By Michael L. Moskowitz and and Melissa A. Guseynov
In the last few months, we have reported on several decisions relating to whether a parent’s school tuition payments for an adult child constitute constructively fraudulent transfers. New York and Connecticut have taken similar approaches in deciding the issue. However, there is still much to be resolved in this developing body of case law.
In a recent decision from the Bankruptcy Court for the Southern District of New York, Geltzer v. Oberlin College (In re Sterman), 18-01015 (Bankr. S.D.N.Y. Dec. 4, 2018), Bankruptcy Judge Martin Glenn held that parents’ tuition payments for their minor children did not constitute fraudulent transfers. Significantly, the age of majority in New York is 21, and not 18, as in many other states. In this case, the parents, who subsequently filed for bankruptcy protection, made certain tuition payments before their children were 21, and other educational payments after they reached the age of majority.
With respect to the payments made while Debtors’ children were under the age of majority, the trustee argued that the payments were constructively fraudulent because, among other things, the children matriculated at an expensive private university. Thus, the parents could have spent much less. However, pointing out that New York State law requires parents to pay for minor children’s housing, food, education and health care, Judge Glenn explained that parents receive reasonably equivalent value when they pay for a minor child’s educational expenses, regardless of the cost, absent “egregious conduct.” As a result, the Bankruptcy Court granted summary judgment and dismissed the claims against the university based on educational expenses paid before the children reached 21 years of age.
With regard to educational payments made after the children turned 21, Debtors argued they received reasonably equivalent value for the payments because educating children facilitates their financial autonomy. However, Judge Glenn clarified that the “economic benefit” as characterized by Debtors failed to constitute “value” under New York State law or the Bankruptcy Code. As a result, the Court held the payments made for the children after turning 21 represented constructive fraudulent transfers, as long as the trustee established the parents were indeed insolvent at the time of the transfers.
As emphasized by Judge Glenn, this body of rapidly emerging case law presents “culturally and socially charged issues” for all parties involved. Weltman & Moskowitz will continue to monitor this issue and provide updates to its clients and colleagues. Feel free to reach out to our attorneys with your bankruptcy questions.
About Weltman & Moskowitz, LLP, A New York and New Jersey Business, Bankruptcy, and Creditors’ Rights Law Firm:
Founded in 1987, Weltman & Moskowitz, LLP is a highly regarded business law firm concentrating on creditors’ rights, bankruptcy, foreclosure, and business litigation. Michael L. Moskowitz, a partner with the firm, focuses his practice on business and bankruptcy litigation, as well as creditor’s rights, foreclosure, adversary proceeding litigation, corporate counseling, M&A, and transactional matters. Michael can be reached at (212) 684-7800, (201) 794-7500 or mlm@weltmosk.com. Melissa Guseynov is an associate of the firm. Melissa can be reached at mag@weltmosk.com.
