Peter Moulinos and Darien Blair represented Brooklyn Law School in an adversary proceeding filed in the United States Bankruptcy Court for the Eastern District of New York entitled: Marc A. Pergament, Chapter 7 Trustee of the Estate of Harold Adamo, Jr. v. Brooklyn Law School, Case No. 8-16-08123-cec, Adv. Proc. No. 16-8124-CEC.  In that “tuition claw back” proceeding, the US Trustee sought to recover from Brooklyn Law School payments that the debtor, Harold Adamo Jr., had made to Brooklyn Law School for the tuition of his daughter, a law student.  The Trustee argued that those payments were post-bankruptcy petition transfers that were not authorized by the Trustee and should thus be paid back by Brooklyn Law School.

After discovery was completed, both parties filed respective motions for summary judgment. It was Brooklyn Law School’s contention that it was not an initial transferee of the tuition payments since those payments were made through the school’s tuition portal that required the debtor to pay funds into the student’s account on behalf of the student. We also argued various public policy issues against this “tuition claw-back” on the basis that it would unfairly penalize a student, make it nearly impossible for educational institutions to investigate whether funds paid by parents on behalf of their children are subject to such claims and also that educational expenses were necessary expenses that did not require explicit authorization of the Trustee.

The Court’s Decision

The Court agreed with our position and granted summary judgment in favor of Brooklyn Law School. Specifically, the Court found that Brooklyn Law School was not an initial transferee under the bankruptcy code and that the Trustee could not recover the monies paid by the debtor on behalf of his daughter. The Court opined that the funds transferred by the Debtor to the students’ accounts were ultimately received by the school as tuition payments, at the time of the initial transfer by the Debtor, and that Brooklyn Law School’s electronic system was merely holding the funds on behalf of the student account holders. Brooklyn Law School was a mere conduit and did not have dominion and control over the funds; rather, the student did.

This ruling is highly important as it is an area of law that has not been addressed in New York. For years, there has been much discrepancy among the Bankruptcy Courts in connection to the type of degree a debtor’s child is seeking to obtain (e.g., high school, undergraduate, graduate, etc.), and whether a debtor’s tuition payments for a child’s specific degree can be clawed back by a trustee. We also believe this recent decision extends the application of 11 U.S.C. §550, providing clarification on the law surrounding “tuition claw-backs” and sets precedent for all future cases in which a debtor seeks to claw back tuition payments when those payments were made to a portal account in which the student has the sole dominion and control.

A copy of the decision can be downloaded by clicking here.

The Case No. is 8-16-08123-CEC, Adv. Proc. No. 16-8124-CEC in the United States Bankruptcy Court for the Eastern District of New York.