Avoidability of Tuition Payments Depends on Timing

Posted by NCBRC - December 12, 2018

Once tuition funds became non-refundable, the universities receiving the funds would be considered initial transferees and the transfers would be subject to avoidance under section 550(a). Pergament v. Brooklyn Law School, Nos. 18-2204, 18-2235, 18-2236 (E.D. N.Y. amended opinion Jan. 4, 2019).

In three adversary proceedings, the Chapter 7 Trustee, Marc Pergament, sought to recover tuition payments the debtor, Harold Adamo, made for his children’s education in three universities. The bankruptcy court found that the trustee could not avoid the transfers because the institutions were subsequent transferees who took in good faith under section 550(b).

On consolidated appeal, the institutions’ good faith was not in question. The only question was whether they were initial transferees, in which case, under section 550(a) good faith would be irrelevant to avoidability of the transfer.

The law in the second circuit is that “[a] party is not an initial transferee if it was a mere conduit of the funds.” Rather, “an initial transferee must exercise dominion over the funds at issue and be able to put them to his own purposes.”

Applying this test, the district court drew a distinction between the tuition payments that were refundable to Mr. Adamo’s children, and those payments that were no longer refundable. Without making the factual determination as to when certain payments became non-refundable, the court noted that once the student registered for classes and the withdrawal period had lapsed, it appeared that they could not obtain a refund of their tuition payments. Once the tuition payments became non-refundable the institutions had immediate dominion over the funds and could be called “initial transferees.”

The court rejected the trustee’s argument that, because they had an obligation to use the funds for tuition only, the children were mere conduits of the funds and could not be deemed intermediary transferees. The court found that while there may have been an understanding between the children and their father as to the funds’ use, the children had no legal obligation to return unused tuition to their father. Even if they did have that obligation, however, the court found that the children exercised dominion over the funds by being able to choose whether to apply them to their college fees or not. The court found that the only conduit involved in the transactions at issue were the institutions because they were the recipients of funds which, until the funds became non-refundable, they had no control over.

On the other hand, timing was everything. Once the funds became non-refundable the institutions would be the initial transferees because they would have the right to exercise immediate and complete control over the funds.

(Upon reconsideration, the court amended its opinion to clarify as follows: “The previous version of this opinion could have been read to suggest that I had found that registration for classes marked the point after which any payments would be nonrefundable. See Mot. for Rehr’g 2–3, ECF No. 15. As should now be clear, I make no finding as to when each school’s tuition payments were refundable or nonrefundable. That factual question was not briefed on appeal, and I express no opinion on it.”)

The district court remanded to the bankruptcy court with instructions to make the factual findings necessary to determine proper treatment of the tuition payments.

Pergament ED NY amended opinion Jan 2019


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