There is a body of caselaw where trustees have sued, with more or less success, to recover tuition paid by parents for emancipated children. But when the trustee for a father recently alleged that an adult child received fraudulent transfers for room and board provided at the parent’s home, Bankruptcy Judge Robert E. Grossman of Central Islip, N.Y., said it reflected a “disturbing lack of judgment . . . by the Trustee.”
A father filed a chapter 7 petition listing a home that he and his nondebtor wife owned as tenants by the entireties. The wife was employed and paid some family expenses.
The couple’s son turned 21 about three years before the father’s bankruptcy, but the son continued living at home in his childhood bedroom. The chapter 7 trustee sued the son, alleging receipt of constructively fraudulent transfers under Section 548 and comparable New York law.
The trustee sought about $35,000 for the son’s room and board and use of a car that the son was driving.
In his June 5 opinion, Judge Grossman explained how the $13,000 in claims regarding the car was a nonstarter based on the facts. The father purchased the car in his name because the son had no credit for an auto loan. However, the facts at trial showed that the son had repaid his father for the auto loan and insurance.
For failure of proof, Judge Grossman dismissed the fraudulent transfer claims related to the car.
Room and Board
The trustee came up with a $22,000 claim for room and board based on a portion of the family’s expenses. The trustee argued that providing a home for the son resulted in fraudulent transfers because the father at the time was not “financially able” and had creditors who weren’t being paid.
Parsing the fraudulent transfer claims for allowing the son to continue living at home, Judge Grossman noted that the nonfiling wife was a wage-earner and part owner of the home. Consequently, he said that “some significant part of the alleged value transferred to the Defendant for Room and Board actually was not property of the Debtor, but rather was property of the non-filing spouse and not subject to avoidance.”
Judge Grossman also said that the trustee offered no evidence about the value of the room that the son occupied, or whether allowing the son to live at home “had any actual value in the hands of the Debtor so as to be of actual value to his creditors.”
Furthermore, Judge Grossman said the trustee had no evidence to show that the father incurred extra expenses stemming from the son’s residence at the family home. In short, he found that “the Trustee manufacture[d] an unsupportable argument that estimates Room and Board at $22,000.”
Alluding to testimony that the son worked around the house, Judge Grossman dismissed the fraudulent transfer claims because he found that the father received reasonably equivalent value.
Next, Judge Grossman analyzed whether the son received unjust enrichment “by his parents allowing him to remain in the family home instead of kicking him out on the street.” He denied the claim for unjust enrichment because “equity and good conscience in this case lead the Court to the conclusion that the Trustee’s claim must be denied.”
Judge Grossman dismissed the trustee’s claims, saying that the “case demonstrates a failure to understand what is required to prove the necessary elements of the claims alleged. Equally disturbing is the lack of judgment exercised by this Trustee.”
Admonitions for Trustees
Reflecting on the bankruptcy court as a court of equity, Judge Grossman admonished trustees to employ judgment and common sense. He said that the claims “for room and board in the family home have been fabricated by the Trustee out of some fiction that the Debtor’s son should have paid a percentage of the household expenses . . . as if he were a renter who failed to pay his rent.”
“However,” Judge Grossman said, “the Trustee’s failure to present a viable case is not the most disturbing aspect of this proceeding. What is most concerning is the lack of judgment shown by the Trustee in commencing a case under these facts.”
Judge Grossman said that the debtors “should not be fearful that utilizing the rights Congress has given them may come at the cost of subjecting their children or other members of their family to ill-conceived actions by an overly aggressive trustee.” He reminded the reader that “bankruptcy is a process that combines law and equity.”
Closing the opinion, Judge Grossman said that “it is the role of the United States trustee to exercise some degree of oversight so as to avoid a repeat of this matter.”
There is a body of caselaw where trustees have sued, with more or less success, to recover tuition paid by parents for emancipated children. But when the trustee for a father recently alleged that an adult child received fraudulent transfers for room and board provided at the parent’s home, Bankruptcy Judge Robert E. Grossman of Central Islip, N.Y., said it reflected a “disturbing lack of judgment . . . by the Trustee.”
A father filed a chapter 7 petition listing a home that he and his nondebtor wife owned as tenants by the entireties. The wife was employed and paid some family expenses.
The couple’s son turned 21 about three years before the father’s bankruptcy, but the son continued living at home in his childhood bedroom. The chapter 7 trustee sued the son, alleging receipt of constructively fraudulent transfers under Section 548 and comparable New York law.
The trustee sought about $35,000 for the son’s room and board and use of a car that the son was driving.
In his June 5 opinion, Judge Grossman explained how the $13,000 in claims regarding the car was a nonstarter based on the facts. The father purchased the car in his name because the son had no credit for an auto loan. However, the facts at trial showed that the son had repaid his father for the auto loan and insurance.
For failure of proof, Judge Grossman dismissed the fraudulent transfer claims related to the car.