Private School Tuition Not Subject to Clawback

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By Daniel Gill

A Chapter 7 trustee wasn’t able to claw back tuition payments made to two private schools in the years before a parent’s bankruptcy filing, a New York bankruptcy judge held in two cases ( Geltzer v. Lawrence Woodmere Acad. (In re Michel) , 2017 BL 328279, Bankr. E.D.N.Y., Case No. 14-43471-ess, Adv. Pro. No. 16-01121-ess, 9/18/17 ; Geltzer v. Trey Whitfield Sch. (In re Michel) , 2017 BL 328298, Bankr. E.D.N.Y., Case No. 14-43471-ess, Adv. Pro. No. 16-01122-ess, 9/18/17 ).

The court therefore dismissed the trustee’s suits against the schools, in a pair of Sept. 18 opinions by Elizabeth S. Stong of the U.S. Bankruptcy Court for the Eastern District of New York.

Judith P. Michel paid tuition to send her three minor children to private schools in Brooklyn, N.Y.—Lawrence Woodmere Academy and Trey Whitfield School—for six years, before filing for bankruptcy on July 4, 2014.

Robert L. Geltzer, the Chapter 7 trustee in Michel’s case, filed lawsuits against the schools, alleging that more than $115,000 of tuition payments made over six years were fraudulent conveyances or unjustly enriched the schools. The trustee is charged with maximizing the debtor’s property for the benefit of her creditors.

Because a free public education was available, Michel didn’t receive measurable economic benefit for paying the tuition, Geltzer argued. The payments were therefore constructive fraud, and could be clawed back, he said.

Michel also intended to hinder, delay or defraud her creditors by paying the tuition, or alternatively that the schools were unjustly enriched by the payments, the trustee alleged.

The court rejected all of these arguments.

Parents are obligated to provide for their children’s necessities, including education, the court said. “It is implausible to suggest that a parent does not receive some value in exchange for tuition payments in connection with meeting these obligations,” it said. Children and the parents must be considered as a single economic unit for the purpose of determining reasonably equivalent value, the court said.

The debtor need not acquire goods at the lowest cost, the court said.

Additionally, Geltzer failed to allege facts to establish that Michel actually intended to hinder, delay or defraud her creditors when she paid for her kids’ schooling.

Finally, the court found that the schools were not unjustly enriched by the tuition payments, because the schools furnished services in exchange for the money.

Allen G. Kadish, New York, represented Geltzer. Ndukwe Agwu, Brooklyn, N.Y., represented Trey Whitfield School, and Lloyd Weinstein, Syosset, N.Y., represented Lawrence Woodmere Academy.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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