First Circ.: No 'Reasonably Equivalent Value' in Exchange for Tuition Payments

In In re Palladino, 942 F.3d 55 (1st Cir. 2019), the U.S. Court of Appeals for the First Circuit addressed whether a debtor receives “reasonably equivalent value” in exchange for paying his adult child’s college tuition. The Palladino court answered this question in the negative, thereby contributing to the growing circuit split regarding the avoidability of debtors’ college tuition payments for their adult children as constructively fraudulent transfers.

Background

In 2012, Steven and Lori Palladino began paying tuition for their 18-year-old daughter to enroll as an undergraduate at Sacred Heart University. From 2012 to March 2014, the Palladinos made a total of $64,656.22 in tuition payments to Sacred Heart. Unfortunately, while they were making these tuition payments, the Palladinos were in the midst of operating a multimillion-dollar Ponzi scheme through Viking Financial Group, their closely held company. Consequently, the Palladinos were charged with and pleaded guilty to fraud, after which the Securities and Exchange Commission obtained a $9.7 million civil judgment against them for securities violations. In April 2014, the Palladinos filed for bankruptcy relief under Chapter 7 of the Bankruptcy Code, and Viking filed its own Chapter 7 petition shortly thereafter. The U.S. Bankruptcy Court for the District of Massachusetts consolidated the two Chapter 7 cases, and appointed Mark DeGiacomo as bankruptcy trustee.