Reversing The Trend: Will Congress Act To Except College Tuition Payments From Clawback In Bankruptcy?

Lynne Xerras is Senior Counsel in our Boston office.

Congress Weighs Legislation that May Preclude Suit by Bankruptcy Trustees Against Colleges and Universities to Recover a Bankrupt Parent's Tuition Payments for a Student

HIGHLIGHTS:

An increasing number of colleges and universities find themselves defending litigation initiated by Chapter 7 trustees administering bankruptcy cases of the parents of past or present students of that college or university. Rep. Chris Collins, R-N.Y., has introduced legislation known as the PACT (Protecting All College Tuition) Act of 2015 that would preclude trustees from clawing back tuition money from universities. While the PACT proposal represents progress in achieving consistency within the Bankruptcy Code as to treatment of prepetition tuition payments toward a dependent child's college education, colleges and universities as well as students and parents affected by Chapter 7 debt remain exposed. A trend emerging in consumer bankruptcy cases around the U.S. is causing concern for many parents, students and undergraduate schools. As was reported by The Wall Street Journal in an article published on May 5, 2015, an increasing number of colleges and universities find themselves defending litigation initiated by Chapter 7 trustees administering bankruptcy cases of the parents of past or present students of that college or university.

These trustees seek to recover from the college or university the value of tuition payments received from debtor-parents on behalf of an adult child at a time when the debtor-parents were "insolvent," on the basis that the tuition payments are avoidable "constructively fraudulent" transfers under either Section 544 or Section 548 of the U.S. Bankruptcy Code, codified at 11 U.S.C. §§ 101 et seq.

Bankruptcy Trustee Theory

The bankruptcy trustees' theory is based on the premise that, while the matriculating student receives consideration from a college or university in the form of an education, the parent writing the check receives nothing. The defending universities typically assert that even without direct consideration flowing to the debtors, the parents received indirect consideration in the form of peace of mind in knowing that their child was getting an education, or the love and affection of their children.

Bankruptcy courts ruling in favor of Chapter 7 trustees explain, however, that while parents may feel a moral obligation to pay their child's tuition, if the debtor-parents do not hold a legal...