appeared to require the government to make
religious exemptions from neutral, generally applicable laws that have the
incidental effect of substantially burdening religious conduct."

But "the legal landscape changed dramatically in 1990," Newcomer said, when
the Supreme Court handed down its decision in Employment Div., Dep't of Human
Resources of Oregon v. Smith, a case brought by two American Indians who were
denied state unemployment compensation benefits after being fired from their
jobs for ingesting peyote, a practice they said was religious and therefore
protected.

The high court refused to apply strict scrutiny and concluded that "the right
of free exercise does not relieve an individual of the obligation to comply
with a valid and neutral law of general applicability on the ground that the
law proscribes (or prescribes) conduct that his religion prescribes (or
proscribes)."

MacIntyre argued that §§ 548 and 544(b) are not subject to the holding in
Smith and should be subject to strict scrutiny, because those sections are
not neutral laws of general application.

Newcomer disagreed, saying, "Sections 548 and 544(b) are not directed at any
religious practice or at any religion, nor do they prohibit any activity."

Likewise, Newcomer found that the same logic was fatal to the churches' claim
that the Pennsylvania Uniform Fraudulent Transfers Act had violated their
religious rights.

"PUFTA, like its federal bankruptcy counterparts, is not directed at any
religious practice, any religion, nor does it prohibit any activity,"
Newcomer wrote.

"Indeed, under the statute, as long as a transfer was made within four years
of the transfer while the debtor was insolvent, and was for less than
reasonably equivalent value, the creditor can recover the transfer."

But in his final paragraphs, Newcomer refused to grant summary judgment in
favor of the trustee, saying it was not yet clear whether C.F. Foods'
transfers to the churches constituted a "substantial amount" of the company's
assets or whether the company had concealed the payments.

Trustee Liebersohn is represented by attorney Camille Spinale of Ciardi
Fishbone.