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January 4, 2019

Another Bankruptcy Court Weighs in on the Tuition Clawback Controversy

Bankruptcy trustees continue to vigorously pursue actions in which they attempt to “clawback” tuition paid by parents to colleges, universities and other institutions of higher education for their adult children’s post-secondary education, when those parents later file for bankruptcy. Trustees have been successful in some instances and defeated in others.

The trustees’ legal theory to support “tuition clawbacks” is held in bankruptcy and state fraudulent transfer law, where a variety of payments can be recovered if the transferor does not receive reasonably equivalent value for payments that were made while the transferor was insolvent. The look back period under Bankruptcy Law is two years. The look back periods for recovery of fraudulent transfers under state law vary from state to state, but are usually between four and six years.[1] The argument propounded by trustees is that the parents do not receive reasonably equivalent value in exchange for the payments they made on behalf of their children for their children’s college education.

Last month, Judge Martin Glenn, a bankruptcy judge in the Southern District of New York, weighed in on the issue, ruling that a debtor parent does not receive reasonably equivalent value in exchange for the payments that debtor parents make on behalf of their adult children for their college education if the child is beyond the age of majority. Geltzer v. Oberlin College et al, Adv. Pro. Case No. 18-01015. The age of majority in New York is 21. The age of majority in most states is 18.

Bankruptcy courts across the nation are in disagreement as to whether parents receive reasonably equivalent value for the costs they incur in providing their adult children with an undergraduate education. To date, four bankruptcy courts have held that parents do, indeed, receive reasonably equivalent value for tuition payments made on behalf of their children and with Judge Glenn’s decision, there are now five courts which disagree.

The facts in the Sherman decision are somewhat unique and distinguish themselves from the facts of other tuition clawback decisions, which primarily involve tuition payments made on behalf of children between the ages of 18 and 22 while they were receiving the education. In Sherman, the debtor parents made transfers to Oberlin College for the benefit of two of their daughters, Alexandra and Samantha. Some of the transfers to or for the benefit of Samantha were made while she was in college before she was 21 years old, and some were made while she was in college after she was 21 years old. The transfers to or for the benefit of Alexandra were made after she was 21 years old and after she had already graduated from college.

In rendering his decision, Judge Glenn broke the transfers into three separate categories: (1) transfers made after both daughters reached the age of majority, (2) transfers made for the benefit of Samantha before she reached the age of 21 and (3) transfers made for the benefit of Alexandra after she reached the age of 21 and after she graduated from college. The Court held that the debtor parents did not receive reasonably equivalent value with respect to the transfers made for the debtor’s daughters after they reached the age of majority and after Alexandra became financially independent.[2] However, transfers made to Oberlin College by the debtor parents before the daughters turn 21 were not voidable because the parents in that instance, did receive reasonably equivalent value. In other words the court held the legal obligation in New York to support children up to age of 21 constituted reasonably equivalent value.

In holding that payments made after the daughters reached the age of 21 were voidable, Judge Glenn noted that he was constrained by the language of the Bankruptcy Code and New York law because both statutes define the terms “value” and “fair consideration” to require either the transfer of property or the satisfaction of an antecedent debt in return for an insolvent debtor’s payments. According to Judge Glenn, because there was no legal obligation to support adult children beyond the age of majority, there was no reasonably equivalent value.

While New York has a strong policy interest in assuring that parents fulfill their support obligations, which would include a post-secondary education throughout their children’s first 21 years of life when a parent has the means to do so, a parent is not legally obligated to pay for an education beyond the age of 17, unless required to do so by domestic support orders.

However, other state and federal laws and policies recognize a parental responsibility to contribute to the cost of an undergraduate education for their children. Federal and state financial aid programs are based on the concept that parents are expected to contribute toward the student’s post-secondary education. Undergraduate students under the age of 24 are considered dependent for the purposes of determining financial aid, unless they are married with dependents of their own, or are veterans, foster children or unaccompanied homeless children. Under the Federal Financial Aid Program, dependent students and their families must use their combined assets to pay for the student’s college education.

The federal government has also created tax incentives based on the assumption that parents will contribute toward their children’s education. For example, the tax deduction for dependents includes students who have not yet attained the age of 24. Further, Congress has created various savings plans, such as the 529 Plan, to encourage parents to save for their children’s college education.

The state laws of many states give courts the power to award college support beyond the age of majority, also called post-secondary or post-minority support. In states that have no statute holding parents responsible for college support, parents may nonetheless include provisions for college education in the support agreement thereby legally binding the parent to pay post-secondary support.

So, if New York’s strong policy interests in assuring parental support to children up to the age of 21 justify the conclusion that a parent receives reasonable equivalent value for paying a child’s undergraduate tuition, the strong policy interests implicit in undergraduate federal financial aid law, state domestic support law, tax incentives and savings plans logically should justify the same conclusion as to parental payments for post-minority support.

[1] In 2016 the Connecticut Legislature passed a law amending the Connecticut Uniform Fraudulent Transfer Act to exclude tuition clawback claims as transfers that could be recovered under Connecticut State Law.

[2]   One would be hard-pressed not to agree that a parent has no obligation to pay for the cost of an undergraduate education once a child becomes financially independent.

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