A parochial elementary school and high school were recently sued in the U.S. Bankruptcy Court for the Eastern District of New York by Robert Geltzer, a bankruptcy trustee.  The suits, Geltzer v. Our Lady of Mt. Carmel-St. Benedicta School and Geltzer v. Xavarian High School, were brought in an effort to recover tuition payments made by a student’s parents who had later filed for bankruptcy. (Kelley Drye & Warren LLP represented Our Lady of Mt. Carmel-St. Benedicta School on a pro bono basis).  Judge Carla Craig, the U.S. Bankruptcy Judge before whom the cases were argued, wrote an opinion granting motions to dismiss that appropriately rejected the trustee’s legal arguments and that should deter other such cases from being brought.

Geltzer sought to have the payments avoided as “fraudulent conveyances”.  Transactions undertaken by people or companies when they are insolvent, and for which they received less than “reasonably equivalent value”, can later be unwound by a bankruptcy court, which can require the funds or assets transferred by the debtor to be paid over to a bankruptcy trustee.  Geltzer’s theory in the Mt. Carmel-St. Benedicta and Xavarian cases was straight forward – the tuition paid by the parents before they filed for bankruptcy were “fraudulent conveyances” because the parents received no benefit from the payments; only the debtors’ children received any actual “value”, in the form of the education that they, and not the parents, received. Geltzer therefore claimed the right to sue the schools and recover the payments.

The lawsuits appeared at first glance to be frivolous to the point of warranting sanctions.  Surprisingly, however, there were no precedent cases explicitly against Geltzer’s position.  Moreover, he was able to cite to two similar cases involving college tuition payments, made by parents on behalf of adult children, that provided at least a veneer of support for his argument.

In their motions to dismiss, Mt. Carmel-St. Benedicta and Xavarian both made similar contentions.  The implications of Geltzer’s position were disturbing.  If his theory were correct, then virtually any expenditures on behalf of a minor son or daughter, made by parents who were later to file for bankruptcy, could subsequently be challenged and recovered by a bankruptcy trustee.

The troubling potential ramifications of Geltzer’s argument aside, the schools strongly attacked his arguments that no “value” was received by the parents for paying school tuition for their children.  The Second Circuit Court of Appeals ruled in a tax case many years ago that a parent could not claim a charitable tax deduction for parochial school tuition “because the [parent] expects, and in fact receives, a definite economic benefit” for the payments.  In another highly analogous case, a bankruptcy trustee sought to recover residential mortgage payments made by a man who voluntarily paid the mortgage for the house in which his acknowledged minor son and the boy’s mother lived.  The bankruptcy court in that case rejected the trustee’s argument that the man could only have received “value” for the mortgage payments if he were legally obligated to make them, noting that the debtor received “reasonably equivalent value” from the “psychic and other intangible benefits that he received from payments that he . . . made for the benefit of [his] child.”

At the hearing, Judge Craig made no secret about how she viewed the lawsuit, at various points characterizing Geltzer’s positions as “ridiculous” and “absurd”.  Her opinion, while slightly more measured than her comments during oral argument, dismissed Geltzer’s claims as “based on a fundamentally flawed legal theory that is . . . at odds with common sense.” There could be no parsing out the value received for the tuition payments, “because the Debtors and their minor children must be viewed as a single economic unit for these purposes.” She then went even further, noting that parents are legally obligated to provide their children with life’s necessities, and their choices cannot be subjected to later review by bankruptcy trustees.  “The fact that they chose [to send] their children to private or parochial school . . . does not render the payments subject to scrutiny by the Trustee for avoidance, any more than the Trustee would be entitled to second-guess other choices made by debtors pre-petition in providing clothing, food [or] shelter . . . to their minor children.”

Before Judge Craig’s ruling, Geltzer had sent letters to several other parochial and private schools in the New York area, demanding the return of tuition payments.  While Geltzer’s legal argument against Mt. Carmel-St. Benedicta and Xavarian perhaps may have fallen just short of frivolous in narrow legal terms, it was, as Judge Craig made clear, “at odds with common sense”.  Her opinion disposed of it appropriately and should prevent similar cases from being commenced.