Consumer Debt

Alexandria, Va. — Amidst increasing tuition clawback suits being brought against colleges and universities in consumer bankruptcy cases, colleges are entitled to assert a good-faith defense under the Bankruptcy Code, according to a November ABI Journal article. “Reported opinions in tuition clawback suits have failed to consider whether, when a college receives a tuition payment from a student's parent, the college is an ‘immediate or mediate transferee’ as opposed to an ‘initial transferee’ under § 550 of the Bankruptcy Code,” James M. Wilton and William A. McGee of Ropes & Gray LLP (Boston) write in their article “Robbing Peter to Pay for College: A Good-Faith Defense in Tuition Clawback Fraudulent Transfers.” “The distinction makes a difference.”

An initial transferee's delivery of value to a non-debtor third party in good faith is not a defense to recovery of the transfer, according to the authors. In many tuition fraudulent-transfer actions, the authors write that the college or university receives tuition payments directly from a parent but is not an initial transferee because tuition payments from a parent are received by the college into an account maintained on behalf of the adult student. “An ‘immediate or mediate transferee’ who receives the transfer from an initial transferee has a defense to recovery based on good faith and value delivered,” Wilton and McGee write.

In the case of tuition payments to a student account maintained by a college or university, the student has dominion and control over the tuition payment by virtue of his/her ability to withdraw from school (by choice or necessity) and receive a refund from the college. “The college is a ‘mere conduit’ under applicable case law, and the student is the initial transferee,” according to Wilton and McGee. “A debtor/parent's tuition payment to a college creates an asset that belongs to the student.”

“As a good-faith immediate or mediate transferee of the student for value, the college should have an absolute defense to recovery in a tuition clawback fraudulent transfer action.”

To obtain a copy of “Robbing Peter to Pay for College” from the November edition of the ABI Journal, please contact ABI Public Affairs Manager John Hartgen at 703-894-5935 or [email protected].

Now available for pre-order in ABI's Bookstore is the second edition of Graduating with Debt: Student Loans under the Bankruptcy Code. The book, written by Profs. Susan E. Hauser and Daniel A. Austin, includes expanded coverage of special issues in chapter 13 cases, updates on litigation issues, legislative initiatives regarding student loan debt forgiveness, and much more. Members of the press looking to review a copy of Graduating with Debt or speak with the authors should contact John Hartgen at [email protected].

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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.