Adult Childs Tuition Payments Avoidable as Fraudulent Transfers

By: Gregory R. Bruno

St. John's Law Student

American Bankruptcy Institute Law Review Staff

In Gold v. Marquette (In re Leonard),[1] the United States Bankruptcy Court for the Eastern District of Michigan held that college tuition payments could be recovered as constructively fraudulent transfers because the debtors did not receive “reasonably equivalent value” for pre-petition payments made to Marquette University (“Marquette”) on their adult son’s behalf.  In 2008, the debtors paid Marquette $21,527 to cover the rest of their son’s tuition and related expenses.[2]  The chapter 7 trustee sought to avoid and recover these payments as fraudulent transfers.[3]  Marquette moved for summary judgment on the ground, inter alia, that the debtors received reasonably equivalent value for these payments because the debtors received two benefits from such payments: (1) peace of mind in knowing that their son was receiving a quality education, and (2) the expectation that their son would become financially independent from them because of such education.[4]

Section 548 of the Code provides that a “trustee may avoid any transfer . . .  of an interest of the debtor in property . . . that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor . . . received less than a reasonably equivalent value in exchange for such transfer or obligation.”[5]  Michigan’s fraudulent transfer statutes contain a similar provision.[6]  Although indirect benefits received through a third person can constitute “value” if they are concrete and quantifiable,[7]  the Court determined that the value received by the debtors in this case was insufficiently concrete and quantifiable to qualify.[8]  As such, Marquette did not provide “value” or “reasonably equivalent value” to the debtors.[9]  

This case may prove significant because of the manner in which it interprets the term “reasonably equivalent value.”  While courts have previously determined that indirect benefits received by debtors need to be economic in nature in order to constitute value, such courts had not explicitly ruled out the proposition that certain intangible benefits might be quantified in terms of economic value.[10]  For example, the court in Dayton Title Agency, Inc. v. White Family Cos., Inc. (In re Dayton Title Agency), held that professional goodwill may provide an indirect benefit to a debtor if the debtor could measure or quantify the economic value of the benefit.[11]  However, the In re Leonard court explicitly held that the satisfaction of strictly moral obligations (such as affording one’s children important opportunities in life) cannot qualify as “value,” and thus firmly grounded “reasonably equivalent value” as an economic inquiry. After this decision, the relevant concern for courts deciding whether a debtor received reasonably equivalent value essentially becomes determining the effect that the benefit received had on the economic net worth of the debtor.

The court indicated that if the net worth of debtors receiving indirect benefits does not increase, than the debtors do not receive reasonably equivalent value.  Therefore, in order for a creditor to prove that a debtor received reasonably equivalent value for an indirect benefit, the creditor must attempt to quantify the effects of that benefit and demonstrate the effect that the benefit had on the debtor’s net worth.  Because it is practically impossible to quantify certain intangible benefits in this way, the court effectively eliminates a wide variety of potential benefits from providing reasonably equivalent value for purposes of section 548 of the Code.  Accordingly, in cases such as this, in which the debtor receives “peace of mind,” the holding in this case forces parties to come up with some way of quantifying the economic value of this intangible benefit, an inherently futile exercise.[12]