Colleges Continue to Return Tuition Money in Bankruptcy Fights

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Colleges have returned $276,434.80 in tuition payments that were made for students whose parents later filed for bankruptcy protection, a Wall Street Journal analysis of more than two dozen lawsuits filed since 2014 has found.

Villanova University, Ithaca College and the New York Institute of Technology are just some of the schools that have been sued by bankruptcy trustees. The trustees, who are in charge of recovering money for the debts of the bankrupt parents, argue that financially struggling parents should have paid their own bills instead of college tuition for a child.

The Wall Street Journal analysis found that most schools have opted to settle the cases and return the tuition rather than battle expensively in court, though two schools are pushing forward in lawsuits that could lead judges to clarify whether the controversial lawsuits are fair. Four federal lawmakers are backing a bill to ban them.

Among the latest settlements:

• Villanova University agreed to pay $10,000 to settle a lawsuit for $12,543 in tuition payments that covered the cost of education for the son of a Durham, Conn., resident who filed for bankruptcy in September.

• The University of Maryland agreed to pay $9,999 to settle a tuition lawsuit that demanded $61,595.33 in tuition.

• St. Vincent’s College in Bridgeport, Conn., agreed to pay $5,270 to settle a tuition battle over payments of $10,641.45.

When Quinnipiac University agreed to turn over $17,000 in tuition payments last year, the legal settlement made it clear that the student could face consequences with this wording: “QU reserves its right to recover the settlement amount from the [bankrupt couple’s] daughter…and to place a hold on her transcript and diploma in the event of non-payment.”

The amount of tuition that colleges have promised to return is expected to grow in the coming weeks.

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The University of Saint Joseph in West Hartford, Conn., has agreed to pay $14,000, though a bankruptcy judge still needs to look over the approval at an April 21 hearing. A judge also needs to give formal clearance to The American Musical and Dramatic Academy–NYC to pay $10,000 for a Nov. 18 lawsuit that pushed for $19,000.

U.S. bankruptcy law enables trustees to sue to recover money that a bankrupt person spent but didn’t get “reasonably equivalent value” in return.

“If parents can afford to pay it, they should,” said Connecticut lawyer Jeffrey Hellman, who has filed more than a dozen tuition lawsuits against colleges. “I’m not saying there’s anything wrong with that, but these [lawsuits involve] people in bankruptcy. They’re having financial problems.”

Without any clear instructions from Congress, bankruptcy judges have split on whether a college should return the money. A key decision came in 2010 when a judge ruled against Marquette University, which was forced to return $21,500 to the bankruptcy estate of Carmen and William Leonard, who cosigned a loan for their son.

Two universities are challenging the payment demands.

Judge Melvin S. Hoffman in Massachusetts recently heard arguments in a case involving Sacred Heart University, a private Catholic school in Fairfield, Conn., that has been sued to return $66,275.18.

The lawsuit came from a bankruptcy trustee trying to collect money to pay off the debt of Steven and Lori Palladino, a Massachusetts couple who filed for bankruptcy after paying for their daughter, Nicole, to start studying at the school fall 2012.

The school hired a higher education economist to counter the bankruptcy trustee’s clawback demand.

“Social norms among the middle and upper classes increasingly include providing financial support for offspring long after they graduate high school,” said Sandy Baum, the economist, said in written court testimony. “In functional families, parents’ sense of their own well-being is affected by their children’s well-being.”

The couple’s bankruptcy trustee, however, said that the tuition money should be redirected to victims of a multimillion dollar Ponzi scheme orchestrated by Mr. Palladino. Mr. Palladino pleaded guilty to criminal charges related to the scheme that left at least 30 victims, according to the U.S. Securities and Exchange Commission.

Meanwhile, lawyers for Johnson & Wales University are preparing for a trial before Judge Julie Manning of the U.S. Bankruptcy Court in New Haven, Conn., over whether the Rhode Island institution can keep $46,909 in tuition that Robert and Jean DeMauro paid for their daughter. In that case, the tuition money didn’t come from the DeMauros’ pockets but rather from the U.S. Department of Education’s Parent PLUS loan program, which is available for undergraduate student who have maxed out borrowing on other federal loans.

Tuition-recovery lawsuits are a new phenomenon, as The Wall Street Journal has reported. Historically, tuition payments were so small that a court-appointed trustee wouldn’t waste time pursuing them. But as college costs rise and more parents chip in to help their kids, bankruptcy experts predict more of these lawsuits to come.

In response to the lawsuits, Rep. Chris Collins (R., N.Y.) introduced a bill in May 2015 that would block bankruptcy trustees from filing lawsuits against universities and college students to recover tuition money that had been paid years before. The bill has three cosponsors.

Write to Katy Stech at [email protected]. Follow her on Twitter at @KatyStech