A developing trend in our nation’s bankruptcy courts has been the number of lawsuits filed or threatened by bankruptcy trustees to recover tuition payments made by a student’s parents when the parents later file for bankruptcy protection. According to a recent article in The Wall Street Journal, a search of public filings across the country, dating back to 2008, revealed that at least 25 colleges have been asked to return money, with more than a dozen complying. (Katy Stech, “Bankruptcy Trustees Claw Back College Tuition Paid for Filers’ Kids,” The Wall Street Journal, May 5, 2015.) The theory of recovery, which is typically directed against the school that received the tuition payments, is that such payments constitute constructively fraudulent transfers that may be recovered by a bankruptcy trustee for the parents’ creditors.
To establish this type of fraudulent transfer, the trustee must show that the parents did not receive “reasonably equivalent value,” in economic terms, for the payments, and that the parents were insolvent at the time the payments were made or rendered insolvent by the payments. The look-back period for recovery is two years prior to the bankruptcy filing under the Bankruptcy Code’s fraudulent transfer statute and is typically longer – up to six years – under applicable state fraudulent transfer law, which is incorporated in the Bankruptcy Code.
The bankruptcy courts that have addressed this particular type of lawsuit are divided. Some have held that if, under state law, a parent does not have a...
