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

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...