We at the BCLP Global Insolvency and Restructuring Developments (the GRID) continue to watch and cover the growing jurisprudence of trustees seeking to recover pre-petition tuition payments made by a debtor parent to support his or her child’s college education. Our prior posts can be found here and here. And in February, the Emory Bankruptcy Developments Journal’s annual symposium will have a panel on this topic (contact me or Lynne, below, in a couple months and we will send you our materials). Well, the party (or hangover??) continues.
Earlier today, Judge Glenn ruled that a debtor parent does not receive reasonably equivalent value, under either the Bankruptcy Code’s fraudulent transfer provisions or New York’s Debtor and Creditor Law, by paying for a adult child’s college tuition. The opinion is In re Sterman, and if you have not followed this fascinating effort to transfer money from America’s colleges and universities to the Chapter 7 bankruptcy system, Sterman provides a thorough – but succinct – summary of all the arguments pro and con on how a debtor may or may not receive “reasonably equivalent value” by paying an adult child’s college tuition. In short – the cases are not uniform, trustees coming out successfully at times and colleges winning other times. My good colleague Lynne Xerras of Holland & Knight, who has also written on this issue, reminded me recently that the First Circuit should be speaking to this issue very soon, in the appeal of DeGiacomo v. Sacred Heart Univ., Inc. (In re Palladino), 556 B.R. 10, 16 (Bankr. D. Mass. 2016). So we will keep up the coverage!
An interesting wrinkle in the second part of the opinion is the Court’s focus on the child’s age of majority – 21 in the state of New York. Because New York (like most or all other states) requires a parent to support a child, a parent’s educational payments to or for the benefit of the child prior to majority would not be recoverable, absent egregious conduct or actual fraud (the court hypothesized that a debtor making a lump sum payment of several years’ tuition in advance could be such an example of actual fraud committed on creditors).
The limits of the late evening and a desire to call it a night preclude any further analysis, but the links above, and Judge Glenn’s opinion, should give you all you need to be aware of and stay abreast of this continuing dispute.