Four congressmen have answered “no” to the title question and introduced the Protecting All College Tuition Act of 2015 (PACT).[1] The bill simply provides: “Section 548 of title 11, United States Code, is amended by adding at the end the following: ‘(f) A payment of tuition by a parent to an institution of higher education (as defined in either section 101 or 102 of Higher Education Act)[2] for the education of that parent’s child is not a transfer covered under paragraph (1)(B).’”[3]
The stated purpose of the bill is “to provide an exception to the avoidance of transactions by bankruptcy trustees under section 548 where the transaction was a good faith payment by a parent of post-secondary education tuition for that child.”[4] The bill’s sponsor admitted that he introduced the bill in reaction to an article in the Wall Street Journal[5] that highlighted what appeared to be a growing trend among bankruptcy trustees to seek to avoid tuition payments as fraudulent transfers.[6]
To be sure, there are a number of written decisions in cases in which the chapter 7 trustee attempted to recover, through fraudulent transfer causes of action, college tuition paid by the debtors for the education of their children. It is, however, well to note that tuition paid by debtors, even for the education of minor children, has long been a hot-button issue in chapter 13 cases and continues to be one, even after BAPCPA.[7]
In fact, one of the tuition clawback cases, McCarthy v. University Liggett School,[8] involved tuition paid to a private elementary school where the children’s mother, who was a debtor in the case, worked. The court ruled against the trustee, noting, among other things, that in Michigan, parents had a legal obligation to educate their minor children. The same is true in most states. Also true in most states is that the age of majority is 18. Of course, under federal law, students may remain dependents well into their twenties under a variety of statutes, regulations and rules, most notably for financial aid purposes.
The legal theory underlying the actions for the clawback of tuition is based on relatively simple fraudulent transfer analysis. Under § 548, fraudulent transfers may be recovered for either actual fraud, § 548(a)(1)(A), or constructive fraud, § 548(a)(1)(B). The actions may be brought under either § 548 or under the strong-arm powers of the trustee, § 544, combined with a state’s version of the Uniform Fraudulent Transfer Act (UFTA). Normally, a trustee would bring claims under both §§ 548 and 544. In the University Liggett School case, the trustee claimed constructive fraud both under § 548(a)(1)(B) and under the Michigan UFTA. The trustee in Gold v. Marquette[9] also proceeded in that manner. But in three other cases in which the judges issued written decisions as discussed below, the trustees proceeded only under state law theories.
In Gold v. Marquette, the court rejected the notion that the debtors received “reasonably equivalent value” in exchange for making tuition payments for their son. The court said that the debtors had no legal duty to pay for their adult son’s education. A transfer is not considered “value” unless it is (1) an economic benefit, (2) concrete and (3) quantifiable. Further, payments to or for a family member do not constitute reasonably equivalent value.[10]
On the other hand, in two Pennsylvania cases brought under the “PaUFTA,” Sikirica v. Cohen[11] and Shearer v. Oberdick,[12] the courts concluded that the tuition expenses were reasonable and necessary for the maintenance of the debtor’s family for purposes of the fraudulent transfer statute. As the Oberdick judge explained, “Even though there may not strictly speaking be a legal obligation for parents to assist in financing their children’s undergraduate education … there is something of a societal expectation that parents will assist with such expenses if they are able to do so.”[13]
Finally, in Banner v. Lindsey,[14] the court found that the debtors’ payment of their son’s tuition constituted constructive fraud under the New York UFTA. The judge noted that she was “not aware of any law requiring a parent to pay for a child’s college education.”[15] Because the consideration was under the debtor’s control and it was an intra-family transfer, the transfer was deemed presumptively fraudulent. The debtors failed to carry their burden of proof to rebut the presumption.[16]
It becomes clear in reviewing these cases that the proposed PACT legislation would have little impact on a trustee’s ability to attempt to claw back tuition payments. It appears that § 548 provided merely an alternative to a state law cause of action and that the proposed amendment may have no effect on the state law claims, except, perhaps, from a public policy standpoint.
The cases also illustrate that there is no consensus on the issues. That being so, why not entrust the debate to experienced trustees exercising their business judgment and bankruptcy court or district court judges who are accustomed to weighing facts and exercising their judgment in balancing the rights of debtors and creditors? Skilled litigation attorneys should be able to develop the facts of each case, including the perhaps-unintended consequences
to the financial aid system and institutions of higher learning. In the Oberdick, Cohen and Lindsey cases, the trustees pursued an array of allegedly fraudulent transfers, not just the tuition payments.
While tuition clawbacks may be an emerging trend in trustee litigation, in only the Leonard and University Liggett School cases was the exclusive focus on tuition payments. The other cases involved an alleged pattern of fraudulent conduct. While the intent of PACT may be to except payments made in good faith, the language of the bill does not so limit its application, thus opening the door to possible abuse.
Moreover, the proposed legislation would only apply to tuition paid by a parent “to an institution of higher education.” It would exclude from the exception, for example, the tuition paid in the University Liggett School case for the education of minors.
There is an abundance of other pending legislation that may provide more direct relief to students and parents.[17] The Student Loans in Bankruptcy Act of 2015,[18] for example, would strike 11 U.S.C. § 523(a)(8), which excepts educational overpayments or loans from bankruptcy discharges.
Although it appears that the PACT bill as crafted may be well meaning, it would probably not fulfill its intended purpose.
[1] H.R. 2267, 114th Cong. (2015).
[2] Sections 101 and 102 generally refer to postsecondary education.
[3] It seems that it should read “paragraph (a)(1)(B)” or perhaps added as § 548(a)(3).
[4] H.R. 2267, 114th Cong. (2015).
[5] Katy Stech, “Bankruptcy Trustees Claw Back College Tuition Paid for Filers’ Kids,” Wall Street Journal, May 5, 2015.
[6] Katy Stech, “Bill Proposes Ban on Tuition Clawbacks in Bankruptcy,” Wall Street Journal, May 12, 2015.
[7] See, e.g., In re Crim, 445 BR 868 (Bankr. M.D. Tenn. 2011), and cases cited therein (pre-BAPCPA courts were split and post-BAPCPA cases are still divided as to whether private school tuition is a reasonable and necessary expense). Form B22C, the means test, sets forth a limit on allowable tuition expenses.
[8] McCarthy v. University Liggett School (In re Karolak.), 2013 WL 4786861 (Bankr. E.D. Mich. 2013).
[9] Gold v. Marquette University (In the Matter of Leonard), 454 B.R. 444 (Bankr. E.D. Mich. 2011).
[10] Id. at 457.
[11] Sikirica v. Cohen (In re Cohen), 2012 WL 5360956 (Bankr. W.D. Pa. 2012).
[12] Shearer v. Oberdick (In re Oberdick), 490 B.R. 687 (Bankr. W.D. Pa. 2013).
[13] Id. at 712.
[14] Banner v. Lindsey (In re Lindsey), 2010 WL 1780065 (Bankr. S.D.N.Y. 2010).
[15] Id. at *9-10.
[16] Id.
[17] See, e.g., S. 108, Financial Aid Simplification and Transparency Act of 2015. Both houses of Congress have introduced resolutions supporting efforts to ensure that students have access to debt-free higher education, S. Res. 143 and H. Res. 214, which were both introduced on April 21, 2015, and will likely lead to the introduction of more legislation.
[18] H.R. 449, 114th Cong. (2015).