Private School Tuition Payments Not Constructively Fraudulent Conveyance

A New York bankruptcy court found that the chapter 7 trustee’s legal theory for recovery of private school tuition payments was “fundamentally flawed” and “at odds with common sense.” Getzler v. Xavierian High School (In re Okanmu), No. 11-43773, AP 13-01105, 13-01107 (Bankr. E.D. N.Y. Dec. 4, 2013). The trustee filed an adversary complaint seeking to avoid the debtors’ private school tuition payments for their minor children as constructively fraudulent transfers under sections 544 and 548(a)(1)(B). The trustee reasoned that the tuition payments were not for the benefit of the debtors themselves and therefore the debtors did not receive reasonably equivalent value or fair consideration in exchange for them. The schools moved to dismiss the complaint.

Key to a finding of constructive fraud under section 548(a)(1)(B) is a finding that the insolvent debtor received less than a “reasonably equivalent value” for the expenditure. While “reasonably equivalent value” is not defined in the Code, it is a flexible concept which may encompass indirect as well as direct benefits and does not require penny for penny equivalency.

The court dispatched the trustee’s argument that the debtors’ did not derive a benefit from their minor children’s education fees because the only users and beneficiaries of the education were the children and not the debtors. Finding that minor children and their parents constitute a single economic unit, the court found that a benefit to the children adheres to the parents. This is especially so in the case of necessities such as food, clothing and education where failure to provide would subject the parents to legal consequences.

The court found that there was no place in the analysis for considering whether the debtors fulfilled their obligation to educate their children in the least costly way. While analysis of the reasonableness of expenditures is an integral part of chapter 13 bankruptcy, “none of the chapters of the Bankruptcy Code authorize the [chapter 7] trustee to review the reasonableness of a debtor’s pre-petition expenditures or to seek recovery of expenditures deemed not ‘reasonably necessary.’” To find otherwise would launch chapter 7 cases down the slippery slope upon which “a trustee could seek to avoid a debtor’s payments to a restaurant for a meal purchased for the debtor’s child, or payments to a department store for clothing purchased for the child, on a theory that adequate food or clothing could have been obtained at lower cost. A trustee could sue the vendor to recover the cost of a computer or other electronic device purchased pre-petition by a debtor for his child, on the theory that the item was not reasonably necessary.” See also McClarty v. University Liggett School (In re Karolak), Case No. 12-61378, Adv. No. 13-04394-PJS, 2013 WL 4786861 (Bankr. E.D. Mich. Sept. 6, 2013) (“The fact that [the debtor] could arguably have provided a cheaper form of education to her children than sending them to Liggett does not mean that she did not receive a reasonably equivalent value in exchange for the tuition payments.”).

The court noted cases in which indirect benefit justified such things as: payment to a daughter’s wedding planner, Montoya v. Campos (In re Tarin), 454 B.R. 179 (Bankr. D. N.M. 2011); paying a third party’s debt, Barber v.Iverson (In re Iverson), 2008 WL 2796998 (Bankr. C.D. Ill. Jul. 21, 2008); paying for a friend’s boat, Satriale v. Key Bank USA, N.A. (In re Burry), 309 B.R. 130 (Bankr. E.D. Pa. 2004); and paying an adult child’s college expenses, In Sikirica v. Cohen (In re Cohen), 2012 WL 5360956 (Bankr. W.D. Pa. Oct. 31, 2012), rev’d on other grounds, 487 B.R. 615 (W.D. Pa. 2013). Compare In re Leonard, 454 B.R. 444 (Bankr. E.D. Mich. 2011) (finding no benefit to debtors in paying adult son’s college tuition but distinguishing case from one in which parents discharge legal obligation by paying minor child’s education tuition).

The court also made quick work of the trustee’s theory that the debtors were unjustly enriched at the expense of the bankruptcy estate, finding that “[f]or an unjust enrichment claim to succeed, the transfer must be unfair as between the transferor and the transferee,” and effects on creditors not involved in the transaction is irrelevant.

Geltzer opinion