In re Palladino, 942 F.3d 55 (1st Cir. Court of Appeals 2019)
In re Palladino, 942 F.3d 55 (1st Cir. Court of Appeals 2019): Bankruptcy Trustee recovered—as constituting fraudulent transfers–the tuition payments that parents made to college, to pay college tuition for parent’s daughter. Whether paying the college tuition for daughter was a fraudulent transfer had to be analyzed from the point of view of the creditors of parents. Creditors of the parents did not receive any benefit from parents paying the daughter’s college tuition.
Note: These were not sympathetic debtors, they had been found liable for running a Ponzi scheme. The First Circuit reversed a bankruptcy court order, that had granted summary judgment in favor of the college, which was sued to recover the tuition payments the college had received. First Circuit found that insolvent parents paying tuition payments to college constituted a constructive fraudulent transfer.
That payment of the tuition ultimately provided reasonably equivalent value to the Palladinos by helping to make their daughter self-sufficient. The bankruptcy court certified its decision for direct appeal to the First Circuit (the appeal was only as to the constructive fraudulent transfer claims). The First Circuit reversed and remanded the bankruptcy court’s decision. Argument that parents paying tuition to make daughter self-sufficient, failed.
In reversing the bankruptcy court’s decision, the First Circuit viewed reasonably equivalent value from the perspective of creditors and not from the perspective of the recipient (the college) or the person who benefitted from the transfer (the Palladinos’ daughter). The First Circuit stated at the outset that “[b]ecause fraudulent transfer law’s purpose is to preserve the debtor’s estate for the benefit of unsecured creditors, courts evaluate transfers from the creditors’ perspective.” The decision makes clear that the result was not a close call, stating that, “[t]o us, the answer is straightforward. The tuition payments here depleted the estate and furnished nothing of direct value to the creditors who are the central concern of the code provisions.”
Reviewing the categories of transactions providing value in 11 U.S.C. § 548(d)(2), the First Circuit determined that “none are present here, nor are parents under any legal obligation to pay for college tuition for their adult children.” In a footnote, the court stated that “Sacred Heart invokes a “societal expectation” that parents will pay college tuition for their adult children, but, and again, this does nothing for the creditors.”
Citing to the Supreme Court’s opinion in TVA v. Hill, 437 U.S. 153, 194 (1978), the First Circuit stated that the fraudulent transfer statutes in the Bankruptcy Code were enacted by Congress and that, “[a]bsent constitutional challenge, when confronted with a clear statutory command like the one in the bankruptcy code, that is the end of the matter.”
Note: In Ponzi scheme cases, the debtor’s actual intent to hinder, delay or defraud creditors is established as a matter of law. See, e.g., In re AFI Holding, 525 F.3d 700, 704 (citing In re Agricultural Research and Technology Group, Inc., 916 F.2d 528, 535 (9th Cir. 1990) as to the impact on fraudulent intent of “the mere existence of a Ponzi scheme”). See also, Donell v. Kowell, 533 F.3d 762, 770 (9th Cir. 2008). The debtor operating as a Ponzi scheme also establishes the insolvency tests for constructive fraudulent transfer claims. See, e.g., Donell v. Kowell, 533 F.3d 762, 770–771 (9th Cir. 2008) and In re Maui Indus. Loan & Finance Co., 463 B.R. 499, 503 (Bankr. D. Hawaii 2011). A bankruptcy trustee’s prima facie case for actual intent fraudulent transfers is therefore proven if it has been established that the debtor operated as a Ponzi scheme.
The issue in this appeal was limited to whether a transfer for an adult child’s school tuition provides reasonably equivalent value to the debtor (“reasonably equivalent value” is part of the prima facie case for constructive fraudulent transfers in 11 U.S.C. § 548(a)(1)(B) whereas taking the transfer for “value to the debtor” and taking the transfer in good faith are affirmative defenses to actual and constructive fraudulent transfer claims in 11 U.S.C. § 548(c)). It is unclear in the opinion why the appeal was only taken in relation to the constructive fraudulent transfer claims.
The opinion focused on whether value is reasonably equivalent from the perspective of creditors. That is the same approach taken in California’s Uniform Voidable Transactions Act in California and related case law. See, e.g., in relation to fraudulent transfer claims in under the Uniform Voidable Transactions Act in California, California Civil Code § 3439.03 in the Legislative Committee Comments—Assembly, Note 2; see also In re Bay Plastics, Inc., 187 B.R. 315, 329 (Bankr. C.D. Cal. 1995) and In re Maddalena, 176 B.R. 551, 555 (Bankr. C.D. Cal. 1995). See also, In re Jeffrey Bigelow Design Group, Inc., 956 F.2d 479, 484 (4th Cir. 1992) (“Hence, the proper focus is on the net effect of the transfers on the debtor’s estate, the funds available to the unsecured creditors.”). Other courts have taken different approaches as to whether tuition payments provide reasonably equivalent value. See, e.g., In re Michel, 572 B.R. 463, 475-478 (Bankr. E.D.N.Y. 2017) (that case dealt with tuition for minor children, which differs from the situation in the present case regarding college tuition payments).