Colleges and universities gained traction with another theory to defeat fraudulent transfer suits mounted by trustees aiming to claw back tuition payments made by bankrupt parents on behalf of their children.
In the case decided by Bankruptcy Judge Ann M. Nevins of New Haven, Conn., a husband and wife took out almost $50,000 in loans under the Federal Direct Parent PLUS Loan program to help finance their daughter’s higher education. The program was established under the Higher Education Act, 20 U.S.C. §§ 1001, et seq.
The chapter 7 trustee filed an adversary proceeding against the university, contending that the payments received by the school were constructively fraudulent transfers by the parents under Section 548(a)(1)(B) and parallel provisions of the Connecticut Uniform Fraudulent Transfer Act, on the theory that the debtors received no value in return.
In her June 19 opinion, Judge Nevins framed the question as whether the debtors ever had an interest in the loan proceeds that a trustee could recover in a fraudulent transfer suit.
The outcome turned on the law and regulations governing the loan program. To ensure that the loan proceeds would be used to pay for higher education, the parents were required to certify under penalty of perjury that the proceeds would be used for their daughter’s education. For belt and suspenders, the government transferred the loan proceeds directly to the university. The proceeds were never in an account in the name of the parents, nor were the proceeds ever under their control.
Judge Nevins rejected the trustee’s contention that state law governed whether the debtors had an interest in the loan proceeds. To the contrary, safeguarding the loan proceeds represented a countervailing federal interest under Butner v. U.S., 440 U.S. 48, 55 (1979), permitting the court to determine ownership of the proceeds by reference to federal law.
Under federal law and regulations governing the loan program, Judge Nevins dismissed the fraudulent transfer suit because the debtors never had an interest in loan proceeds that the trustee could recover. She cited bankruptcy courts in Pennsylvania and Connecticut for reaching the same result with regard to the loan program.
ABI recently reported Pergament v. Hofstra Univ. (In re Adamo), 16-8122 (Bankr. E.D.N.Y. March 28, 2018), where the bankruptcy court in Brooklyn, N.Y., dismissed a similar suit on the theory that the university was not the initial transferee, thus enabling the school to rely on the good faith defense as a subsequent transferee under Section 550(b). Judge Nevins said it was unnecessary for her to reach that issue. To read ABI’s discussion of Adamo, click here.