Over the past few years, higher education institutions have seen an increase in litigation from an unexpected source: bankruptcy trustees. Trustees appointed in personal bankruptcy cases are seeking to claw back tuition payments made by insolvent parents in the months or years preceding their individual bankruptcies. The trustees argue, under both state and federal statutes, that the payments are fraudulent transfers because the tuition (or the education) did not inure to the benefit of the parents and, therefore, the money should be recovered and distributed pro rata to the parents' creditors.
In response to a recent Wall Street Journal article on this subject, on May 12, 2015, Congressman Chris Collins (R-NY) introduced a bill that would prohibit bankruptcy trustees from filing lawsuits to recover "good faith payment of post-secondary education tuition." We will follow the progression of "The PACT (Protecting All College Tuition Act) of 2015"; meanwhile, colleges and universities remain in the sights of bankruptcy trustees.
Ballard Spahr's Bankruptcy, Reorganization and Capital Recovery Group has compiled a number of factors to consider as potential defenses to these claims, including:
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Whether the student was a minor at the time of the payment and/or whether applicable state law requires the payment of education expenses for students over the age of 18;
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Whether the parents have the required property interest in the funds from which the tuition payments were made (e.g., proceeds of student loans or 529 plans);
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Whether the date of the parents' contributions to savings accounts and 529 plans put the alleged fraudulent transfers outside of the applicable statute of limitations; and
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Whether tuition payments to nonprofit institutions can be considered charitable donations, which are not subject to recovery under the applicable provisions of the Bankruptcy Code.
