PBCBA BAR BULLETINS PBCBA Bulletin - January 2020 - Page 9

BANKRUPTCY CORNER Avoiding and Recovering Tuition Payments for Adult Children JASON S. RIGOLI The United States Court of Appeals for the First Circuit Court is the first circuit court to rule on the issue of whether tuition payments made by parents for their adult children are avoidable as constructively fraudulent transfers. DeGiacomo v. Sacred Heart University, Inc. , Case No. 17-1334 (1st Cir. Nov. 12, 2019). Fraudulent transfers, as that term is used, come in two forms: (i) actual fraudulent transfers, i.e., the debtor purposefully transferred property to prevent legitimate creditors from satisfying the debt from the transferred property; and (ii) constructively fraudulent transfers, where the insolvent debtor transfers property away for less than reasonably equivalent value. See generally 11 U.S.C. § 548(a)(1)(b)(i). In DeGiacomo the Debtors had been convicted of operating a Ponzi scheme and during the two years preceding the filing of their bankruptcy petition the debtors had paid over $64,000 in tuition to Sacred Heart University, Inc. (“Sacred Heart”) for their 18- year old daughter. The sole issue on appeal related to constructive fraudulent transfers and specifically whether “reasonably equivalent value” was received in exchange for the payment of the tuition. “[T]he bankruptcy court found that the Palladinos paid their daughter's tuition because ‘they believed that a financially self-sufficient daughter offered them an economic benefit[,]’ " DeGiacomo , p.4 (quoting In re DeGiacomo, 556 B.R. 10, 16 (Bankr. D.Mass. 2016), and that belief satisfied the “reasonably equivalent value” element. The First Circuit did find that “value” is defined and “includes five categories of transactions that confer value: (1) the exchange of property; (2) the satisfaction of a present debt; (3) the satisfaction of an antecedent debt; (4) the securing or collateralizing of a present debt; and (5) the granting of security for the purpose of securing an antecedent debt.” DeGiacomo, pp. 7-8 ( citing 11 U.S.C. § 548(d)(2)(A)). Nov. 12th Coffee & Bagels with the Judges Join us for the next one on the second Tuesday of every month in the north end of the cafeteria at the main courthouse. A bonus for attending is that those who have a UMC hearing that morning can sign-up to be called first once the hearings begin. The First Circuit found that none of the five categories of transactions existed in this case and the debtors were under no legal obligation to support their daughter, who reached the age of majority, and, therefore, no value could have been provided by Sacred Heart to the Debtors in exchange for the payment of tuition. Id. at p. 8. The issue of whether a parent has a legal obligation to support a child is a question of state law. DeGiacomo, at p.2 FN 1. 1 The term insolvent is being used for ease of discussion 2 11 U.S.C. § 544 permits trustees to use applicable non-bankruptcy law to avoid transfers, such as Mass. Gen. Laws ch. 109A, §§ 5(a) and 6(a). DeGiacomo, p. 3 FN. 2. See also Chapter 726, Florida Statutes. 3 In Florida, a “minor” is defined as “includ[ing] any person who has not attained the age of 18 years.” (L-R) Allison Brown, Kelly Schulz, Judge Carolyn Bell, Laurin Zborski & Amber Moseley This article is submitted by Jason S. Rigoli, Esq., Furr Cohen, 2255 Glades Road, Suite 301E, Boca Raton, FL 33431, jrigoli@furrcohen.com. Nancy La Vista & Judge Lisa Small The First Circuit disagreed and found the issue to be “straight forward.” Despite “reasonably equivalent value” not being defined by the Bankruptcy Code, it did not include “intangible, emotion, or non- economic benefits.” DeGiacomo , p. 7 ( citing Tavenner v. Smoot, 257 F.3d 401, 408-09 (4th Cir. 2001)). The analysis of value is done from the perspective of the creditors, meaning as a result of the “transaction” at issue will the debtors’ creditors see any direct value. See DeGiacomo, at p. 7. Laura Scala-Olympio & Charles Vercillo Judge Joseph Curley, Amy Fischer & Jeffrey Siskind PBCBA BAR BULLETIN 9