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Clawing Back Tuition Payments

posted by Dalié Jiménez

Are tuition payments for an adult child's education, while the parents are insolvent, constructively fraudulent? As the WSJ reported this week, Bankruptcy Judge Hoffman (D. Mass.) recently held that they are not. But other courts have disagreed. In fact, there seem to be courts on both sides of this (although apparently, no circuit decisions yet).

In this latest case, In re Palladino, the debtors made tuition payments for their adult daughter's college education. There was no question that the debtors were insolvent when they made payments or that they did so within the last two years. The only question was whether the debtors received "reasonably equivalent value" (REV) under section 548 of the Bankruptcy Code (and Massachusett's UFTA). That section defines value as "property, or satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor." 548 (a)(2)(A). Courts have interpreted REV as requiring an economic benefit, which could be indirect, but has to be "concrete" and "quantifiable."

Here, the court explained that

[The Palladinos] believed that a financially self-sufficient daughter offered them an economic benefit and that a college degree would directly contribute to financial self-sufficiency. I find that motivation to be concrete and quantifiable enough ... A parent can reasonably assume that paying for a child to obtain an undergraduate degree will enhance the financial well-being of the child which in turn will confer an economic benefit on the parent. This, it seems to me, constitutes a quid pro quo that is reasonable and reasonable equivalence is all that is required.

Opn. at 8 (emphasis mine).

That is all well and good, but it seems to me completely ignores the definition of "value" in the statute as well as the fact that the Palladinos' have no legal obligation to support their adult daughter. I can understand the desire for this result. A rule where trustees can claw back parents' tuition payments just by proving the parents were insolvent at the time could make things complicated for colleges and universities. Especially since most require parents to pay something towards their (adult) children's education. And that something could be quite substantial (in the Palladinos' case, $64,696.22).

It could also be quite problematic for the student. Schools that are forced to return tuition payments may not allow the student to re-enroll or might even sue her to collect. Such a rule might even make some parents thinking of filing bankruptcy think twice before doing so, perhaps delaying (by 2 years after the last tuition payment) what could otherwise be a very necessary fresh start.

I get it. But still, it doesn't seem to me that that the statue permits this kind of "enhancement of well-being" of a child to be enough. And how far does it go? One court agreeing with the rule in this case expressly limited their holding to undergraduate tuition payments, finding that "children in graduate school are well into adulthood."

What say you, readers? Should the courts retain this "practical" rule? Or do you agree that the kinds of benefits parents get from their children attending college are concrete and quantifiable enough that the parents receive REV when making them? If so, does graduate tuition count? What about making a down payment for an adult child's first home? Wouldn't that also "enhance the financial well-being of the child which in turn will confer an economic benefit on the parent"?

 

Comments

Students who receive no support from their parents are forced to find out and report their parents income when applying for financial aid. This is true even if the parents refuse to share that information with the student.

The federal student aid program effectively makes it a requirement that parents pay for the undergraduate education with few exceptions ( like student is a parent).

Because of this I would say that this is a great ruling. If the parents want their child to go to college, they have to pay. This reality should be recognized in bankruptcy court.

I'm thinking of where this could go if courts end up having to define "reasonably equivalent value".

Seems like an issue that both political parties could agree on and could be resolved by a Code amendment, like was given to charities. I.e. undergraduate college tuition payments representing X% of parents income cannot be clawed back.

As the law is today, I think that they are subject to avoidance.

In general, any creditor who is receiving voluntary payments from a third party not liable on the debt is at risk, despite the blamelessness of the creditor. I once had to explain that to a bank client whose borrower had been making home mortgage payments from a corporate account, and the corporation filed Ch. 11.

The difference is that with tuition, the university's contract is nominally with the student but no one expects that the student is going to make the bulk of the payments. How you fold that expectation into fraudulent transfer law is an interesting question. It's arguably an unintended consequence of reducing the age of majority from 21 to 18.

One other factor to consider is whether the parents have a duty under state law to fund a college degree for their kids if the are able. That varies from state to state. In some situations it has led to a bizarre dichotomy where children of divorced families can compel a parent to pay tuition but children of happily married parents cannot (although, wasn't there a case a few years ago of a child suing her parents in precisely that situation?). But, in any event, if the parent is discharging a legal duty, not just an "unperformed promise to furnish support" which implies a gratuitous promise, should that make a difference under the fraudulent transfer laws?

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