If it’s a fraudulent transfer when insolvent parents pay tuition for their adult children, shouldn’t the insolvent parents be entitled to avoid loans they took out for their children as fraudulent transfers?
When unsecured creditors will not benefit, Chief Bankruptcy Judge Stephani W. Humrickhouse of Raleigh, N.C., said there is “no valid legal avoidance purpose,” and the fraudulent transfer suit must be dismissed for failure to state a claim.
Nothing for Unsecured Creditors in the Chapter 13 Plan
A couple filed a chapter 13 petition. They had taken down student loans for their adult daughter. The federal department of education filed a $39,000 proof of claim.
The wife filed an adversary proceeding in bankruptcy court to avoid the student loan debt as constructive fraudulent transfers under Section 548(a)(1)(B) and the state law equivalent. The debtor alleged that she had not received reasonably equivalent value for the loans that benefited her adult daughter. The chapter 13 trustee joined the suit as a plaintiff.
The government filed a motion to dismiss on several grounds. In a seven-page opinion on July 9, Judge Humrickhouse granted the motion on one of the grounds.
Judge Humrickhouse said courts are split on whether a debtor receives reasonably equivalent value in paying tuition for an adult child, but she did not base her decision on that concept. Instead, she rested her decision on the idea that fraudulent transfer law “allows creditors to avoid transactions which unfairly or improperly deplete a debtor’s assets or that unfairly or improperly dilute the claims against those assets.”
Following Fourth Circuit authority, Judge Humrickhouse said that the outcome of the motion to dismiss would turn on whether the government’s claim “will actually dilute the other unsecured claims.” She then laid out the claims of creditors and the debtors’ chapter 13 plan.
The government’s student-loan claim represented more than 60% of all unsecured claims. Under the debtor’s 36-month plan, unsecured creditors would receive nothing. Judge Humrickhouse called it “an attorneys’ fees only plan,” because the debtors’ payments of $90 a month would go only to their attorney and the chapter 13 trustee.
No Benefit for Creditors
Analyzing the fraudulent transfer claim from the creditors’ perspective, Judge Humrickhouse observed that the debtor was “seeking to avoid an obligation that will have no effect on the distribution to other creditors, but only serves to improve her chances to discharge the loan without satisfying the requirements of § 523(a)(8).”
Because the fraudulent transfer suit served “no valid legal avoidance purpose,” Judge Humrickhouse dismissed. In dicta, she said that the lack of benefit for unsecured creditors “supports the propriety of requiring the trustee to serve as a plaintiff.” She predicted that a trustee would bring a suit of the type “if, and only if, there will be some benefit to unsecured creditors.”
Observations
The opinion could be read to imply that the motion to dismiss would have been denied were there assets to pay claims of unsecured creditors. That doesn’t mean, however, that Judge Humrickhouse would have ultimately avoided the student loan debt.
Even if the complaint would have survived a motion to dismiss, the government was claiming that the avoidance power cannot circumvent the rigorous dischargeability rules for student loans under Section 523(a)(8).
If it’s a fraudulent transfer when insolvent parents pay tuition for their adult children, shouldn’t the insolvent parents be entitled to avoid loans they took out for their children as fraudulent transfers?
When unsecured creditors will not benefit, Chief Bankruptcy Judge Stephani W. Humrickhouse of Raleigh, N.C., said there is “no valid legal avoidance purpose,” and the fraudulent transfer suit must be dismissed for failure to state a claim.
Nothing for Unsecured Creditors in the Chapter 13 Plan
A couple filed a chapter 13 petition. They had taken down student loans for their adult daughter. The federal department of education filed a $39,000 proof of claim.
The wife filed an adversary proceeding in bankruptcy court to avoid the student loan debt as constructive fraudulent transfers under Section 548(a)(1)(B) and the state law equivalent. The debtor alleged that she had not received reasonably equivalent value for the loans that benefited her adult daughter. The chapter 13 trustee joined the suit as a plaintiff.
The government filed a motion to dismiss on several grounds. In a seven-page opinion on July 9, Judge Humrickhouse granted the motion on one of the grounds.
Judge Humrickhouse said courts are split on whether a debtor receives reasonably equivalent value in paying tuition for an adult child, but she did not base her decision on that concept. Instead, she rested her decision on the idea that fraudulent transfer law “allows creditors to avoid transactions which unfairly or improperly deplete a debtor’s assets or that unfairly or improperly dilute the claims against those assets.”