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

• Author: Derek A. Huish
• Position: J.D. Candidate, The University of Iowa College of Law, 2019; B.S., Brigham Young University, 2016
• Pages: 2151-2221

2151

Clawing Back

Tuition Payments in Bankruptcy:

Looking to Ancient and Recent History to

Define the Future

Derek A. Huish*

ABSTRACT: Tuition clawback lawsuits are a relatively recent phenomenon

in bankruptcy in which trustees are attempting to recover tuition that was

paid to universities by insolvent parents for their adult children’s education.

This Note contains an Appendix that catalogs 152 tuition clawback lawsuits

to help examine and explain what is happening. Out of the cases that have

been ruled on, courts have struggled with the question of whether tuition

payments by insolvent parents are constructively fraudulent. More

specifically, the main point of debate has been whether tuition paid by an

insolvent parent for an adult child provides “reasonably equivalent value” to

the debtor-parent(s). Based on an analysis of the facts of 152 tuition clawback

lawsuits and the historical development of fraudulent transfer law, this Note

concludes that tuition payments for an adult child do not provide reasonably

equivalent value to their parents. Although this conclusion would resolve the

current split on the question, it does not necessarily provide a solution that

balances the rights of creditors with the rights of parents to help their children

and the rights of universities to be protected. Thus, this Note proposes

amendments to the Bankruptcy Code to better strike a balance between

competing rights and policy considerations.

I.INTRODUCTION ........................................................................... 2153

II.WHY ARE TUITION CLAWBACK LAWSUITS A PROBLEM? ............... 2156

A.USING DATA TO EXPLORE THE PROBLEM ................................ 2158

B.WHY ARE TUITION CLAWBACK LAWSUITS HAPPENING? ........... 2160

*

J.D. Candidate, The University of Iowa College of Law, 2019; B.S., Brigham Youn g

University, 2016. I would like to thank Anne and Jense for their constant and irreplaceable love

and patience. They support and motivate me every day. I would also like to thank Professor

Patrick Bauer for his priceless insight and suggestions and his willingness to help me navigate the

deep waters of bankruptcy. Lastly, I express my gratitude to the Iowa Law Review board for Volume

104. It has been a pleasure to work with you as a fellow board member and writer.

2152 IOWA LAW REVIEW [Vol. 104:2151

III.THE HISTORICAL DEVELOPMENT OF FRAUDULENT

TRANSFER LAW AND BANKRUPTCY .............................................. 2162

A.FRAUDULENT TRANSFERS UNDER ROMAN LAW ........................ 2165

B.EARLY ENGLISH BANKRUPTCY AND FRAUDULENT

TRANSFER LAW ..................................................................... 2166

C.ACTUAL FRAUD, TWYNE’S CASE, AND THE EMERGENCE OF

MODERN CONSTRUCTIVELY FRAUDULENT TRANSFER LAWS ..... 2169

D.FRAUDULENT TRANSFER LAWS IN THE UNITED STATES ............ 2172

1.The Uniform Fraudulent Conveyance Act ................ 2173

2.The Bankruptcy Reform Act of 1978:

Big Changes for Fraudulent Transfers in

Bankruptcy Proceedings ............................................. 2174

3.The Uniform Fraudulent Transfers Act .................... 2176

E.POLICIES AND PATTERNS ....................................................... 2177

IV.LESSONS FROM TUITION CLAWBACK LAWSUITS .......................... 2178

A.TUITION PAYMENTS BY INSOLVENT PARENTS AS ACTUAL

FRAUDULENT TRANSFERS ....................................................... 2178

B.PARENTAL TUITION PAYMENTS AND THE DEBATE

REGARDING “REASONABLY EQUIVALENT VALUE” .................... 2182

1.Cases Where Courts Found that Parents Receive

Reasonably Equivalent Value .................................... 2182

2.Cases Where Courts Found that Parents Do Not

Receive Reasonably Equivalent Value ........................ 2184

3.A Possible Middle Ground? ........................................ 2187

V.LOOKING AT POLICY AND ECONOMICS, RESOLVING THE

SPLIT, BUT SEEING A NEED ......................................................... 2187

A.THE LAW ALWAYS PROTECTS AGAINST ACTUAL

FRAUDULENT TUITION PAYMENTS ......................................... 2189

B.PARENTAL TUITION PAYMENTS DO NOT RESULT IN

REASONABLY EQUIVALENT VALUE AND VIOLATE THE

JUSTNESS BEFORE GENEROSITY PRINCIPLE .............................. 2189

1.Why Tuition Payments Near Bankruptcy by

Insolvent Parents for Their Adult Children Are

or Should Be Appropriate .......................................... 2190

2.Counterpoints and Conclusion: Tuition Payments

by Insolvent Parents are Constructively

Fraudulent Transfers .................................................. 2192

3.The Need for a Middle Ground ................................. 2196

VI.A LEGISLATIVE SOLUTION TO BALANCE COMPETING

INTERESTS ................................................................................... 2198

2019] CLAWING BACK TUITION PAYMENTS IN BANKRUPTCY 2153

A.A SOLUTION THAT DISTINGUISHES BETWEEN INSOLVENT

PARENTS BASED ON THEIR CONDUCT .................................... 2198

B.WHY OTHER PROPOSED LEGISLATIVE SOLUTIONS ARE

INADEQUATE ......................................................................... 2204

VII. CONCLUSION .............................................................................. 2206

APPENDIX .................................................................................... 2207

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

1. JAMES ALEXANDER, THE BEST CONFUCIUS QUOTES 23 (2015) (ebook).

2. See generally L. Alexandra Hogan, This Vehicle Is Used to Avoid, Recover College-Tuition

Payments: The ‘Tuition Claw Back,’ B

USINESSWEST (Aug. 9, 2016), http://businesswest.com/

blog/this-vehicle-is-used-to-avoid-recover-college-tuition-payments; Kat y Stech, Colleges Continue to

Return Tuition Money in Bankruptcy Fights, WALL ST. J.: BANKR. BEAT (Apr. 19, 2016, 11:25 AM),

https://blogs.wsj.com/bankruptcy/2016/04/19/colleges-continue-to-return-tuit ion-money-in-

bankruptcy-fights; infra Appendix.

3. Insolvency is defined in § 101 of the Bankruptcy Code, but a common definition

typically associated with fraudulent transfers, and for purposes of this Note, is that insolvency

means that “the sum of the debtor’s debts is greater than all of the debtor’s assets at a fair

valuation,” or that the debtor is not able to pay his or her debts as they become due. See UNIF.

FRAUDULENT TRANSFER ACT § 2 (UNIF. LAW COMM’N 1984).

4. Sections 544, 548, and 550 of the Bankruptcy Code work together to permit a trustee

to avoid (nullify) and recover property, or the value of property, that is inappropriately

transferred by a debtor before or during bankruptcy. 5 COLLIER ON BANKRUPTCY ¶ 550.01

(Richard Levin & Henry J. Sommer eds., 16th ed. 2012); see also infra Section III.D.2.

5. See, e.g., United States v. Aldrich (In re Rigdon), 795 F.2d 727, 730 (9th Cir. 1986);

Bryan D. Hull, A Void in Avoidance Powers? The Bankruptcy Trustee’s Inability to Assert Damages Claims

on Behalf of Creditors Against Third Parties, 46 U. MIAMI L. REV. 263, 264 (1991).