By Roger Cox *
New York Bankruptcy Court holds that Debtors did not receive “reasonably equivalent value” for their prepetition tuition and education-related payments made on behalf of their adult daughters (distinguished from similar payments made while daughter was still a minor).
In re Sterman, _______ B.R. ________, 2018 WL 6333588 (Bankr. S.D. N.Y. 2018).
A Chapter 7 trustee sought to recover, as constructively fraudulent transfers, sums paid by Chapter 7 debtors to or for the benefit of their daughters, purportedly for college tuition, books, supplies, and room and board while in college. According to the stipulated facts, some transfers were made while one daughter was a student before she was 21 years old, while others were made after she turned 21. Transfers for the other daughter were made after she was 21 years old and had already graduated from college.
From a narrow legal standpoint, under Section 548 of the Bankruptcy Code, the issue was whether these education-related transfers, made while the debtors were allegedly insolvent, were without “reasonably equivalent value.” In other words, fraudulent intent was not an issue (the New York fraudulent transfer statute was also implicated).
Generally, the court distinguished between expenditures made while the children were minors, and those made after the children became adults. The latter was exacerbated by the fact that certain expenditures were apparently made after the adult child had graduated from college and was already self-sufficient.
The opinion recognizes that “whether insolvent parents receive reasonably equivalent value for college tuition payments made for the benefit of their adult children is a culturally and socially charged issue.” With respect to payments made to/for children before the age of majority, parents are effectively satisfying an obligation to educate their children, “thereby receiving reasonably equivalent value and fair consideration.” According to this Bankruptcy Court, whether the costs were incurred at a private, as opposed to public school, was not determinative, noting that a trustee “is not granted veto power over a debtor’s personal decisions, at least with respect to prepetition expenditures.” Also, it would be impracticable to take such a deep dive into every expenditure.
On the other hand, the court seemed to paint a rather bright line as to payments made once the applicable child reached the age of majority (i.e., adulthood). Once reaching the age of majority, any such “obligation” to educate the adult child would seem to have lapsed.
Fraudulent transfer cases can be harsh, especially when there is no allegation of fraudulent intent, but the transfer is rather one of “constructive” fraud (a transfer made for less than reasonably equivalent value, while insolvent). This court’s analysis of fraudulent transfer law is sound; however, one cannot help but wonder whether the outcome would have been the same but for the aggravating circumstance of the bulk of the payments having been made after one of the daughters had already graduated.
`It is difficult to draw a bright line when it comes to parental obligations in support. On the other hand, any transfers made while a debtor is insolvent are by their nature subject to close scrutiny, if not avoidance. Our best guess, then, is that these cases will continue to be (or should be) quite fact-specific.
For a recent opinion by a New York District Court dealing with a somewhat different fact situation (on appeal from an Eastern District of New York Bankruptcy Court), see Pergament v. Brooklyn Law School (in re Adamo), 2018 WL 6182502 (E.D. N.Y. 2018).
*Roger Cox is the author of Cox’s Texas Creditors Rights Laws Annotated (Thomson Reuters 2018), and a former contributor to the SMU Law Review. He is Board Certified in Business Bankruptcy Law, Commercial Real Estate Law, and Farm & Ranch Real Estate Law by the Texas Board of Legal Specialization. Underwood has offices in Amarillo, Austin, Fort Worth, Lubbock, and Pampa. This article is for general and academic information only and is not intended as legal advice or as a specific position asserted on behalf of any existing or future client of the firm.