Connecticut Joins New York on Fraudulent Transfers for Children’s Tuition

Courts in Connecticut and New York are taking the same approach in deciding whether a parent’s payments of tuition for an adult child are constructively fraudulent transfers to the college or university entirely, in part, or not at all.

The facts were fundamentally the same in the New York and Connecticut cases. A parent, who later became a chapter 7 debtor, made tuition payments for an adult child. The payments by the parent went into an account in the child’s name at the university. After deposit, the parent had no control over the money in the account. If a refund were owing, the refund would go to the child.

If the child withdrew before classes began, the child would receive a refund for the entire amount in the account. If the child withdrew in the first week of classes, the child would receive a 90% refund. The refund declined depending on how much later the child withdrew from the university.

In the opinion on January 31 by Bankruptcy Judge James J. Tancredi of Hartford, Conn., the date of deposit into the account determined whether the university received a potentially fraudulent transfer.

Judge Tancredi explicitly adopted the rationale employed by Chief Bankruptcy Judge Carla E. Craig of Brooklyn, N.Y., and District Judge Allyne R. Ross of Brooklyn, N.Y. Judge Ross concurred with Judge Craig’s analysis but remanded for further factual exploration. For ABI’s discussion of the decisions by Judges Craig and Ross, click here and here.

The university in Judge Tancredi’s case argued that the child was the initial transferee and that it was a subsequent transferee entitled to the good faith defense under Section 550(b). Under the Craig-Ross analysis, the university would be a subsequent transferee depending on when it received the deposit.

According to Judge Tancredi, the university’s status as to all or part of a payment depended on whether it was a “mere conduit.” Under Second Circuit authority, a “mere conduit” is someone without “dominion” over the money.

If the deposit arrived when the student would have been entitled to a full refund, the university would be a mere conduit because it had no control over the money in the account. On the other hand, Judge Tancredi ruled that the university would be the initial transferee as to the amount that would not be refunded if the deposit arrived when the student could have received only a partial refund.

Judge Tancredi granted summary judgment in favor of the university with regard to the portion of the payments that was refundable. As to the nonrefundable payments, however, he could not grant summary judgment for the trustee.

As to the transfers where the university was “strictly liable” as an initial transferee, Judge Tancredi still needed to rule on the university’s defense that it was entitled to a lien under Section 548(c).