Here at Shenwick & Associates, one of our goals
when a client files for bankruptcy is to flag potential issues that may
complicate their bankruptcy filing. One
of those potential issues is an action by the chapter 7 bankruptcy trustee to
recover fraudulent conveyances.
A fraudulent conveyance is a transfer of the debtor’s
assets to a third party with the intent to prevent creditors from reaching the
assets to satisfy their claims against the debtor. There are two types of fraudulent
conveyances, involving either actual fraud (where the debtor intends to defraud
creditors) or constructive fraud (where the debtor makes the transfer for less
than “reasonably equivalent value”).
Fraudulent conveyances are governed by Article 10 of
the New York Debtor and Creditor Law and §
548 of the Bankruptcy Code.
In a
recent case in the U.S. Bankruptcy Court for the Southern
District of New York, a chapter 7 trustee commenced an adversary
proceeding to recover allegedly constructively fraudulent transfers made by the
debtors to or for the benefit of their two daughters. Both the chapter 7 trustee and the daughters
filed cross–motions for summary judgment of whether the debtors received “reasonably
equivalent value” for the transfers for college tuition and expenses.
In his opinion, Bankruptcy Judge
Martin Glenn examined the split among courts as to whether college
tuition payments made by parents for the education of their children after they
reach the age of majority are constructively fraudulent. He held that the transfers to both daughters
for college tuition and related expenses were avoidable as constructive
fraudulent transfers if the debtors were insolvent at the times the transfers
were made. However, the transfers to one
of the daughters for college tuition and related expenses while she was a minor
were supported by reasonably equivalent value (not a fraudulent conveyance and
not subject to claw back).
The lesson here is for parents who are considering
bankruptcy not to pay college tuition for a child who is above the age of
majority (in New York, the age of majority is 21) and file chapter 7 bankruptcy
or risk a chapter 7 trustee trying to “claw back” tuition payments from
educational institutions and their children.
For a smooth bankruptcy process guided by specialists in bankruptcy and
debtor/creditor practice, please contact Jim Shenwick.
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