Banking and Financial Services Sections

Appeal Pending in Bankruptcy Case Regarding Tuition Payments

A Matter to Watch

By Steven Weiss

Steven Weiss

Steven Weiss

One of the biggest priorities for parents of college-age students is paying tuition. While it is not a legal obligation (at least in Massachusetts) to provide education and support to children over 18, many feel a strong moral obligation to do so.

What happens, however, when parents pay a child’s (often substantial) college tuition, but at a time when they can’t pay their own debts and end up in bankruptcy? Can the bankruptcy trustee recover the tuition payments from the university so the payments can be distributed to the parents’ creditors?

Bankruptcy courts across the country have been wrestling with this issue, with inconsistent results. A recent Massachusetts case involving a trustee’s efforts to recover tuition payments is drawing national attention and may ultimately reach the Supreme Court.

The case pits the well-established rights of trustees in bankruptcy to recover funds for creditors, against colleges and universities, who claim it is fundamentally unfair to be required to repay tuition payments made for debtors’ children.

In DeGiacomo v Sacred Heart University, the parents had paid more than $60,000 in tuition payments for their daughter to attend Sacred Heart University (SHU). However, at the same time they were making these payments, they owed millions of dollars to their creditors; worse yet, those debts were the result of a Ponzi scheme perpetrated by the parents.

When they filed for Chapter 7 bankruptcy relief, the trustee in their case filed suit against SHU, seeking to recover the tuition payments made within four years as fraudulent transfers. Under state and federal fraudulent-transfer statutes, the trustee does not need to prove the payments were actually intended to defraud creditors; the transfers are “constructively fraudulent” if they were made while the debtors were insolvent and for which the debtors did not receive “reasonably equivalent value.”

It was on whether the parents received “reasonably equivalent value” that the case turned. There was no question that the parents were not legally obligated to pay their daughter’s tuition. Thus, the trustee argued that they did not receive any legally recognizable value for the payments, and that satisfying a “moral” obligation to provide for their non-minor daughter’s education was not of any direct or sufficiently quantifiable economic benefit to the parents, and certainly of no benefit to their creditors.

SHU, with the support of the debtors, opposed the trustee’s arguments. They pointed out that, while the parents may not have been legally obligated to pay tuition, their daughter was classified as a ‘dependent’ on both the debtors’ tax returns and on college financial-aid applications. More importantly, SHU asserted that the debtors did in fact receive economic consideration for the payments. By paying for their daughter’s education, the university argued, the parents ensured that she would become more financially independent, less likely to be a drain on her parents’ financial resources, and more likely to care for them as they aged. Finally, SHU pointed out that society as a whole benefited from the payments.

Bankruptcy Judge Melvin Hoffman sided with the university. He wrote as follows: “I find that the [parents] paid [SHU] because they believed that a financially self-sufficient daughter offered them an economic benefit and that a college degree would directly contribute to financial self-sufficiency. I find that motivation to be concrete and quantifiable enough. The operative standard used in [the fraudulent conveyance statutes] is ‘reasonably equivalent value.’ The emphasis should be on ‘reasonably.’”

The trustee has appealed the decision. Recognizing the importance of this issue nationally, Hoffman took the unusual step of recommending that the appeal bypass the U.S. District Court and be heard directly by the First Circuit Court of Appeals. The case has drawn national attention.

In addition to briefs by the parties, amicus briefs have been filed by the National Assoc. of Bankruptcy Trustees and by a group of 20 organizations supporting colleges and universities. Briefing has been completed. Oral arguments are scheduled in October, and a decision is expected early next year.

Steven Weiss is a shareholder with the Springfield-based law firm, Shatz, Schwartz and Fentin, P.C.; (413) 737-1131.