Section 548(a)(1)(B) authorizes a trustee to avoid a transfer of an interest in property of the debtor under a theory of constructive fraud. That section provides:
The trustee may avoid any transfer . . . of an interest of the debtor in property, or any obligation . . . incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily – (B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and (ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
There is currently a split among the courts as to whether pre-petition school tuition payments can be avoided as fraudulent conveyances under §548(a)(1)(B). This issue has various permutations and can involve tuition for private schooling when a public education is available, or tuition for college when made for students over the age of 18.
Private School Tuition:
In In re Michel, 573 B.R. 46 (Bankr.E.D.N.Y.2017), the trustee commenced an adversary proceeding against the Trey Whitfield School by filing a complaint to avoid and recover tuition payments that the debtor made to the school for the school years beginning in 2011, 2012, and 2013. The trustee claimed that he could avoid and recover the tuition payments as constructive and intentional fraudulent transfers under Sections 548, 550, and 551 of the Bankruptcy Code and New York Debtor and Creditor Law Sections 273, 274, 275, 276, and 278, and also that they can be recovered from the school under a common law theory of unjust enrichment. Specifically, from September 1, 2011 until June 4, 2014, when minor child JM was between the ages of eight and eleven, the trustee alleges that the debtor made tuition payments totaling $15,385 to Trey Whitfield for the child’s education.
The court dismissed the action. In doing so, it noted that “it is axiomatic that parents are obligated to provide for their children’s necessities, such as food, clothing, shelter, medical care, and education.” Id. at 60 (citing to Geltzer v. Xaverian High School (In re Akanmu), 502 B.R. 124, 132 (BankrE.D.N.Y.2013)). In addition, the court noted that New York state law requires parents to ensure school attendance by their child. Further, a parent’s failure to observe minimum standards of care in performing these duties entails both remedial sanctions, such as the forfeiture of custody, and criminal sanctions. Therefore, it was implausible to suggest that a parent does not receive some value in exchange for tuition payments in connection with meeting these obligations. Id.
The court went on to note that it is not necessary that a debtor acquire goods or services at the lowest cost, or no cost at all, before his or her bankruptcy case is filed:
It is irrelevant to this determination whether the Debtors could have spent less on the children’s education, or, for that matter, on their clothing, food or shelter. To hold otherwise would permit a trustee to scrutinize debtors’ expenditures for their children’s benefit, and seek to recover from the vendor if, in the trustee’s judgment, the expenditure was not reasonably necessary, or if the good or service could have been obtained at a lower price, or at no cost, elsewhere. … The absurdity of this scenario is obvious.
Id. at 60 (quoting to Xaverian, 502 B.R. at 132).
The court then quoted from Balaber–Strauss v. Sixty–Five Brokers (In re Churchill Mortg. Inv. Corp.), 256 B.R. 664, 681 (Bankr.S.D.N.Y.2000) (quoting Martino v. Edison Worldwide Capital (In re Randy), 189 B.R. 425, 441 (Bankr.N.D.Ill.1995)), aff’d sub nom. Balaber–Strauss v. Lawrence, 264 B.R. 303 (S.D.N.Y.2001) as follows:
Often, a debtor prior to bankruptcy will make improvident purchases or expenditures which have a detrimental effect on creditors and may even be the precipitating cause of bankruptcy. A spendthrift debtor may purchase clothes or a new car, take costly vacations on credit, or otherwise incur unpayable debts for goods or services. The fact that all these transactions may be said to “exacerbate the harm to creditors and diminish the debtor’s estate” from an overall perspective does not mean that the debtor received less than reasonably equivalent value in respect of each particular transaction.
Id. at 60-61.
Michel stated that the debtors and her minor children must be viewed as a single economic unit and so goods and services purchased by the debtor for her minor children should generally be treated, for purposes of constructive fraudulent conveyance analysis, as though they had been purchased by the debtor for herself. Finally, the court agreed that it was simply not part of a Chapter 7 trustee’s portfolio of duties to exercise a “veto power over a debtor’s personal decisions, at least with respect to pre-petition expenditures.” Id. at 61.
College Tuition:
In Gold v. Marquette University (In re Leonard), 454 B.R. 444 (Bankr.E.D.Mich.2011), the court ruled that debtors did not receive “value,” and thus did not receive “reasonably equivalent value,” for prepetition transfers made to a university to pay for their adult son’s tuition. The court concluded that the debtors received no concrete and quantifiable economic benefit from paying son’s tuition, and had no duty under Michigan law to pay son’s college education.
Similarly, in Banner v. Lindsay (In re Lindsay), 2010 WL 1780065 (Bankr.S.D.N.Y.) the court held that such tuition payments were avoidable as constructively fraudulent transfers, concluding that the debtor presented no evidence of a legal obligation to pay his son’s college tuition. Without that evidence, the court concluded that “the debtor did not receive fair consideration.” Id. at * 9-10.
Matter of Dunston, 566 B.R. 624 ((Bankr.S.D.Ga.2017) followed this line of cases. The court recognized that the debtor may feel a moral obligation to pay for their child’s college education and help her to achieve financial independence. “However, I find that the satisfaction of such moral obligation does not provide an ‘economic’ benefit to the Debtor. By paying for her daughter’s tuition, the Debtor did not discharge or satisfy any legal duty or obligation to do so, nor did she increase her assets in any way that could be used to pay her creditors. Because [no] . . . evidence [was provided] of an “economic” benefit conferred on the Debtor, it is not entitled to summary judgment as to any of the Transfers on the basis that the Debtor received “reasonably equivalent value” in exchange for the Transfers.” Id. at 637.
On the other hand, in Shearer v. Oberdick (In re Oberdick), 490 B.R. 687, 712 (Bankr.W.D.Pa.2013) where the court held that funds paid for undergraduate college tuition for a debtor’s children constituted expenditures for necessities that were therefore not avoidable under Pennsylvania’s UFTA.
In In re Fisher, 575 B.R. 640 (Bankr.M.D.Pa.2017), the trustee filed a complaint which alleged that, within two years of the Petition date, the debtor made tuition payments to Pennsylvania State University on behalf of her adult son. The complaint also alleges that the tuition payments, totaled approximately $5,827.72, and were allegedly recoverable as fraudulent transfers pursuant to the provision of the Bankruptcy Code.
The only real issue was whether the debtor received reasonably equivalent value for the tuition payments. In evaluating this issue, the court quoted from In re Lewis, 574 B.R. 536, 541 (Bankr.E.D.Pa.2017), where the court concluded:
A parent’s payment of a child’s undergraduate college expenses is reasonable and necessary expense for maintenance of the family and for preparing family members for the future. The parent therefore receives reasonably equivalent value in exchange for the tuition payment.
The court stated that it agreed with Lewis’ conclusion concerning reasonably equivalent value, but only to a limited extent. It conclude that the debtor received at least some intangible value in exchange for the tuition payments, in that the debtor was now less worried about her son’s future economic prospects. However, the court needed more of a record, explaining that there were still unanswered questions. In particular, the court inquired as follows: Has the Debtor’s son graduated? If so, in what is his degree? Is he presently employed? If so, what is his position and does it require an undergraduate *648 degree? Is the Debtor currently providing any financial support to her son? Id. at 648.
Matthew T. Gensburg
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