The US Court of Appeals for the First Circuit has become the first Circuit Court to expressly allow bankruptcy trustees to recover from colleges tuition payments made by parents for their children if the parents subsequently file for bankruptcy.
The Trustee in DeGiacomo v. Sacred Heart University, Inc. sought the return of $64,000 in tuition from Sacred Heart as constructively fraudulent under Section 548 of the Bankruptcy Code and applicable Massachusetts law. The Trustee alleged that the tuition is recoverable because the parents, who eventually filed for bankruptcy, did not receive “reasonably equivalent value” in exchange for their payments. The underlying Bankruptcy Court found in favor of Sacred Heart in ruling “that a financially self-sufficient daughter offered them (the parents) an economic benefit."
The First Circuit reversed the decision of the Bankruptcy Court, emphasizing that the claw back laws “protect creditors from transactions undertaken by the debtor prior to bankruptcy proceedings which deplete the pool of assets that will eventually be available to satisfy the creditors' claims.” The Court reasoned that although the term ‘reasonably equivalent value’ is not defined in the statute, “it does not include intangible, emotional, and non-economic benefits,” and thus “the 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.” Because the tuition payments did not fall under any of the exceptions to Section 548 and the parents were under no obligation to make the tuition payments, the Trustee had the right to recover from Sacred Heart.
This has become a hotly contested area of bankruptcy law with some states even looking at amending their fraudulent transfer laws. For now, bankruptcy trustees armed with this decision will undoubtedly be going after colleges to recover tuition paid by insolvent parents on a growing basis.