Tuition Payments for Adult Daughter Subject to Claw Back

Posted by NCBRC - November 22, 2019

The chapter 7 trustee could use his strong-arm powers to “claw back” tuition payments the debtors had made for their adult daughter’s education. DeGiacomo v. Sacred Heart University, Inc. (In re Palladino), No. 17-1334 (1st Cir. Nov. 12, 2019).

Steven and Lori Palladino made college tuition payments for their adult daughter within two years of filing for chapter 7 bankruptcy. The bankruptcy trustee filed an adversary proceeding against Sacred Heart University seeking to recover almost $65,000 in tuition payments. Both the trustee and Sacred Heart filed motions for summary judgment and the bankruptcy court granted judgment to Sacred Heart. The First Circuit granted direct appeal.

On appeal, the trustee cited his authority to “claw back” the payments under the strong-arm powers conferred by section 544(a), which allows him to exercise the rights of a creditor in the case of a fraudulent or preferential transfer. The trustee argued that the tuition payments were constructively fraudulent under section 548(a)(1)(B). Under that section, fraud may be shown when a debtor makes payments to a creditor, while insolvent, within two years of filing for bankruptcy, and does not receive equivalent value in return. Bad motive is not an element of constructive fraud.

The case turned on whether the Palladinos received equivalent value from their tuition payments. The circuit court found that they did not.

The court began its analysis with the premise that equivalent value does not include emotional, intangible or non-economic benefits. In fact, the court found that, under the definition of “value” supplied in section 548(d)(2), reasonably equivalent value must be in the form of: “(1) the exchange of property; (2) the satisfaction of a present debt; (3) the satisfaction of an antecedent debt; (4) the securing or collateralizing of a present debt; and (5) the granting of security for the purpose of securing an antecedent debt.” It found that none of those itemized benefits were present in this case and noted additionally that the Palladinos had no legal obligation to make the tuition payments.

While acknowledging a split in the courts as to whether tuition payments meet the standard for establishing the receipt of reasonably equivalent value, the court here resolved the issue without difficulty, stating, “[t]he 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.” In the face of Congress’s indication of what constitutes value, the court found that the benefits received by the Palladinos do not fall within that definition.

The court reversed and remanded.

Sacred Heart 1st Cir Nov. 2019



Post a Comment

You must be logged in to post a comment.