Clawing Back Tuition Payments

Are tuition payments for an adult child's education, while the parents are insolvent, constructively fraudulent? As the WSJ reported this week, Bankruptcy Judge Hoffman (D. Mass.) recently held that they are not. But other courts have disagreed. In fact, there seem to be courts on both sides of this (although apparently, no circuit decisions yet).

In this latest case, In re Palladino, the debtors made tuition payments for their adult daughter's college education. There was no question that the debtors were insolvent when they made payments or that they did so within the last two years. The only question was whether the debtors received "reasonably equivalent value" (REV) under section 548 of the Bankruptcy Code (and Massachusett's UFTA). That section defines value as "property, or satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor." 548 (a)(2)(A). Courts have interpreted REV as requiring an economic benefit, which could be indirect, but has to be "concrete" and "quantifiable."

Here, the court explained that

[The Palladinos] 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 ... A parent can reasonably assume that paying for a child to obtain an undergraduate degree will enhance the financial well-being of the child which in turn will confer an economic benefit on the parent. This, it seems to me, constitutes a quid pro quo that is reasonable and reasonable equivalence is all that is required.

Opn. at 8 (emphasis mine).

That is all well and good, but it seems to me completely ignores the definition of "value" in the statute as well as the fact that the Palladinos' have no legal obligation to support their adult daughter. I can understand the desire for this result. A rule where trustees can claw back parents' tuition payments just by proving the parents were insolvent at the time could make things complicated for colleges and universities. Especially since most require parents to pay something towards their (adult) children's education. And that something could be quite substantial (in the Palladinos' case, $64,696.22).

It could also be quite problematic for the student. Schools that are forced to return tuition payments may not allow the student to re-enroll or might even sue her to collect. Such a rule might even make some parents thinking of filing bankruptcy think twice before doing so, perhaps delaying (by 2 years after the last tuition payment) what could otherwise be a very necessary fresh start.

I get it. But still, it doesn't seem to me that that the statue permits this kind of "enhancement of well-being" of a child to be enough. And how far does it go? One court agreeing with the rule in this case expressly limited their holding to undergraduate tuition payments, finding that "children in graduate school are well into adulthood."

What say you, readers? Should the courts retain this "practical" rule? Or do you agree that the kinds of benefits parents get from their children attending college are concrete and quantifiable enough that the parents receive REV when making them? If so, does graduate tuition count? What about making a down payment for an adult child's first home? Wouldn't that also "enhance the financial well-being of the child which in turn will confer an economic benefit on the parent"?