The Bankruptcy Code on the Nature of Tithing

The bankruptcy code has some deep things to say about the nature of tithing. In order to understand why, we have to take a little detour through the nature of bankruptcy law and couple of technicalities in the code. Bear with me on this, and I promise that there are some fun questions at the end.

Personal bankruptcy is a way of starting over when you get mired in too much debt. Essentially you go into court and all of your assets (above some protected level) are sold off and the proceeds are distributed to your creditors. Then the court wipes clean the slate, releasing you from any further legal obligation for your debts. Your “excess” assets are gone but so are your bills. Since the creditors are faced with a limited set of assets to satisfy their claims, the real fights in bankruptcy law tend to be between creditors. There are basically two kinds of creditors: secured and unsecured. Secured creditors loaned the debtor money which was secured by some asset. The most familiar example is a home mortgage, where the home is pledged to satisfy the debt in the event that the debtor does not pay. The law, however, allows you to used practically any asset (including intangibles like accounts receivables) as security. Security interests are “good” in bankruptcy. This means that in bankruptcy the asset securing a creditor’s loan will be sold, but all of the proceeds from the sale of that asset go to the secured creditors. Unsecured creditors, in contrast, get a pro rata distribution of the proceeds from the sale of whatever assets are left over after the sale of unencumbered property.

Because all of the creditors’ rights are more or less fixed at the moment of filing bankruptcy, there is an incentive to shuffle around assets and obligations immediately prior to filing. For example, some unsecured creditors could demand security interests, which of course eats into the post-bankruptcy distribution to unsecured creditors. Alternatively, if you are on the brink of filing for bankruptcy, you might be tempted to transfer all of your assets to your sister as a way of beggaring your unsecured creditors. This is where we get into the law of “voidable preferences” and “fraudulent transfers.” Basically, the law looks back to the period immediately preceding filing for bankruptcy and voids transactions that transform an unsecured creditor into a secured creditor or transfer the bankrupt’s wealth in order to avoid debts. It gets more complicated than this, but these are two important points for our purposes. First, this body of law does not apply to new debt. Hence, if I borrow $1 million immediately before bankruptcy, that transaction stands. Second, it does not apply to purchases. If I go an buy a plasma TV the day before I file for bankruptcy or take a cruise, the law doesn’t do anything to those transactions.

So what if I pay tithing immediately before bankruptcy? Normally, large gifts of cash made while you are insolvent are voidable. You can buy stuff when you are broke, but you can’t give stuff away. However, in 1998 Congress, largely at the instigation of Sen. Orrin Hatch, added 11 U.S.C. 548(a)(2) to the bankruptcy code. This section exempts donations to religious institutions of up to 15 percent of annual income (enough for a full tithe and generous fast offering?) from the normally applicable law. In other words, if you give your sister $10,000 before you file for bankruptcy, the bankruptcy court is going to hit her with a judgment demanding that she pay it $10,000. If you write out a $10,000 check to your church before bankruptcy, it is safe.

Now there are a number of reasons for this special treatment. At the time, it was mainly pitched as a church protection act. If the church got the cash and then spent it before getting hit with the bankruptcy court’s judgment, it would have to come up with the cash to pay the judgment or have its assets attached. Not nice, a big pain. Of course, it is not nice and big pain for anyone else hit with these judgments. The other argument is that churches are such good institutions that we ought provide them with a bit of a break on this one. The problem, of course, is that the break comes at the expense of the debtor’s unsecured creditors. It is fine to encourage voluntary donations to charity, but should we really encourage donations with other people’s money?

Another justification, one that was not offered, is that people get value for paying tithing. Remember, if you buy something then the law doesn’t void the transaction. If tithing is a kind of purchase of spiritual benefits, then the law makes good sense. Spiritual benefits are simply quickly dissipated or difficult to liquidate assets. (Alternatively, we might think of them as part of the homestead exemption — the core of protected assets to guarantee that the courts don’t absolutely beggar someone — that creditors don’t have a right to.)

Finally, one might think of tithing as a payment on a pre-existing debt. God has given us everything and we are obligated to give something back to him. This approach, however, suggests a very different policy than that enshrined in the law by Sen. Hatch and company. If the debtor owes God, then he ought to be treated as a creditor in bankruptcy. Hence, we void the tithing payment, bring that money back into the bankruptcy pool, and give God a pro-rata distribution along with all of the rest of the unsecured creditors. Of course, God, like the government, might be entitled to a statutory lien in the bankrupt’s property, regardless of the other creditors.

Essentially, the bankruptcy code gives us three ways of conceptualizing tithing: as payment of a debt, as purchase of a service, or as a gift. The code treats it as a purchase. What say you?

47 comments for “The Bankruptcy Code on the Nature of Tithing

  1. January 11, 2005 at 10:02 am
  2. January 11, 2005 at 10:24 am

    Interesting post Nate. The question you asked about should we encourage spending other peoples’ money seems pretty clear to me. But of course I am thinking of it from an LDS point of view. Tithing is for us to pay based on our increase. Even if we have accumulated debt as we continue to be paid for our jobs we should pay tithing first. It is a precedent of our faith. Tithing goes out first, then we spend our money as we see fit.

    We cannot second guess anyone else’s faith that paying tithing is or is not motivated by religious reasons. That is, we cannot say just because someone is not LDS and they have never paid tithing to their church before, that a sudden donation is motivated by “sticking it to the creditor” or by religious faith. Therefore we must accept all religious donations as valid tithing or all fraudulent.

    Second, tithing is a function of religion. If the state refused to allow it, they would be interfering with religious practices which is a guarded right and freedom. Therefore religious organizations should qualify for this exemption where other charities should not.

    The first justification, the one not originally mentioned, carries a certain flaw in a secular society. If the state recognized tithing as a purchasing of spiritual benefits, a case could be made that the state is endorsing religion by acknowleging spritual benefits. This would make a lot of people nervous to some level. Also a person with no religious association could claim spiritual benefits by “tithing” to his freind Bob and secureing that money is the same circumstance.

    The second justification faces similar problems. The state would have to acknowlege God’s existence and endorse religion as well as recognizing a previous debt without a reciept of purchase.

    I hope this makes some sense in the legal gallery, since I am only using my layman’s common logic, BARring my limited legal knowledge.

  3. January 11, 2005 at 10:32 am

    Nate,

    Thanks for a fascinating post. Do you know the impetus behind 11 U.S.C. 548(a)(2) of the Code? Did it have anything to do with the church’s decision to return tithing paid by Bonneville Pacific Corp. executives? As best as I can recall some of the executives of the company used off-shore SPEs to funnel money out of the company while propping up the balance sheet (ala Enron). Some of the executives paid tithing on the money and when the bankruptcy trustee traced the money, demanded that the church return the cash. After several years of negotiations the church voluntarily returned the money. This happened back in the early nineties (although I think the resolution over the dispute over the tithing funds was about the time that Hatch introduced this legislation) and my memory is hazy, so someone with more knowledge should flesh this episode out.

    This seems like a provision ripe for abuse by anyone who wants to shelter assets. Given the generous definition of what constitutes a religion under the Constitution it seems that someone with a reasonable amount of foresight could park their money at the Church of Defrauding My Creditors w/ little repercussion.

  4. Marko
    January 11, 2005 at 11:22 am

    Nate — The answer is clearly (d) None of the above. The only reason tithes are not considered preferential or fraudulent transfers is because tithes are a secured debt and the collateral is your soul. As much as the bankruptcy trustee would like to bring this collateral into the estate, there is only one potential buyer, and that buyer is known to be very unforgiving. There are also significant administrative difficulties in negotiating such a sale.

  5. Frank McIntyre
    January 11, 2005 at 11:33 am

    Steve, you’re grandstanding. Both posts use the word “bankruptcy”. Other than that they are wildly different.

  6. Ann
    January 11, 2005 at 11:38 am

    Steve isn’t grandstanding. He’s marketing.

  7. Frank McIntyre
    January 11, 2005 at 11:41 am

    Thank you, Ann. I was trying to think of the right word and lost patience. I still sort of like “grandstanding” though because it makes Steve look eviler. But maybe marketing is eviler than grandstanding…

  8. Rosalynde Welch
    January 11, 2005 at 11:43 am

    The rights of conscience have historically received greater legal protection than other rights, because the rights of conscience are understood to originate in one’s duty to God. (See this interesting article by Rodney Smith in the BYU Law Review: http://www.law2.byu.edu/lawreview/archives/2003/3/SMI.pdf ) Maybe this bears on the situation: any payment, purchase or debt that originates in duty receives greater protection. I assume this is why a certain level of assets is protected–in order to accommodate one’s duty to provide necessities for self and family.

  9. January 11, 2005 at 11:43 am

    I’m not sure I would call God “very unforgiving.” Tithing is def. a purchase. You purchase your Temple recommend with it; along with the opportunity to make additional covenants/contracts with God. Do country club memberships purchased get attached via bankruptcy? Ergo, you purchase your exaltation with it; albeit even if it is only an infintesimally small portion of said payment.

  10. Frank McIntyre
    January 11, 2005 at 11:45 am

    By the way, Nate. Did this post get triggered by the SLtrib spread on bankruptcy that noted 12% of the bankrupt paid some money in tithing? I thought the fact was interesting though a little disingenuous. Although 12% report paying something, very few of those are likely to be full tithe payers.

    Also, your example of the $10,000 payment requires that the person be making at least $66,000 annual income when they declare. Which would be a little extreme.

  11. Julie in Austin
    January 11, 2005 at 12:02 pm

    frank–

    what’s the basis for assuming they aren’t full tithe payers, or that people making 66K don’t file for bankruptcy?

  12. January 11, 2005 at 12:04 pm

    Frank,

    What basis do you have for believing that very few of the 12% of bankrupts who claim to have paid something in tithing paid a full tithe? Statistically it would be safe to assume than not all paid a full tithe, but I don’t see how you can go from that to the assumption you have made.

  13. Frank McIntyre
    January 11, 2005 at 12:12 pm

    Julie,

    I have been doing some work on bankruptcy so I’ve been looking at court filings. Some people do report charitable contributions in the last year before filing but typically not nearly enough to make them full tithe payers. I’m positive there are some full tithe payers, but not all that many. Certainly not 12% of filers.

    As for 66K, people at all incomes declare bankruptcy, but $66,000 in income is well above the typical income of a bankruptcy case. That is all I meant by “a little extreme”. It is on the high end of the filings. This impression also comes from the work I have been doing on bankruptcy records. Most bankruptcy filers could not donate $10,000 to the church and have it protected.

  14. Julie in Austin
    January 11, 2005 at 12:19 pm

    Thanks, Frank. what would you say is the average family income for a b. case–and is that one income or two (i.e., is a spouse working)? Or is the majority single/divorced? This might shed some light on the discussion about b. at the other blog, which i found interesting.

  15. Daylan Darby
    January 11, 2005 at 12:29 pm

    If I may hijack this thread (a bit)…

    Why are charitable contributions (e.g., tithing) tax-deductible? I would think the ALCU and other church/state separators would try to eliminate this deduction. Do you suppose that 11 U.S.C. 548(a)(2) would be eliminated if tithing was not deductible?

  16. January 11, 2005 at 12:32 pm

    Frank, I am grandstanding, of course. I’m not sure that makes me “eviler” or “gooder” but maybe “smarter” :)

    I also am not sure about the average incomes of bankruptcy filers, but it seems to me that it would be helpful to plot the relative trajectories of descent for income levels; i.e., do poorer families crash into bankruptcy faster or slower than rich families? This in turn could help us understand tithing payments within those sets.

  17. January 11, 2005 at 1:19 pm

    Daylan: The constitutionality of tax deductability for gifts’s to religious organizations was decided about thirty years ago in a case called Walz v. Tax Commission. It is about as well-settled a principle of first amendment law as you are likely to find.

  18. January 11, 2005 at 1:34 pm

    If debts to two people have come due but you can’t afford to pay both, does one deserve the money more than the other? Is it better to pay one and not the other, or should both be paid proportional to the amount of credit they have respectively given?

    I question whether it is morally right to pay a full tithe when you know that you are about to declare bankruptcy. But I don’t remember any parables that would answer this question.

  19. Mark B
    January 11, 2005 at 1:47 pm

    Another of the Flying Apostrophe Bothers. Man!

    Lawyers reason by analogy. They just can’t help themselves. But the fact that tithing and other contributions are not considered fraudulent conveyances and therefore receive treatment similar to simultaneous exchanges does not mean that anybody, except Nate, ever considered tithing to be the purchase of anything. The answer to your multiple choice question, then, is (d) charitable contributions are sui generis.

    The whole post is mildly amusing, but reminds me of what Anthony Kronman, criticizing much of what passes for legal scholarship, called an “intellectual masturbatory exercise”. (I just checked Lexis to confirm that I wasn’t just making this up, but got no hits. Maybe 1978 didn’t make it into their database.)

  20. Frank McIntyre
    January 11, 2005 at 3:19 pm

    Julie,

    See this link for some basic stats on (Utah) bankruptcy. Most are married but almost 30% are single and almost 15% are divorced. Annual incomes average around $20-25K for single filers and $40K for married filers. These averages are likely a little deceiving because income tends to be skewed. So although the average is $40K, more than half make less than that because there are some big income earners making a lot of money.

    The skewing is of particular concern with looking at how much debt people default on. There are a few very high values that really dominate the distribution, while there are lots of people defaulting on $20K or less.

    As for second earners, I have the data to look at it but haven’t done so. It will certainly be interesting to know, though.

    I went back and looked at a few filings and I think there are more full tithe payers than I originally expected. If I had to defend a range I’d say probably around 3-4% but possibly as low 2% or as high as 6%.

    Steve, I think grandstanding makes you “Stever”.

  21. January 11, 2005 at 3:21 pm

    :)

  22. January 11, 2005 at 3:49 pm

    Mark B: The masturbation imagry doesn’t belong to Kronman; it belongs to Karl Marx. And he was referring to philosophy not legal scholarship. Of course, once one reaches a certain curmugeonly age, I imagine that all personalities begin running together and there is little difference between 1978 and 1848. Both simply belong to the good old days before these young wippersnappers started coming out with their high fluttin’ ideas.

    I am impressed that someone who has gathered such accumulated wisdom through the ages has mastered such new fangled things as Lexis. Kudos to you! I assumed that you did your research with the Corpus Iuris Romanum. If you click through the library information, you will notice, however, that their coverage of most law journals ends in the early- to mid- 1980s (back when that young Mr. Reagan was President).

  23. January 11, 2005 at 3:49 pm

    “It is fine to encourage voluntary donations to charity, but should we really encourage donations with other people’s money?”

    I wanted to reconsider this actual question from the post. I firmly believe that we should heed the counsel of the bretheren when we are told to avoid unnecessary debt. However, I like to extend this a bit further and with apologies to those who work for creditors and with much tongue in cheekness, I must say lets not only avoid these institutions for unnecessary debt but lets send them a message that they themselves are more unnecessary than they believe.

    Since lawlers like to argue by analogy I’ll put it this way. I don’t drink because it is against the WoW but I also don’t buy alcohol for cooking or any other purpose. I don’t frequent bars either. This is because I won’t support the company. Now this is not because of the WoW this is just my opinion that alcohol is really that bad.

    But using this analogy, I wouldn’t support the creditors either. And if the money does more good going to charity, I’m all for it! Charity wins and the creditors learn a lesson in promoting debt.

    But seriously it is an intersting question.

  24. greenfrog
    January 11, 2005 at 5:19 pm

    I question whether it is morally right to pay a full tithe when you know that you are about to declare bankruptcy. But I don’t remember any parables that would answer this question.

    Though this may not be directly on point, it is interesting in this context nonetheless:

    Luke 16

    1 AND he said also unto his disciples, There was a certain rich man, which had a steward; and the same was accused unto him that he had wasted his goods.

    2 And he called him, and said unto him, How is it that I hear this of thee? give an aaccount of thy stewardship; for thou mayest be no longer steward.

    3 Then the steward said within himself, What shall I do? for my lord taketh away from me the stewardship: I cannot dig; to beg I am ashamed.

    4 I am resolved what to do, that, when I am put out of the stewardship, they may receive me into their houses.

    5 So he called every one of his lord’s debtors unto him, and said unto the first, How much owest thou unto my lord?

    6 And he said, An hundred measures of oil. And he said unto him, Take thy bill, and sit down quickly, and write fifty.

    7 Then said he to another, And how much owest thou? And he said, An hundred measures of wheat. And he said unto him, Take thy bill, and write fourscore.

    8 And the lord commended the unjust steward, because he had done wisely: for the children of this world are in their generation wiser than the children of light.

    9 And I say unto you, Make to yourselves friends of the mammon of unrighteousness; that, when ye fail, they may receive you into everlasting habitations.

    FWIW, I think that not even sui generis is a fair characterization of the particular provision under discussion — it is more appropriately understood as an example of special interest politicking. It is justified by political will, not by ratiocination.

  25. Adam Greenwood
    January 11, 2005 at 5:22 pm

    “Finally, one might think of tithing as a payment on a pre-existing debt. God has given us everything and we are obligated to give something back to him. This approach, however, suggests a very different policy than that enshrined in the law by Sen. Hatch and company. If the debtor owes God, then he ought to be treated as a creditor in bankruptcy. Hence, we void the tithing payment, bring that money back into the bankruptcy pool, and give God a pro-rata distribution along with all of the rest of the unsecured creditors. Of course, God, like the government, might be entitled to a statutory lien in the bankrupt’s property, regardless of the other creditors.”

    Nate, I think you’ve got it wrong. In all seriousness, you start out right with your third option but then you treat God as just another general creditor. The law gets it exactly right, in that it treats God as a creditor with superior rights to all other creditors, but (and this should make your libertarian instincts tingle) no one is forced to honor their obligations to God. But if they do, their decision is protected.

    In short, the law is a neat way of honoring the primacy of God and the spiritual life in our polity.

  26. Adam Greenwood
    January 11, 2005 at 5:24 pm

    Really, Greenfrog? There is no view of the roles of churches and states that would make such a law sensible?

  27. Adam Greenwood
    January 11, 2005 at 5:43 pm

    I just realized that Greenfrog might have been making a merely empirical claim. If so, I’m inclined to disagree in the absence of evidence, but I withdraw my #26.

  28. greenfrog
    January 11, 2005 at 10:22 pm

    I assert the lack of integral rationale based on the percentage limitation. I can think of no principle of law that would lead one to conclude that such payments should be shielded from preference treatement only if they are 15% or less of one’s income.

    As to what the legislative history likely says? I imagine that the purported rationale for the exclusion was to 1. to avoid unnecessary entanglement of church and state (which is the only secular rationale I can think of that justifies treating religious organizations differently than other charitable organizations), and 2. to avoid the unexpected requirement of refund (which would be as true of the Nature Conservancy as it would be of a church).

    I don’t see either of those reasons as consistent with the bankruptcy regime in any meaningful degree. It’s fun to think about how one might conclude that God gets super-priority, even as against the IRS, but that seems a tad implausible. IOW, I think it exceedingly unlikely that a court considering whether such an exception should be applied outside the scope of bankruptcy law (such as deciding how to interpret security interests under the UCC), would conclude that it should understand violations of security interests that resulted in a favorable outcome to a religious organization should somehow become privileged because God outranks banks.

  29. Adam Greenwood
    January 11, 2005 at 10:36 pm

    So, you’re suggesting that no rational legislator could have concluded that God should get priority and that, in our country, 10% was customary (15% as a cushion)? I flatly disagree.

    You are drawing your definition of rationality very tightly. I wonder how many people who aren’t Greenfrog qualify as rational in your view?

  30. Sheri Lynn
    January 12, 2005 at 1:06 am

    I’m tempted to run this whole thread through Babelfish.

  31. January 12, 2005 at 9:28 am

    While I appreciate the rationales Nate and others have offered, they do not explain the applicability of the 548(a)(2) exception to qualified non-religious entities. 548 defines “qualified religioius or charitable entity or organization” as one desribed in the tax code section 170(c)(1), which is a very broad group.

    The only rationale offered that applies to both the tithe payer and the supporter of the ACLU or the NRA, is that it spares non-profit orgs the burden of having to return the voided transfer. Many of these 170(c)(1) orgs have savy lobbying efforts–I think the ammendment is reflective of this.

  32. Marko
    January 12, 2005 at 9:28 am

    I’m having a bit of trouble interpreting the posts on this thread. My sense was that Nate’s initial post was merely a fun way to think about how law and religion might intersect by nevertheless using an example that has strong secular justifications. My reading is that it is less about the legislative intent of 548(a)(2), although that likely has an interesting background as Mat indicates, and more about how we might conceptualize tithing in light of how different payments are conceptualized in a particular statutory regime, which, as it happens, pays particular attention to the categorization of asset transfers.

    My post was not serious, although lyle seems to have interpreted it that way (lyle-the unforgiving buyer is not God). However, I get the feeling that other direct responses to the initial post have interpreted the initial post far differently than I did.

  33. January 12, 2005 at 11:37 am

    It is perfectly fine to creatively look at the way law and religion might intersect. Like I said, I appreciate the persuasive efforts made to this end. One of the primary reasons I visit T&S is to keep up with Nate’s emerging school of Law and Mormonism.

    I was just trying to re-emphasize the original secular reason that seemed to be getting lost as the fun became progressively serious.

  34. January 12, 2005 at 12:31 pm

    Greenfrog: The exemption has nothing to do with security interests. It is contained in the special federal version of fraudulent conveyance law that applies in bankrtupcy. To my knowledge the Uniform Fraudulent Conveyance Act and other state laws contain no similar provision. (If I am wrong on this let me know, as I would be interested in seeing the state laws.) Security interests would be covered by the law of voidable preferences, which is governed by another section of the code. Hence, if you promoted a church from an unsecured to a secured creditor immediately prior to bankruptcy, the resulting secuirty interest would be voidable by the bankruptcy trustee.

    Ian R.: You are right of course, about applying the exemption to other non-profits. The legislative history of the law goes like this: there were a number of cases where churches were hit by judgements in favor of bankruptcy trustees for fraudulent conveyances. Initially, everyone took a wait and see attitude, since it was assumed that RFRA would limit the application of the bankruptcy code in this context. (RFRA remains good law as to federal action even post-Boerne.) The courts’ response to this argument was a bit haphazard and Congress intervened. Non-profits were thrown in to give a bit of political cover to those who might get in trouble with liberal constitutencies for favoring relgion. However, the fact that the exemption is limited to 15% of income indicates that the primary beneficiaries were assumed to be tithe payers. (Although the law does also allow one to exempt larger amounts if one habitually gives that much away.)

  35. Mark B
    January 12, 2005 at 2:31 pm

    Nate,

    Marx may have been the first to put it to paper, but it was Kronman’s use of it that I was alluding to. And I suspect that Marx’s copyright in the phrase had expired by 1978.

  36. January 12, 2005 at 2:34 pm

    Kronman, I suspect, is too good a philosopher (Ph.D. in philosophy not economics, despite his early work on L&E btw) not to know the source of the image and I seriously doubt that he would claim it as his own composition.

  37. January 12, 2005 at 2:39 pm

    Nate: Somehow I missed in Con Law I that RFRA survives Boerne as to federal action–that is good to know. Thanks for the history too.

    I wonder as an empirical matter what the ratio of individual contributions to Churches is compared to individual contributions to non-religious charitable organizations? I would suspect that most non-religious orgs survive on smaller contributions from individuals, i.e. amounts that would constitute less than 15% of annual income. They are worthy of discussion in their own right, but it seems to me that the “law and mormonism” rationales offered will have more strength if tithing/church giving greatly outpaces secular giving.

    Any post that intelligently involves the bankruptcy code and The Church is interesting to me. Good stuff.

  38. greenfrog
    January 12, 2005 at 4:11 pm

    Adam Greenwood wrote: So, you’re suggesting that no rational legislator could have concluded that God should get priority and that, in our country, 10% was customary (15% as a cushion)? I flatly disagree.

    Funny. So do I.

    My point, instead, was that if the solution were based on an existing principle of law, rather than being a special interest exception, it wouldn’t be limited to 15%, since I’m not aware of any principled reason to exempt donations of 15% of one’s income to God, but not 18%, 27%, 83% or 100%. Custom? Hardly. Take a look at customary donation levels within the US and explain why the exception applies to 15% rather than 2%.

    Sen. Hatch was doing a political favor to the Church, and he managed to get enough support for it from his sister and brother legislators to enact it. That’s the way politics works. Trying to stuff that political peg into a hole defined by pre-existing legal rationales is pointless, IMO. It’s a one-off. They happen all the time.

    My awkward point about UCC law wasn’t based on the mistaken assumption that bankruptcy law and UCC law are one and the same. Instead, what I had in mind was what might happen if a judge were to mistakenly try to “rationalize” the exception under discussion by discerning a principle of general applicability from the exception. If such a misguided judge were to attempt it, and were to conclude some kind of super-priority for limited amounts allocated to God, then the same misguided judge might conclude that such principle applies in realms related to, but not governed by, the Bankruptcy Code.

    It was a strained point, and my presentation of it was probably sprained, so take it for the little it was worth.

  39. Adam Greenwood
    January 12, 2005 at 4:19 pm

    You say that you also flatly disagree, but then you turn around and say that if if were rational, the number would not be 15% (but rather 0% or 100%?). Please explain.

  40. January 12, 2005 at 4:33 pm

    “My awkward point about UCC law wasn’t based on the mistaken assumption that bankruptcy law and UCC law are one and the same. Instead, what I had in mind was what might happen if a judge were to mistakenly try to “rationalizeâ€? the exception under discussion by discerning a principle of general applicability from the exception. If such a misguided judge were to attempt it, and were to conclude some kind of super-priority for limited amounts allocated to God, then the same misguided judge might conclude that such principle applies in realms related to, but not governed by, the Bankruptcy Code.”

    Hypothetical please. The only thing I can think of is if you bring an action under state fraudulent conveyance law, and argue that there was an exchange of equivalent value and point to the Bankruptcy Code in support. I think that there were actually some people who made this argument prior to the amendment and one or two courts accepted it. (Very, very, very foggy recollection here; no warranties of any kind.)

    The jurisprudential question is whether or not public choice analysis of the kind that you are adopting exhausts the possibility of legal theory. First, you are are overly pessimistic when you claim that nothing but special interest pandering could possibly justify the law. This seems like a silly and unnecessary exageration. On a deeper level, there is the question of whether or not an accounting of laws origins necessarily negates the need to account for its authority. Raz makes the interesing point that in order to understand law as intelligible order one must understand its authority, that is understand that law is analytically different than a simple matter of interests, threats and force. If Raz’s analytic claim is correct (and it is controversial to be sure) then providing a political account of a laws origin never fully accounts for the law. There will always be an important part of the phenomena of “law” — namely its authority — that will be left unanswered by such a political account.

  41. Frank McIntyre
    January 12, 2005 at 6:06 pm

    Interior solutions (15% instead of 0% or 100%) are often the result when one is weighing two competing claims. The benefits start dropping and the costs start rising, and so the optimal response is something in the middle. 15% could respresent such a tradeoff, because it recognizes the importance of some exemption but also recognizes the fear that gifts of 100% are really just cover for some form of fraud, so the law rules out extremely high charitable contributions. Very few people make regular charitable contributions over 15%, so such a limit would let in all the legitimate exemptions but provide a defense against fraudulent ones.

    By the way, greenfrog, I got your email about the single gendered presidencies thing. But my reply bounced back to me. I guess I had a bad email address.

  42. Mark B
    January 12, 2005 at 6:42 pm

    Perhaps the history of the law of fraudulent conveyances would shed some light on this issue. I would expect that the greatest concern for creditors isn’t the debtor who gives all his property away without adequate consideration just prior to bankruptcy. The greatest concern would be debtors who do that, but then continue to enjoy the use of that property after bankruptcy. In the first instance, the creditors would lose their right to a portion of the property, but the debtor would have nothing. In the second case, the creditors would again lose their rights, but the debtor would have the same assets he had before the bankruptcy. Thus he has worked a fraud on the creditors, for his own benefit.

    A gift to charity has none of the elements of this second type of transfer. Whatever good feelings the debtor has from his charitable gift, he receives no monetary reward, and does not enjoy the use of or income from his gift. The ownership and control of the assets given to the charity are completely within the charity’s control, and the likelihood of fraud is low.

    (Of course, if a private foundation were the charity, and the debtor an executive with the foundation, then the likelihood of fraud rises.)

  43. January 12, 2005 at 7:02 pm

    Mark B.: This is actually an interesting way of looking at things. Let me tweak the story a little bit. The law of fraudulent conveyances is a bit of misnomer (IMHO) because it assumes the answer to one of the big questions in this area: Are we concerned about fraud? There are two ways of thinking about this body of law:

    First, you can think about it as a way of getting at sneaky debtors who are out to screw their creditors. My understanding is that this has historically been the dominate theme. It has manifested itself in the law in terms of scienter requirements. You have had to show that the transfer was made with the intent to defraud creditors.

    The second way of thinking about fraudulent transfers has nothing to do with fraud, but rather with the nature of property rights. The baseline assumption of the private law is that contract does not alter property. One can enter into agreements but those agreements do not place legal limits on your ability to dispose of property. Rather, contracts create liability, that is they create debts not rights to particular property. Hence, my obligation to pay you $1000 places no legal restrictions on my ability to spend my money as I see fit, even if my actions result in a breach of contract. However, once a debtor enters insolvency, one might claim that this right to control property “absolutely” diminishes. At this point, the law will intervene to protect your creditors. My understanding is that this is the approach taken by the Uniform Fraudulent Conveyances Act as well as the fraudulent convenaces provision of the bankruptcy code. They dispense with the traditional intent requirement, and look only to the solvency of the debtor. (This is an oversimplification since the bankruptcy code actually adopts both approaches simultaneously.)

    Return now to the question of exemptions for gifts to religious institution. Perhaps this is best thought of as enshrining a certain hierarchy of property rights. Insolvency, we say, will invalidate certain property rights, but not others. This suggests a certain teleological hierarchy in our property rights. Depending on the ends towards which we direct our property, our rights can become more absolute. Hence, your right to dispose of your property for religious purposes enjoys greater protection than your right to dispose of your property in other ways.

  44. greenfrog
    January 13, 2005 at 9:07 am

    I may (arguably) have something useful to say in response, but I’m lost with the reference to Raz (and wikipedia doesn’t seem to be responding at this moment). Any help on whom you’re referring to (assume I haven’t been in law school for 15-20 years and am unread when it comes to political and legal theory materials)?

  45. January 13, 2005 at 9:42 am

    Sorry to be obscure. I am referring to Joseph Raz. The modern analytic philosophy of law begins with HLA Hart’s _The Concept of Law_. Hart is responding largely to the 19th century English philsopher John Austin who argued that law consisted of commands backed by threats. Hart shows that for a variety of reasons that Austin’s theory of law cannot adequately explain or account for it. Among other things, he argued that Austin’s theory cannot account for what he (Hart) called the “internal perspective of law.” Hart pointed out that for those who are particpating in the law it offers more than simply commands and threats; it offers reasons for engaging in particular actions. Joseph Raz was a student of Hart’s at Oxford who built on this point. He argued that any adequate explanation of the law must account for the fact that law is analytically different than say a highway robber. (This is simply a restatement of Hart’s attack on Austin.) He argued that what accounted for this difference was authority. The law has authority in a way that a mugger does not, even though both of them will back up their commands with force if necessary. From this Raz concluded that any adequate account of the law must also account for its authority. Raz is not a natural lawyer. He does not claim that immoral or stupid laws are not “really” laws, but he does assert that any theory of law must have a component that is recognizably moral, in the sense that it provides an account for the law’s authority. This moral compenent needn’t be ultimately persuasive in the sense of being a good moral theory. For example, suppose that we are providing an account of the Nuremburg Laws of Nazi Germany, which created all sorts of civil and criminal disabilities for Jews and other non-Aryans. Raz’s theory would require that we provide a moral account of these laws in order to make sense of their authority. Hence, we might point to theories about how Jews are racially inferior and ought to subjugated to Aryans. Now, you and I regard these sorts of theories of racial superiority to be morally repugnent, but they are identifiable as moral theories in a way simple threats are not. Hence, these theories might provide an analytic account of the authority of the Nuremburg Laws even though we conclude that those laws were ultimately illegitimate and wicked.

    Now apply Raz’s reasoning to cheap realism. Suppose that we are inclined to say that law is nothing but the will of the stronger (shades of Thracymachus here). Cast in the language of public choice, we say that law is simply the outcome rent seeking and special interest pleading in the political marketplace. Now it may be that these theories provide a good historical account of where a particular law came from. (Of course, they may not. This is an emperical question.) However, it doesn’t follow that these theories provide a complete or adequate account of the law. Indeed, their failure to account for the authority of law suggests that they completely miss a vital component of the phenomena they purport to explain. Hence, dismissing attempts to account for something like 11 U.S.C. 548(a)(2) in moral terms as nothing more than a woolley headed refusal to understand the political realities misses the point of the discussion. This dismissal rests on a kind of conceptual category mistake. It mistakenly assumes that analytic accounts of the law are meant to provide historical explanations of it; and that historical explanations of the law can provide answers to the questions posed by the analytic theories. Both assumptions are, IMHO, false.

  46. greenfrog
    January 13, 2005 at 10:58 am

    Thanks for the quick tutorial. Can you recommend readings by Raz, so I can understand his concept of “authority”? I typically think of “authority” in a bifurcated sense — on the one hand, it means (to me) author-ity — that the hypothesized speaker is in a meaningful (if not necessarily literal) sense deemed to be the author of whatever is in question. From your description of Raz, this may be his concept, as well. On the other hand, I think of “authority” more in terms of finality than unity of conception — whether a concept makes sense or not, there is no further that one can go — rather like an arbiter of last resort.

    FWIW, I tend to think of the basic elements of human cognition as perception of data and assemby of the data points into patterns and arrays — whether conceptual, dimensional or temporal (or some combination of those). Certainly legal reasoning offered by courts fits such a model (even referring to something “fitting a model” is an example of the same process). I don’t intend to be understood to deny the utility of such a process, as it seems to me that such a process is practically inevitable. However (and here’s why I want to understand better Raz’s theory of authority that you’ve referred to), engaging in the process without consciously acknowledging that what we’re engaged in is post hoc creativity make it rather too easy to disregard the nooks and crannies of the particular datum we’re working with. I worry about that because sometimes when I craft a more-or-less useful legal model in my head, what I remember when I’m practicing law is not the peculiar facts of a particular case that fit the model, but rather the model itself. So when I encounter a legal model (such as the ones discussed above on this thread) that I think not only doesn’t account for a particular aspect of a case, but in fact would lead one to disregard (and then forget) some non-conforming aspect of a case, I find it more useful (i.e., more easily remembered correctly) to consider the case to be simply an exception to the existing model, than to think of it as consistent with an elaboration of the existing model.

    The models offered for this particular element of the Bankruptcy Code don’t seem to account, IMO, for the badly mistaken assumption that the 15% limitation was a proxy for a reasonable approximation of the typical upward boundary of charitable donations in the US. When I get a moment, I’ll do a more concerted web search (as I would imagine that this type of information may be readily available with a little attention), but I’m highly confident that the percentage of income represented by typical charitable donations by US residents is rather more on the order of low single digits.

    If I were to adopt the rationalizing (not a bad word in this context) models offered above, I’d either have to incorporate a significantly counter-factual assumption about donation rates in the US in order to remember the 15% limitation, or I’d have to remember the 15% limitation as an unexplained erratum to my model. For my mundane practical purposes, it’s easier for me to remember the more standard model of bankruptcy preferences that I think is relatively common ground and to remember this as a public choice exception to that model spawned by Orrin Hatch than to develop a model that incorporates some, but not all, aspects of the exception.

    Additionally, I personally find it easier (not sure why) to attribute unitary conceptions of authority to common law than I do to statutory law. In my experience, courts don’t often try to discern unitary authorial intentions based on a particular legislative statement in one area and then try to import the model into other statutory areas of law that don’t use the same or similar language. Because of that, the exercise in trying to conceptually model a set of rules that includes the exception under discussion seems unnecessarily artificial, and may (as I’ve outlined above) lead to less useful understandings of the law, rather than more useful ones.

    But, again, I need to read more of Raz, so any suggestions would be welcome.

  47. January 13, 2005 at 11:08 am

    See Raz, The Authority of Law. It is also probably not such a bad idea to read Hart’s The Concept of Law, since it more or less structures all of the current debates in English language philosophy of law.

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