Bankruptcy trustees:  “Thank you First Circuit!  We love it!  I will cherish this gift forever.”

 

We here at the Global Restructuring & Insolvency Developments (GRID to our friends) have been following the tuition clawback wars for a few years – the cases in which a bankruptcy trustee sues a college to return tuition that the bankrupt parent paid for  their child when the parent was otherwise stiffing other creditors.  It is a textbook constructively fraudulent transfer because the parent(s) do not receive reasonably equivalent value (or anything, for that matter) for the payment of the kid’s tuition.  Our prior coverage is here and here.  (And for those of you who want to really geek out on this, here’s a video of an entire symposium panel on the topic, from our friends at the Emory Bankruptcy Developments Journal.)

Anywho, yesterday the First Circuit decided the long-awaited appeal in DeGiacomo v. Sacred Heart University (In re Palladino).  Feel free to click on the prior link, but spoiler alert – its very short, doesn’t add much to the analysis or debate, and the trustee won.

Nothing special about the facts (although the debtor parents pled guilty to taking part in a Ponzi scheme – it didn’t matter for the ruling but is a curious fact).  Parents paid $64,000 in college tuition to Sacred Heart on behalf of their 18 year old daughter.  Parents filed bankruptcy after the Ponzi scheme blew up.  Trustee sued Sacred Heart for receipt of a transfer (the tuition) for which Sacred Heart provided no value to the Palladinos or their eventual bankruptcy estate.

Bankruptcy court ruled in favor of Sacred Heart, buying the argument that a well-educated child could provide “reasonably equivalent value” by future self-sufficiency and non-reliance on the parents.

The First Circuit would have none of it.  In a very short opinion, the First Circuit held nothing of direct value flowed to the parents (or their unpaid creditors) due to the daughter’s ability to go to college.  The First Circuit took a textual approach, noting that Congress has specifically excluded certain transfers from the fraudulent conveyance regime  – and none of those exclusions have anything to do with a child’s college tuition.  Supporting a family member may be worthy, and laudable, but a court can’t render such a payment immune in the face of unpaid creditors, and a clear fraudulent conveyance statute.

And that’s it.  The trustee and higher ed communities had been waiting a while for this ruling.  Certainly a leg up for trustees as they continue to seek recovery for creditors.  And a further annoyance for colleges stuck in the middle (after all, why aren’t the kids being sued by the trustees in all of this?).  But regardless of the fairness, this is a completely correct ruling on the letter of the law.