PROPOSED NEW LAW WON'T SHIELD COLLEGES FROM TRUSTEE CLAWBACK ACTIONS, ACCORDING TO COMMENTARY IN ABI JOURNAL

February 22, 2016, Alexandria, Va. — Numerous bankruptcy trustees have sought to clawback from educational institutions tuition payments made by parents who later filed for bankruptcy, on a “constructive fraud” theory. The trend and conflicting caselaw is cause for concern from parents, students and schools. Legislation has been proposed to provide a safe harbor of sorts. 

A commentary in the February ABI Journal argues that the Protecting All College Tuition Act of 2015 (PACT), would have little impact on a trustee’s ability to claw back tuition payments. “As a threshold matter, the bill only attempts to exclude college tuition payments from claims based on constructive fraud under § 548(A)(1)(B),” Elizabeth E. Stephens of Sullivan Hill Rez & Engle APLC (Las Vegas) writes in “PACT Will Not Prevent Trustees from Attempting to Claw Back College Tuition Payments.”

The stated purpose of PACT is “to provide an exception to the avoidance of transactions by bankruptcy trustees under section 548 where the transaction was a good-faith payment by a parent of post-secondary education tuition for that child.” Stephens notes that tuition paid by debtors, even for the education of minor children, has long been a hot-button issue in chapter 13 cases and continues to be one, even since the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).

After examining recent cases involving the issue, Stephens finds that “the proposed PACT legislation would have little impact on a trustee's ability to claw back tuition payments.” She also found that the cases illustrate no consensus on the issue of the clawback of college tuition. “That being so, why not entrust the debate to experienced bankruptcy trustees exercising their business judgment, as well as bankruptcy or district court judges, who are accustomed to weighing facts and exercising their judgments in balancing the rights of debtors and creditors?" Stephens writes.

“Regardless of the wisdom of the proposed legislation, it is clear that PACT would not fulfill its intended purpose,” writes Stephens. She thinks that other legislation pending consideration in the 114^th Congress may provide more direct relief to students and parents, such as the Student Loans in Bankruptcy Act of 2015 that would strike 11 U.S.C. § 523(a)(8), which excepts education overpayments or loans from bankruptcy discharges.

To obtain a copy of “PACT Will Not Prevent Trustees from Attempting to Claw Back College Tuition Payments,” published in the February edition of the ABI Journal, please contact ABI Public Affairs Manager John Hartgen at [email protected] or 703-894-5935.

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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/education-events.