Colleges Can Be Forced to Return Tuition When Parents Go Bankrupt

On Tuesday, the United States Court of Appeals for the First Circuit issued a decision in Degiacomo v. Sacred Heart University. The case involved an issue of first impression in the First Circuit – namely whether a bankruptcy trustee can “claw back” tuition payments made by insolvent parents on behalf of their child, where the parents subsequently declare bankruptcy. The court reversed the Bankruptcy Court’s decision in favor of Sacred Heart, holding that the parents had no legal obligation to pay for the education of their adult children, and they personally received no value by paying those tuition expenses. The court did not buy the argument that “a financially self-sufficient daughter offered them [the parents] an economic benefit.” The $64,656.22 payment of tuition to Sacred Heart therefore was treated as a “constructive fraudulent transfer,” subject to claw back under the bankruptcy code. First Circuit interpretation of the bankruptcy code is binding on bankruptcy courts in Maine, New Hampshire, Massachusetts and Puerto Rico, and therefore applies to tuition payments to colleges and universities in those states.

This case has a salacious element to it because the student’s parents pled guilty to running a multi-million-dollar Ponzi scheme, resulting in dad’s imprisonment for 10 years. Mom was sentenced to five years’ probation.  The SEC obtained a $9.7 million civil judgment against them, thereby leading to the Chapter 7 bankruptcy petition. Click here to view the decision.

Please contact any member of our Higher Education Practice should you have any questions regarding this decision.