CURRENT MONTH (November 2019)

First Circuit Rules That Parents’ Payment of Adult Child’s College Tuition is Subject to Claw Back

By Edward M. Fitzgerald

In individual bankruptcy cases where the debtor has made college tuition payments on behalf of an adult child, trustees will often attempt to recover those tuition payments from the college under the theory that they are constructively fraudulent transfers.  11 U.S.C. § 548(a)(1) allows trustees to avoid transfers made by insolvent debtors within two years preceding their bankruptcy filings if the debtors did not receive “reasonably equivalent value” in return.  The underlying concept behind these trustee avoidance actions against colleges and universities is that the debtor’s estate received nothing of direct value for the tuition payments, and the payments depleted the estate of assets that could have otherwise been distributed to creditors.  In opposition, the colleges and universities targeted by these claims argue that the debtor parents do receive value from the payments in that paying for their child’s college education enhances the child’s financial well-being, which in turn confers an economic benefit on the parent.  This issue has divided several courts, and now the First Circuit Court of Appeals has officially entered the debate with its decision in DeGiacomo v. Sacred Heart University (In re Palladino), 2019 WL 5883721 (1st Cir 2019), which gives a favorable ruling for trustees and holds that a debtor’s pre-bankruptcy payment of college tuition for an adult child is subject to avoidance as constructively fraudulent transfer.  In this case, the daughter of the debtors attended Sacred Heart University.  From March 2012 through March 2014, the debtors paid approximately $65,000 in tuition payments to Sacred Heart University on her behalf.  In April 2014, the debtors filed their chapter 7 bankruptcy petition.  In 2015, chapter 7 trustee , Mark G. DeGiacomo, filed an adversary proceeding against Sacred Heart University seeking to claw back the debtor’s tuition payments as fraudulent transfers.  The bankruptcy court granted summary judgment in favor of Sacred Heart, ruling that a financially self-sufficient daughter offered the debtors an economic benefit, and then certified its own decision on the issue to the First Circuit Court of Appeals.  In issuing its ruling, the First Circuit rejected the bankruptcy court’s opinion that the tuition payments conferred a benefit on the debtors.  The First Circuit stated that “the tuition payments here depleted the estate and furnished nothing of direct value to the creditors who are the central concern of the code provisions at issue.”  Relying on statutory textualism, the First Circuit found that the tuition payments could not have conferred any value under 11 U.S.C. Section 548(d)(2)(A), i.e. that there was no exchange of property, payment of a current or prior debt, or collateralization of a current or prior debt.  This decision will no doubt be cited by trustees across the country in support of future similar avoidance actions against colleges and universities. 

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