Academic journal article Iowa Law Review

Clawing Back Tuition Payments in Bankruptcy: Looking to Ancient and Recent History to Define the Future

Academic journal article Iowa Law Review

Clawing Back Tuition Payments in Bankruptcy: Looking to Ancient and Recent History to Define the Future

Article excerpt

I. Introduction

"Study the past if you would define the future."1

This quote, attributed to the famous Chinese philosopher Confucius, encapsulates a central theme of this Note as it explains, analyzes, and proposes solutions for a relatively new problem in bankruptcy law: tuition clawback lawsuits.2 While the circumstances of each tuition clawback lawsuit vary significantly, each shares a basic formula. First, they involve a parent or parents who, while insolvent,3 paid for an adult child's college tuition and relatively soon thereafter filed for bankruptcy. Then, during the bankruptcy proceedings, the trustee of the parents' bankruptcy estate attempts to use the avoidance powers bestowed by the Bankruptcy Code4 to "claw back" the tuition that was paid by the debtor-parents from either the university to which it was paid and/or the adult child for whom it was paid. Why? Trustees-who have a duty to maximize the value of the estate for creditors5-claim that the tuition payments are fraudulent transfers, and therefore, under the Bankruptcy Code, should go to the parents' creditors.6

Broadly defined, a fraudulent transfer is any transfer that has "the object, tendency, or effect of . . . defraud[ing] [a creditor], or the intent of which is to avoid some duty or debt."7 The Bankruptcy Code contains the two main types of fraudulent transfers that have repeatedly emerged throughout history8: A transfer can be actually fraudulent-a transfer within two years of filing for bankruptcy that was made with the actual intent to delay or prevent a creditor from obtaining the property?-or constructively fraudulent-a transfer within two years of filing for bankruptcy that was made while the debtor was insolvent and for which the debtor did not receive "reasonably equivalent value."10

When considering whether tuition payments by insolvent parents fall into either of these two types of fraudulent transfers, one can certainly imagine that a parent could actually intend to deprive creditors of money in an upcoming bankruptcy by using it to pay for a child's tuition in the present. But does or would that ever really happen? Furthermore, even if certain tuition payments were not actual fraudulent transfers, they could still be constructively fraudulent transfers if the parents made the payments while insolvent and a court determined that the tuition paid for the adult child did not provide reasonably equivalent value to the parents. If the tuition payments do not provide reasonably equivalent value to the parents who make them, then every parent who is insolvent and pays for an adult child's tuition within two years11 of filing for bankruptcy is making a constructively fraudulent transfer. Is that really the conclusion the law demands? If so, should it be?

To analyze these issues and answer these questions, this Note looks to history, both ancient and recent. To help with this process, this Note presents an Appendix cataloging 152 tuition clawback lawsuits that have arisen, many of which are discussed and cited throughout this Note. In Part II, this Note explores why tuition clawback lawsuits are concerning, what they look like, and the society in which they have emerged. Part III examines the historical development of fraudulent transfer law, starting at its ancient origins and finishing at the modern day. Part IV, looks at tuition clawback lawsuits that have been ruled on, revealing some common patterns and the split among bankruptcy courts regarding whether tuition payments for an adult child provide reasonably equivalent value to their insolvent debtor-parents. Part V analyzes the reasoning of bankruptcy courts on both sides of the split. It analyzes the question of whether or "[w] hen is it OK for financially struggling parents to pay for a child's college education?"12 It focuses on whether the law views these parental tuition payments as fraudulent transfers,13 as well as whether society views them as fraudulent or impermissible debtor conduct. …

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