Pre-bankruptcy Tuition Payments not Subject to Clawback

It is not uncommon for a chapter 7 bankruptcy trustee to sue an educational institution to recover pre-bankruptcy tuition payments parents make on behalf of their children. The theory is that such payments benefit the child, not the parents, and can thus be recovered as constructive fraudulent conveyances because the parents do not receive reasonably equivalent value in exchange for the payments. While the law is not settled in this area, some courts have blocked these suits by concluding that the payment of the tuition does confer a benefit on the parents, thus undercutting the trustee's contention that the parents do not receive reasonably equivalent value. As one court recently observed in dismissing such a suit: "In sum, persuasive law in this and other jurisdictions supports the conclusion that tuition payments made by a debtor to educate his or her minor children confer reasonably equivalent value on the parent because, among other reasons, parents have an obligation to provide for their children’s necessities, including their education and care, and it is not necessary for a family to meet that obligation, and all of its other pre-petition daily needs and requirements, at the lowest possible cost, or no cost at all. Such education and care expenses also confer reasonably equivalent value on the parent because parents and their minor children form a single economic unit for these purposes, so that the value received in the form of the education and care of the minor child provides a tangible benefit to the parent. Indeed, it is hard to imagine how the education and care of a young child could provide a benefit to the child, but not to the parent or family. A different rule would effectively expand the role and the duties of the Chapter 7 trustee well beyond its statutory limits, and this Court declines to take that step."