Under the rules for recovery of fraudulent transfers under the Bankruptcy Code, a Trustee can recover against “an initial transferee” or the person “for whose benefit transfer was made.” Trustees rarely pursue the party who gets the actual benefit of the tuition payments, i.e., the student. The First Circuit found that even if payments by insolvent debtors were made to assist elderly parents or needful siblings or for other worthy causes, such payments do not constitute reasonably equivalent value and can be undone by the rules that allow bankruptcy trustees to recover tuition payments.īecause the schools are usually the initial recipient of the tuition funds, the schools are deemed to be the “initial transferee” of the so-called fraudulent transfer.

In its decision, the First Circuit bluntly said that the answer is “straightforward” because the tuition payments “depleted the estate and furnished nothing of direct value to the creditors who are the central concern of the Code provisions at issue.” The bare bones decision provides no analysis of the evidence and arguments asserted by the college or the Amici parties. The First Circuit is the first court of appeals in the country to weigh in on this issue. Last month, the First Circuit reversed the bankruptcy court’s decision which found the parent received “concrete and quantifiable” value and, as such, the tuition payments made by the parents did not constitute fraudulent conveyances. Sacred Heart University, Inc., 942 F.3d 55 (1 st Cir. The lower courts are divided on the viability of these so-called “tuition clawback suits,” but the First Circuit Court of Appeals recently ruled on the issue in DeGiacomo v.

Trustees argue that it is the children, and not the parents, who receive a direct economic value in exchange for the payments they made for their children’s college education, and that the payments should thus be “clawed back” for the benefit of the parents’ creditors. The trustee’s legal authority to support “tuition claw backs” is based on bankruptcy and state fraudulent transfer law, where a variety of payments can be recovered if the transferor does not recover reasonably equivalent value for payments that were made while the transferor was insolvent. Bankruptcy trustees continue to vigorously pursue actions in which they sue colleges, universities and other institutions of higher education to recover tuition payments made by parents for their children when the parents later file for bankruptcy relief.

Fraudulent conveyance lookback period