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Massachusetts Court Rejects Trustee’s Effort to Clawback Tuition Fees as Fraudulent Transfers

DeGiacomo v. Sacred Heart Univ., Inc. (In re Palladino), Nos. 14-11482-MSH, 15-01126, 2016 Bankr. LEXIS 2938 (U.S. Bankr. D. Mass. Aug. 10, 2016)

This lawsuit primarily addressed a question of value – when parents pay for the college education of their adult child do they receive anything of value? Does it matter if the parents happen to be convicted as Ponzi scheme offenders who, at the time they paid the tuition, had been engaged in perpetrating the Ponzi scheme?

Mark G. DeGiacomo, the Chapter 7 Trustee of the bankruptcy estate of Steven and Lori Palladino, brought an action against Defendant Sacred Heart University (SHU), to set aside certain payments as fraudulent transfers in amount of $64,696.22 pursuant to actual and constructive fraud under §548 of the Bankruptcy Code and the Massachusetts Uniform Fraudulent Transfer Act (MUFTA) and to recover that sum from SHU for the benefit of the bankruptcy estate.
The Trustee maintained that during the period between 2012 and 2014, the Palladinos were actively engaged in the Ponzi scheme for which they were ultimately convicted. As a result, he invoked the so-called “Ponzi scheme presumption” that all payments by the Palladinos to SHU were made with actual intent to hinder, delay, or defraud creditors. In the alternate, the Trustee argued that the alleged payments were constructively fraudulent because the Palladinos received no reasonably equivalent value from SHU in exchange for the payments and the Palladinos were insolvent at the time the alleged payments were made. SHU argued that the Ponzi scheme presumption was inapplicable to the payments in question, and in any event, SHU already rebutted that presumption with undisputed evidence of its good faith and lack of knowledge as to the Palladinos’ fraudulent conduct. With regards to the Trustee’s assertion of constructive fraud, SHU acknowledged the Palladinos’ insolvency but maintained that the Palladinos did receive reasonably equivalent value in return for their payments.

The Court held that the Ponzi scheme presumption does not apply to the tuition payments paid to a university for a child’s tuition. The Court stated that the alleged payments were not actually fraudulent under §548(a)(1)(A) and the MUFTA, Mass. Gen. Laws ch. 109A, §5(a)(1) because the university had no knowledge of the Debtors’ fraudulent activity and received their payments in good faith. Further, the payments were not constructively fraudulent transfers as the Debtors did receive reasonably equivalent value under §548(a)(1)(B) and §5(a)(2) because a parent could reasonably assume that paying for a child to obtain an undergraduate degree would enhance the child’s financial well-being, which would confer an economic benefit on the parent.


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