No Trustee Left Behind – Another Bankruptcy Court Requires Colleges to Return Tuition to the Bankruptcy Estate
February 13, 2017
Authored by: Mark Duedall
Another bankruptcy trustee catches another hapless college unaware. In Roach v. Skidmore College (In re Dunston), Bankr. S.D. Ga. (Jan 31, 2017), a trustee appears to win the next battle of “bankruptcy estates v. child’s college,” ruling that an insolvent parent who paid the college tuition of an adult child made a fraudulent transfer to the college. Thus, the unsuspecting college will likely have to return the tuition to the parent’s bankruptcy estate.
The theory is simple (albeit unsettling to some). Under Section 548 of the Bankruptcy Code (and applicable state law, as a back-up), if any debtor makes a transfer to a third party while insolvent, and does not receive reasonably equivalent value in return, the debtor’s bankruptcy trustee may reclaim such transfer for the benefit of unsecured creditors (and for the benefit of the trustee’s fees, of course). In plain English, the recipient got the money, and didn’t provide anything to the insolvent party which made the payment. That’s unfair to the insolvent payor’s other creditors (who are left with crumbs, or nothing),