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"PACT" Act Fails to Fully Shield Colleges from Tuition Clawbacks by Bankruptcy Trustees, According to July ABI Journal

Alexandria, Va. — The lead article in the July issue of the ABI Journal highlights the proposed “Protecting All College Tuition (PACT) Act of 2015” and the potential loopholes that could leave colleges and universities exposed to bankruptcy trustee clawback suits. “While PACT may provide colleges and universities with some much-needed comfort, an amendment to § 548 [as proposed in the legislation] does not go far enough,” writes Lynne B. Xerras of Holland & Knight LLP (Boston) in her article “PACT: Will Congress Except College Tuition Payments from Avoidance?” “Trustees will arguably still hold the ability to sue to recover a debtor’s tuition payments under the applicable state fraudulent transfer statutes if the prerequisites of § 544 of the Bankruptcy Code can be satisfied by the trustee as plaintiff.”

 

An increasing number of colleges and universities find themselves defending litigation initiated by chapter 7 trustees administering bankruptcy cases of the parents of past or present students, according to Xerras. “The trustees seek to recover the value of tuition payments funded by the debtor/parents on behalf of an adult child in the years preceding the parents’ bankruptcy filing on the bases that those transfers were ‘constructively’ fraudulent and therefore avoidable under either §§ 544 or 548 of the Bankruptcy Code,” she writes. “The trustee’s theory is based on the premise that while the matriculating student receives consideration from a college or university in the form of an education, the parent writing the check receives nothing.”

 

After reports in the ABI Journal and Wall Street Journal earlier this year pointed out the trend, Xerras said that Rep. Chris Collins (R-N.Y.) introduced the PACT Act on May 12 in an attempt to reverse it. The bill seeks to amend § 548 of the Bankruptcy Code to preclude trustees from avoiding a good-faith payment by a parent of post-secondary education tuition for that parent’s child.

 

“While PACT represents progress in achieving consistency within the Bankruptcy Code as to treatment of pre-petition tuition payments toward a dependent child’s college education, colleges and universities that received payments funded by chapter 7 debtors remain exposed,” Xerra writes. “Until PACT becomes law, colleges and universities must determine how to best structure the parent/student/university relationship to protect tuition payments from avoidance and enable collection from students after graduation, if previous payments are avoided.”

 

To obtain a copy of “PACT: Will Congress Except College Tuition Payments from Avoidance?,” published in the July issue of the ABI Journal, please contact John Hartgen at 703-894-5935 or via email at jhartgen@abi.org.

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ABI is the largest multi-disciplinary, nonpartisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues. The ABI membership includes more than 12,000 attorneys, accountants, bankers, judges, professors, lenders, turnaround specialists and other bankruptcy professionals, providing a forum for the exchange of ideas and information. For additional information on ABI, visit www.abiworld.org. For additional conference information, visit http://www.abi.org/calendar-of-events