Loan Paid Directly from Dept. of Educ. to Penn State Not a Fraudulent Transfer

Posted by NCBRC - June 12, 2017

A Parent Plus loan made directly from the Department of Education to Penn State University prior to the debtor’s bankruptcy filing is not a fraudulent transfer where the funds were never in the debtor’s possession and would not have been available to his creditors. Eisenberg v. Pennsylvania State Univ. (In re Lewis), No. 16-12372, Adv. Proc. Nos. 16-0282, 16-0284 (Bankr. E.D. Pa. April 7, 2017).

Prior to filing chapter 7 bankruptcy, the debtor, Daniel Lewis, signed for two loans through the Department of Education’s Parent Plus program to pay tuition and other qualified educational benefits for Mr. Lewis’s two children to attend Pennsylvania State University. The payments were paid directly from the Department of Education to Penn State.

The trustee filed an adversary complaint arguing a “relatively new legal theory” under which he sought to recover the payments to Penn State as fraudulent transfers under both the Bankruptcy Code and the Pennsylvania Uniform Fraudulent Transfer Act (PUFTA).

The court denied the motion.

The court reasoned that to avoid a fraudulent transfer under either the Code or PUFTA, the trustee must show that the debtor had an interest in the property transferred which would have made the property part of the bankruptcy estate had the transfer not occurred.  The underlying purpose is to prevent a debtor from hiding funds that would otherwise be available to pay his creditors. In this case, the Parent Plus loan program was governed by the Higher Education Act and, by operation of the program, the funds were accessible only by Penn State. The funds were never in Mr. Lewis’s possession, and would not have been available to his creditors at any time. Permitting the trustee’s avoidance of the transfers would essentially treat the fraudulent transfer provision as a method of revenue generation rather than righting the balance between debtors and creditors.

The court also agreed with Penn State that even if the funds were deemed to have entered the bankruptcy estate, “A parent’s payment of a child’s undergraduate college expenses is reasonable and necessary expense for maintenance of the family and for preparing family members for the future. The parent therefore receives reasonably equivalent value in exchange for the tuition payment.”

Finding that neither Mr. Lewis nor his estate held an interest in the proceeds from the loans, and that Mr. Lewis received reasonably equivalent value in exchange for the transfers, the court concluded that no fraudulent transfer occurred.

At the end of the opinion, as an alternate examination of the issues raised by the complaint, the court listed several ramifications of successful prosecution of the trustee’s position. These issues are:

“1. If the Trustee is successful, does someone owe Penn State the avoided tuition?

  1. Under any result in this litigation, does Mr. Lewis owe the bank non-dischargeable Debt?
  2. What happens if PSU files a claim against Mr. Lewis?
  3. Does Mr. Lewis face BOTH (1) non-dischargeable liability to the bank for the loans AND (2) the avoided tuition payments owed to PSU?
  4. Can PSU somehow bootstrap the status of the bank and have the debt be non-dischargeable?
  5. If Debtor’s debt to PSU is dischargeable or uncollectible, can PSU undertake collection efforts against Mr. Lewis’ son and daughter?
  6. Does that make Mr. Lewis and his son and daughter necessary parties who must have been joined in the complaint as party defendants?
  7. Can PSU refuse to give Mr. Lewis’ son and daughter transcripts, etc, until paid in full by someone for all money avoided by the Trustee?”

Lewis Bankr ED Pa opinion April 2017

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