Faculty Scholarship

Document Type

Article

Publication Date

2020

Abstract

Trustees in bankruptcy hold the power to initiate lawsuits, relying on theories of fraudulent transfer. These lawsuits are aimed at recovering payments made by the debtor to third parties prior to the filing by the debtor of the debtor’s bankruptcy case. In recent years, several colleges and universities have found themselves the target of fraudulent transfer claims by trustees. These trustees seek to have these colleges and universities disgorge payments of tuition and other educational expenses made by debtor-parents for their children. They argue that, while the payment by the debtor-parent of educational expenses for the debtor’s adult child may result in value to the adult child (in the form of an education), no value is given to the debtor. Because no value was given to the debtor, they argue, these payments should be deemed constructively fraudulent and should be returned to the trustee for distribution to the debtor’s creditors. The courts have struggled with defining the proper limits of constructive fraud. They have grappled, in particular, with determining how to gauge whether a debtor has received “reasonably equivalent value” in exchange for a transfer such that the subject transfer will not be deemed a constructive fraud. The decisions to address the reasonably equivalent value requirement as applied to the payment by the debtor of undergraduate educational expenses for the debtor’s adult children illustrate that the traditional paradigm of the fraudulent transfer, and the doctrines that have developed for assessing reasonably equivalent value, are inadequate. Courts have applied the doctrines inconsistently, resulting in no clear understanding of whether or to what extent the debtor may be perceived as having received “value” in exchange for the debtor’s payment of educational expenses for the debtor’s adult children sufficient to withstand an assertion that a given payment is constructively fraudulent. This article proposes a new framework for analyzing reasonably equivalent value for purposes of determining whether undergraduate educational expense payments made by debtor-parents on behalf of their adult children should be deemed constructively fraudulent such that the college or university that received the subject payments should be required to disgorge them. It proposes a test that accounts for the practical, cultural, and societal context in which these payments are made. The proposed test for reasonably equivalent value in this context will result in a more standardized and efficient approach to the courts’ consideration of such claims. Moreover, it will result in decisions that more accurately reflect the economic realities of the family, thereby more faithfully advancing the overarching purposes of both bankruptcy law and fraudulent transfer law.

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