Tuition Payments for Adult Children Squarely Held to Be Constructively Fraudulent

On an issue dividing the lower courts, Bankruptcy Judge Martin Glenn of New York squarely held that educational expenses paid for a child over the age of majority are constructively fraudulent transfers, assuming the debtor-parent was insolvent. Conversely, Judge Glenn found no fraudulent transfer in his December 4 opinion when parents paid educational expenses for a minor child, because parents receive reasonably equivalent value by satisfying their obligations to educate their children. Judge Glenn said the case presented “culturally and socially charged issues.” Citing a “developing body of case law,” he listed decisions holding that tuition payments for adult children are or are not constructively fraudulent transfers. Judge Glenn said he was “constrained” by the Bankruptcy Code and New York’s fraudulent transfer law to determine whether the bankrupt parents received “reasonably equivalent value” or “fair consideration” for educational expenses they paid. Stipulated facts presented the issues starkly. Within six years before their joint bankruptcies, the parents paid tuition and related expenses for their two children. Some payments came before the children were 21, and others were after. The trustee sued the children, the college they attended and student loan lenders.

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