“Reasonably equivalent value” – – part of the standard for evaluation of potential constructive fraudulent transfers – – is both subjective and imprecise. The words “equivalent value” require the court to make a subjective judgment whether consideration received in exchange for a transfer is worth the same as the consideration transferred by the debtor. And the considerations exchanged by the two parties are necessarily of differing characters. A transaction may involve the exchange of money for a tangible asset or for services. In that event, at least one side of the bargain has a recognized and relatively objective value. However, even in those instances, the court must make a subjective judgment as to the value of the non-monetary side of the transaction. It becomes even more complicated when both sides of the exchange are open to subjective conclusions as to their value.
A further complication comes from the addition of the modifier “reasonably” to the test applied. The court is not finished when it reaches its subjective conclusion regarding the value of the two sides of the exchange. The court must then decide how much of a difference in the relative values of the exchanged consideration is reasonable. Is a 10% difference “reasonably equivalent?” And if so, at what point does a greater variation cease to be “reasonably equivalent?”
The ultimate result of these three slippery words is that we are often left with an inconsistent landscape for decisions involving similar fact patterns. The courts struggle to apply the words of the statute and the variations in outcome leave us without any clear guidance. A prime example of this varying landscape involves cases where a trustee seeks to recover tuition payments made by a debtor parent on behalf of a child.
In DeGiacomo v. Sacred Heart University, Inc. (In re Palladino), Adv. Pro. No. 15-01126, 2016 Bankr. LEXIS 2938 (Bankr. Mass. Aug. 10, 2016), the debtor parents paid about $65,000 in college tuition on behalf of their adult daughter. The bankruptcy trustee sought to recover that amount from the college, arguing that the parents had no legal obligation to provide a college education for their daughter. The trustee also argued that any emotional benefit the debtors received as a result of the payment was not sufficiently “concrete” or “quantifiable” to qualify as “value” for purposes of the statute. In response, the college offered the testimony of the debtor mother that she felt obligated to pay tuition for her daughter and that she also felt a college education would help the daughter to become economically self-sufficient.
The Court began by noting that “[e]thereal or emotional rewards, such as love and affection, do not qualify as value for purposes of defeating a constructive fraudulent conveyance claim.” However, the court found the trustee’s effort to completely dismiss the debtor mother’s testimony to be “overly rigid.” The court focused on the undisputed testimony that the mother believed that a college education would help make her daughter financially self-sufficient, a result that would be an economic benefit to the parents. The court accepted that evidence as “concrete and quantifiable enough” to provide value for fraudulent conveyance purposes.
The court also emphasized the notion of reasonable equivalence. The court found that future outcome and economic hindsight do not provide an appropriate standard for measurement, acknowledging that it is often difficult at the outset to know whether a particular payment “will turn out to have been ‘worth it.’” It accepted as reasonable the debtor’s testimony that she believed a college education would enhance the financial well-being of the child and thus confer an economic benefit. On that basis, the court dismissed the trustee’s complaint.
The DeGiacomo decision typifies the difficulty in applying the words “reasonably equivalent value.” The ruling necessarily turns on the court’s subjective judgment that the expenditures provided enough “concrete” and “quantifiable” value to avoid clawback as a fraudulent transfer. Another court presented with the same facts could as easily find that value absent or insufficient. And a reliance on the debtor’s expectations at the time of the transfer presents the risk of after-the-fact efforts to articulate a justifiable basis for a given decision.
The requirement of “reasonably equivalent value” presents another instance where one must necessarily rely on the judgment of the bankruptcy judge, based on evidence presented. The absence of objective guideposts provides an unavoidable risk, but also the opportunity for capable counsel to help provide a record to support their desired outcome.