Tuition Payments for Adult Children Squarely Held to Be Constructively Fraudulent

On an issue dividing the lower courts, Bankruptcy Judge Martin Glenn of New York squarely held that educational expenses paid for a child over the age of majority are constructively fraudulent transfers, assuming the debtor-parent was insolvent.

Conversely, Judge Glenn found no fraudulent transfer in his December 4 opinion when parents paid educational expenses for a minor child, because parents receive reasonably equivalent value by satisfying their obligations to educate their children.

Judge Glenn said the case presented “culturally and socially charged issues.” Citing a “developing body of case law,” he listed decisions holding that tuition payments for adult children are or are not constructively fraudulent transfers.

Judge Glenn said he was “constrained” by the Bankruptcy Code and New York’s fraudulent transfer law to determine whether the bankrupt parents received “reasonably equivalent value” or “fair consideration” for educational expenses they paid.

Stipulated facts presented the issues starkly. Within six years before their joint bankruptcies, the parents paid tuition and related expenses for their two children. Some payments came before the children were 21, and others were after. The trustee sued the children, the college they attended and student loan lenders.

In New York, majority occurs at age 21, not 18. State law requires parents to pay for their minor children’s housing, food, education, and health care, Judge Glenn said.

The parents contended they received sufficient value because educating their children helped to ensure that the kids would be financially independent. Indeed, Judge Glenn cited studies showing that an education decreases the odds that a child will live with his or her parents.

Nonetheless, Judge Glenn said that “the economic ‘benefit’ identified by the [parent-debtors] does not constitute ‘value’ under [New York law] or the Bankruptcy Code.” He therefore held that expenses paid for the children after majority were constructively fraudulent, assuming the trustee could later prove that the parents were insolvent at the time of the transfers.

The trustee contended that expenses paid before majority were also constructively fraudulent because the children attended an expensive private college.

Judge Glenn framed the question as whether “the parents receive reasonably equivalent value when they do pay for” a minor child’s more expensive education.

Judge Glenn followed a decision by Chief Bankruptcy Judge Carla E. Craig of the Eastern District of New York, who said that paying tuition satisfies the parents’ “‘legal obligation to educate their children. . . . It is irrelevant to this determination whether the Debtors could have spent less.’” In re Akanmu, 502 B.R. 124, 132 (Bankr. E.D.N.Y. 2013).

Absent “egregious conduct,” Judge Glenn granted summary judgment and dismissed claims based on expenses paid before majority.

Given the procedural posture of the case, Judge Glenn did not reach the question of whether the children, the college or the student loan lenders were the initial or subsequent transferees. Likely as not, only the initial transferee would be liable, because subsequent transferees would be entitled to the good faith defense under Section 550(b)(2).

Question: The age of majority varies among the states. With regard to constructively fraudulent transfers under Section 548(a)(1)(B), should federal courts borrow the age of majority in the forum, and if so, on what theory? Or, should the age of majority depend on the residence of the defendant or the residence of the debtor? Or, is there separate federal law for the age of majority in cases under Section 548(a)(1)(B)?