This opinion just seems a little crazy on the surface. The short version of the facts — The debtors paid for their daughter’s college education to the tune of almost $65,000, and the Trustee filed suit against the school, Sacred Heart University, to recover that amount as a fraudulent conveyance under §548 and the Mass. UFTA. The basis for the “fraud” element, the Trustee contended, was that the Debtors were actively engaged in a Ponzi Scheme at the time and, therefore, all fruits of the scheme were considered as part of the fraud. As the debtors were convicted of the scheme, that element was met. The Judge, however, found that the Debtors received “reasonably equivalent value” for the transfers because…
I find that the Palladinos paid SHU because they believed that a financially self-sufficient daughter offered them an economic benefit and that a college degree would directly contribute to financial self-sufficiency. I find that motivation to be concrete and quantifiable enough. The operative standard used in both the Bankruptcy Code and the UFTA is “reasonably equivalent value.” The emphasis should be on “reasonably.” Often a parent will not know at the time she pays a bill, whether for herself or for her child, if the medical procedure, the music lesson, or the college fee will turn out to have been “worth it.” But future outcome cannot be the standard for determining whether one receives reasonably equivalent value at the time of a payment. A parent can reasonably assume that paying for a child to obtain an undergraduate degree will enhance the financial well-being of the child which in turn will confer an economic benefit on the parent. This, it seems to me, constitutes a quid pro quo that is reasonable and reasonable equivalence is all that is required.
Thanks to Mark Duedall at Bryan Cave for the initial tip on this case. His article on the case can be found at the Bankruptcy Cave Blog. I would expect the decision to be appealed. While not all parents are convicted of running a Ponzi Scheme, Bankruptcy Courts are probably full of parents who have paid their child’s educational expenses (or for housing, vehicles, and living expenses). As Mark points out, this new twist on the defense could create a safe haven for many otherwise fraudulent transfers to children. It could also lead to some novel pre-Bankruptcy planning.
Future debtors, please take note of this remarkable opinion. If you want to help a family member, then give them money before bankruptcy, for any plausible (or implausible reason). Sick relative? Down on their luck relative? Relative that wants to invest in uranium stock, purchase the Brooklyn Bridge, or bail a Nigerian prince out of jail? The Palladino ruling creates a debtor-friendly “it tugs on your heartstrings” / “blood is thicker than water” defense to fraudulent transfer actions. And preferences too! Why not? Palladino is a safe haven for most or all of these wrongful actions.
The case is Degiacomo v. Sacred Heart, Case No. 15-01126 (Bankr. E.D. Mass. August 10, 2016). Click here for the .pdf of the opinion.
Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation. For more information, click here.