Protecting Private Wealth: Recent Bankruptcy Cases Involving Tuition Payments and Profit Sharing Plans

by BakerHostetler

Two recent decisions may affect the assets of individuals available to satisfy creditors' claims in bankruptcy. In the first decision, the Bankruptcy Court for the Eastern District of New York determined that married, joint debtors received value in exchange for tuition payments and rejected the bankruptcy trustee's arguments that the tuition payments were fraudulent transfers. In the second decision, the United States Court of Appeals for the First Circuit determined that assets in a debtor's profit sharing plan, funding an individual retirement account, are property of the estate, available to satisfy the claims of creditors, if the debtor has failed to maintain the profit sharing plan in substantial compliance with applicable tax laws.

Certain Tuition Payments Held Not To Be Fraudulent Transfers

A bankruptcy trustee has the power to avoid and recover certain transfers made by a debtor prior to the commencement of the bankruptcy case. An avoidable transfer includes a transfer made by an insolvent debtor within two years of the petition date, if no "reasonably equivalent value" is received in exchange for the transfer.[1] In such circumstances, the transfer is deemed to be constructively fraudulent, and the trustee does not need to prove intent to defraud. A gift or a gratuitous transfer by an insolvent debtor is a prime example of a constructively fraudulent transfer.

The bankruptcy trustee in In re Akanmu, 502 B.R. 124 (Bankr. E.D.N.Y. 2013) brought an action against two high schools, Xaverian High School and Our Lady of Mt. Carmel-St. Benedicta School, to avoid and recover tuition payments made by joint debtors, arguing that the tuition payments were constructively fraudulent transfers. The trustee argued that the debtor received no direct benefit from the private education obtained in return for those tuition payments. Chief Judge Carla E. Craig found that the debtors were legally obligated under New York state law to provide their minor children with an education. It was of no consequence that the parents chose to educate their children in parochial school rather than public school. The court acknowledged the line of cases analyzing whether tuition payments for students over eighteen years old constitute constructively fraudulent transfers, because parents are not legally obligated to provide an education to children at that age. In those cases, the courts found the parents received no benefit or value in exchange for tuition payments. Because the tuition payments in In re Akanmu were made for the education of minor children, they were not susceptible to an analysis as constructively fraudulent transfers.

Individual Retirement Accounts Funded by Profit Sharing Plans can be Reached by Creditors

Generally, any and all legal and equitable interests of a debtor are subject to distribution to creditors, except for certain exempt property. What constitutes property of the estate is broadly construed. In In re Daniels, 736 F.3d 70 (1st Cir. 2013), the debtor sought to exempt from a bankruptcy estate certain retirement funds held in a fund or account that is tax-exempt under section 401 of the Internal Revenue Code.

The First Circuit found that the debtor could not exempt a profit sharing plan that repeatedly violated the Internal Revenue Code. The profit sharing plan prohibited any transaction in which a plan fiduciary "deals with" plan assets "in his own interests or for his own account," or receives consideration connected to a transaction involving plan assets. The court determined that there were "prohibited transactions"[2] between the plan, on one hand, and the debtor's son, daughter-in-law, and other family members, on the other, including, but not limited to: (1) the rental of property owned by the profit sharing plan over a ten-year period to the debtor's son and daughter-in-law; (2) a "lease and sale" agreement between the debtor's son and the profit sharing plan; (3) a "gift of equity" associated with the same transaction; (4) a loan to the debtor's son from the profit sharing plan; and (5) the sale of property and loan to the plan administrator's daughter. Although the IRS had previously audited the debtor's tax returns and did not disqualify the profit sharing plan or assess additional taxes, the First Circuit rejected the debtor's argument that the IRS's favorable determination following the audit created a presumption that the debtor's interest in the profit sharing plan was exempt from his bankruptcy estate.

The First Circuit also upheld the bankruptcy court's ruling that the debtor's individual retirement accounts were not exempt because the debtor intentionally concealed or failed to fully disclose those assets in a number of court filings. The debtor had formed the individual retirement accounts less than seven months before filing a bankruptcy petition in the wake of affirmance of a large judgment against him. The funds transferred to the individual retirement accounts represented nearly 50 percent of the debtor's total assets. The First Circuit concluded that even though the individual retirement accounts may have been exempt from the bankruptcy estate, the debtor should have disclosed their existence. The First Circuit upheld the lower courts' rulings that the individual retirement accounts were property the bankruptcy estate to be distributed to the debtor's creditors.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© BakerHostetler | Attorney Advertising

Written by:


BakerHostetler on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.