PLUS Loan Proceeds Are Not Debtor’s Property and Transfer Cannot Be Avoided

Posted by NCBRC - June 22, 2018

The chapter 7 trustee could not avoid transfers of PLUS Loan funds to the University where the debtors’ daughter was enrolled because the debtors, who applied for and obtained the loans, had no property interest in the funds. Roumeliotis v. Johnson & Wales University (In re DeMauro), No. 14-32312, Adv. Proc. No. 15-3011 (Bankr. D. Conn. June 19, 2018).

The chapter 7 trustee, George Roumeliotis, sought to avoid eight payments totalling $46,909.00 made to Johnson & Wales University for debtors, Robert and Jean DeMauro’s, adult daughter’s tuition and education expenses. All of the payments consisted of Federal Direct Parent PLUS Loan proceeds under the program established by the Higher Education Act and administered by the U.S. Department of Education. Pursuant to regulations, once the DeMauro’s were approved for the loan, the PLUS loan funds were deposited in a “G5 Portal” and the University withdrew the funds as they became due. The DeMauros had no access to the funds at any time and, in fact, swore to use the funds only for their daughter’s education expenses as a condition of receipt of the loan. Any unauthorized use of the funds would subject the DeMauros to criminal prosecution.

Citing sections 544, 548 and 550, the trustee filed an adversary proceeding in the DeMauro’s bankruptcy seeking to recover those funds from the University as constructive fraudulent transfers. Section 548 permits the trustee to avoid a transfer of property that would have otherwise been property of the bankruptcy estate, made within two years of the bankruptcy filing, if the debtor did not receive “reasonably equivalent value” for the transfer. Section 550 authorizes the trustee to collect the transferred property from the recipient. Section 544 allows the trustee to step into the shoes of a creditor and avoid any transfer that the creditor would have been entitled to avoid under applicable law. The trustee cited as the relevant law the Connecticut Uniform Fraudulent Transfer Act, a statute comparable to section 548 and applicable only to property of the debtor.

The case hinged on whether the PLUS loan funds constituted an interest in property belonging to the debtors. The court found they were not. To determine the DeMauros’ property interest, the court turned not to state law, but to the terms of the federal Higher Education Act. PLUS loans through the HEA are structured such that the funds go only to the University for payments of education costs. The DeMauros never possessed or controlled the funds and could never have used the funds for any purpose other than payment of their daughter’s higher education costs. There was never a time that the DeMauros’ creditors could have gained access to the funds.

The court stated, “A conclusion that the Direct PLUS Loan proceeds are property of the debtor for purposes of §§ 544 and 548 and therefore available for distribution to a debtor’s creditors would undermine the purposes of the HEA and disregard the parent-debtor’s lack of possession and control over the Direct PLUS Loan proceeds.” The court further noted that section 548 seeks to prevent the debtor from depleting assets that would otherwise be available to creditors. But here, the debtor never had any right to use the funds to pay his own debts, and the trustee could not have a greater interest in the funds than the debtors.

The court concluded that the debtors did not have a property interest in the funds and the trustee could not avoid the transfers or recover the funds from the University. The court granted the University’s motion for summary judgment.

DeMauro Bankr Conn June 2018


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