Filed: Nov. 12, 2019
Latest Update: Mar. 03, 2020
Summary: United States Court of Appeals For the First Circuit No. 17-1334 IN RE: STEVEN PALLADINO; LORI PALLADINO, Debtors. _ MARK G. DEGIACOMO, Chapter 7 Trustee for the Estate of Steven Palladino and Lori Palladino, et al., Appellant, v. SACRED HEART UNIVERSITY, INC., Appellee. APPEAL FROM THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Melvin S. Hoffman, U.S. Bankruptcy Judge] Before Howard, Chief Judge, Torruella and Lynch, Circuit Judges. Jeffrey R. Hellman, with whom the
Summary: United States Court of Appeals For the First Circuit No. 17-1334 IN RE: STEVEN PALLADINO; LORI PALLADINO, Debtors. _ MARK G. DEGIACOMO, Chapter 7 Trustee for the Estate of Steven Palladino and Lori Palladino, et al., Appellant, v. SACRED HEART UNIVERSITY, INC., Appellee. APPEAL FROM THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Melvin S. Hoffman, U.S. Bankruptcy Judge] Before Howard, Chief Judge, Torruella and Lynch, Circuit Judges. Jeffrey R. Hellman, with whom the L..
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United States Court of Appeals
For the First Circuit
No. 17-1334
IN RE: STEVEN PALLADINO; LORI PALLADINO,
Debtors.
___________________
MARK G. DEGIACOMO, Chapter 7 Trustee for the Estate of
Steven Palladino and Lori Palladino, et al.,
Appellant,
v.
SACRED HEART UNIVERSITY, INC.,
Appellee.
APPEAL FROM THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Melvin S. Hoffman, U.S. Bankruptcy Judge]
Before
Howard, Chief Judge,
Torruella and Lynch, Circuit Judges.
Jeffrey R. Hellman, with whom the Law Offices of Jeffrey R.
Hellman was on brief, for appellant.
Martin P. Sheehan and Sheehan & Nugent PLLC on brief for the
National Association of Bankruptcy Trustees, amicus curiae.
Elizabeth J. Austin, with whom Jessica Grossarth and Pullman
& Comley LLC were on brief, for appellee.
Aaron S. Bayer, Benjamin M. Daniels, and Wiggin & Dana LLP on
brief for the American Council on Education, APPA, Association of
American Medical Colleges, Association of Catholic Colleges and
Universities, Association of Community College Trustees,
Association of Governing Boards of Universities and Colleges,
Association of Independent Colleges and Universities in
Massachusetts, Association of Independent Colleges and
Universities of Rhode Island, Association of Jesuit Colleges and
Universities, Commission on Institutions of Higher Education of
NEASC, Connecticut Conference of Independent Colleges, Council for
Christian Colleges & Universities, Council of Independent
Colleges, Higher Learning Commission, Middle States Commission on
Higher Education, National Association of College and University
Business Officers, National Association of Independent Colleges
and Universities, Southern Association of Colleges and Schools
Commission on Colleges, University Risk Management and Insurance
Association, and WASC Senior College and University Commission,
amici curiae.
November 12, 2019
HOWARD, Chief Judge. Mark G. DeGiacomo, the Chapter 7
bankruptcy trustee for the bankruptcy estate of Steven and Lori
Palladino ("the Palladinos") and Viking Financial Group, Inc.,
appeals from the bankruptcy court's grant of summary judgment in
favor of appellee, Sacred Heart University. The summary judgment
order allowed the university to retain tuition payments made by
the Palladinos for their adult child's college education, payments
that were tendered while the Palladinos were legally insolvent.
In the fall of 2012, Nicole Palladino, the Palladinos'
18-year-old daughter, enrolled as an undergraduate at Sacred Heart
University in Fairfield, Connecticut.1 Between March 2012, and
March 2014, the Palladinos paid $64,656.22 in tuition to Sacred
Heart. In January 2014, however, the Palladinos also pled guilty
in a state court to fraud in connection with operating a
multimillion-dollar Ponzi scheme through their closely held
company, Viking Financial Group, Inc. ("Viking").
Following their fraud convictions, Steven was sentenced
to serve ten years in prison and Lori to five years' probation.
The Securities and Exchange Commission also obtained a $9.7 million
civil judgment against the Palladinos for securities violations.
1The age of majority -- that is, the age below which
parents are expected to provide financial support for their
children -- is a question of state law. See Geltzer v. Oberlin
Coll. (In Re Sterman), 594 B.R. 229, 236 n.8 (Bankr. S.D.N.Y 2018).
In both Massachusetts and Connecticut, that age is eighteen. See
Mass. Gen. Laws ch. 4, § 7; Conn. Gen. Stat. Ann. § 1-1d.
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In April 2014, the Palladinos filed a Chapter 7 bankruptcy
petition. Viking filed its own Chapter 7 petition shortly
thereafter. In May 2014, the bankruptcy court consolidated the
two bankruptcy estates and appointed DeGiacomo to serve as the
Chapter 7 trustee.
In July 2015, DeGiacomo filed a four-count adversary
complaint against Sacred Heart in bankruptcy court seeking to
avoid, and thus to claw back, the Palladinos' tuition payments to
Sacred Heart. Two counts of the complaint claimed that the
Palladinos' tuition payments constituted actual fraud under
11 U.S.C. § 548(a)(1)(A) and Mass. Gen. Laws ch. 109A,
§§ 5(a)(1), 8, and 9.2 The other two counts alleged that the
Palladinos' payments were constructively fraudulent under 11
U.S.C. § 548(a)(1)(B) and Mass. Gen. Laws ch. 109A, §§ 5(a)(2), 8,
and 9 because the Palladinos did not receive "reasonably equivalent
value" in exchange for their tuition payments.
The concept underlying fraudulent transfer is easily
grasped. Where a person cannot reasonably expect to pay his debts
in due course, that person's transfer of his assets to another
person, without receiving equivalent value in return, can if done
2 Under 11 U.S.C. § 544(a), commonly referred to as the
strong-arm clause, the bankruptcy trustee may exercise the rights
of creditors under state fraudulent transfer or preferential
transfer laws. Because DeGiacomo is a bankruptcy trustee, the
strong-arm clause allows him to avoid transfers that violate 11
U.S.C. § 548(a)(1) or Mass. Gen. Laws ch. 109A, §§ 5(a) and 6(a).
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with bad motive be viewed as a dishonest trick that ought to be
civilly undone and perhaps criminally punished. The present case
involved only the civil remedy, namely, the effort of the trustee
to force the school to return the tuition payments.
The statutes or doctrine extending the remedy to
"constructive fraud" contemplates the same remedy where the
insolvent transferor does not have a bad motive. This is a
reasonable result on its own terms since the concern is with equity
among claimants and not criminal punishment. "Constructive" means
that, as only a civil remedy is involved, the court will treat the
situation as if it were fraud and require that the tuition or other
transfer be undone and the money returned to the estate. 5 Collier
on Bankruptcy ¶ 548.01 (Alan N. Resnick & Henry J. Sommer eds.,
16th ed. 2017) [hereinafter Collier].
In February 2016, DeGiacomo and Sacred Heart each moved
for summary judgment. The bankruptcy court granted summary
judgment in Sacred Heart's favor on all four counts of DeGiacomo's
complaint. With respect to the constructive fraud claim -- the
only issue on appeal -- the bankruptcy court found that the
Palladinos paid their daughter's tuition because "they believed
that a financially self-sufficient daughter offered them an
economic benefit." DeGiacomo v. Sacred Heart Univ. (In Re
Palladino), 556 B.R. 10, 16 (Bankr. D. Mass. 2016). This belief,
the bankruptcy court reasoned, satisfied § 548(a)(1)(B)(i)'s
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reasonably equivalent value standard. The bankruptcy court then
acted sua sponte to certify its decision for direct appeal to this
court under 28 U.S.C. § 158(d)(2). Because the bankruptcy court's
ruling presents a question of law, our review is de novo. Irving
Tanning Co. v. Kaplan, 876 F.3d 384, 389 (1st Cir. 2017).
The law prohibiting fraudulent transfers protects
creditors from transactions undertaken by the debtor prior to
bankruptcy proceedings which deplete the pool of assets that will
eventually be available to satisfy the creditors' claims. Collier
¶ 548.01. The origins date back to the Statute of 13 Elizabeth,
which "made it fraudulent to hide assets from creditors by giving
them to one's family, friends, or associates." Husky Int'l Elecs.,
Inc. v. Ritz, 136 S. Ct. 1581, 1587 (2016). Such a transfer
operates to prioritize the friend or family member over bona fide
creditors, which in turn "violates the principle, 'be just before
you are generous.'" Bos. Trading Grp., Inc. v. Burnazos,
835 F.2d
1504, 1508 (1st Cir. 1987) (Breyer, J.).
Section 548(a)(1)(B)(i) of the Bankruptcy Code provides
that:
The trustee may avoid any transfer . . . of an
interest of the debtor . . . incurred by the
debtor, that was made or incurred on or within
2 years before the date of the filing of the
petition, if the debtor voluntarily or
involuntarily . . . received less than a
reasonably equivalent value in exchange for
such transfer or obligation.
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11 U.S.C. § 548(a)(1)(B)(i). The term "reasonably equivalent
value" is not defined in the statute, but it does not include
intangible, emotional, and non-economic benefits. See, e.g.,
Tavenner v. Smoot, 257 F.3d 401, 408-09 (4th Cir. 2001).
Because fraudulent transfer law's purpose is to preserve
the debtor's estate for the benefit of unsecured creditors, courts
evaluate transfers from the creditors' perspective, Riley v.
Countrywide Home Loans, Inc. (In re Duplication Mgmt., Inc.), 501
B.R. 462, 483 (Bankr. D. Mass. 2013), measuring value at the time
of the transfer, BFP v. Resolution Tr. Corp.,
511 U.S. 531, 545–
46 (1994); see also Cooper v. Ashley Commc'ns, Inc. (In re Morris
Commc'ns NC, Inc.),
914 F.2d 458, 466 (4th Cir. 1990). Tuition
payments made by insolvent parents have divided the courts,3
although the recent cases have mostly ruled for trustees.
To us, the answer is straightforward. The tuition
payments here depleted the estate and furnished nothing of direct
value to the creditors who are the central concern of the code
provisions at issue. The code recognizes five classes of
3 Compare Sikirica v. Cohen (In re Cohen), 2012 Bankr.
LEXIS 5097 (Bankr. W.D. Pa. 2012), and Shearer v. Oberdick (In re
Oberdick), 490 B.R. 687, 711-12 (Bankr. W.D. Pa. 2013) (holding
for parents and universities), with Roach v. Skidmore Coll. (In Re
Dunston),
566 B.R. 624, 637 (Bankr. S.D. Ga. 2017), Boscarino v.
Bd. of Trs. of Conn. State Univ. Sys. (In re Knight), 2017 Bankr.
LEXIS 3324 (Bankr. D. Conn. 2017), and Geltzer,
594 B.R. 229
(holding in favor of trustees).
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transactions that confer value: (1) the exchange of property; (2)
the satisfaction of a present debt; (3) the satisfaction of an
antecedent debt; (4) the securing or collateralizing of a present
debt; and (5) the granting of security for the purpose of securing
an antecedent debt. 11 U.S.C. § 548(d)(2)(A). None are present
here, nor are parents under any legal obligation to pay for college
tuition for their adult children.4
Payments not for value by insolvent creditors could in
many situations go to worthy causes or, for example, to elderly
parents or needful siblings. But such payments, absent one of the
exceptions above, will be undone by the rules that allow bankruptcy
trustees to claw back transfers. Congress enacted the fraudulent
and constructively fraudulent claw back laws. The members of
Congress were elected by the public and when they have made the
trade-offs which are set forth in the statute, courts must enforce
those statutes. Absent constitutional challenge, when confronted
with a clear statutory command like the one in the bankruptcy code,
4 One might argue for a different outcome in the case of
a minor child if, for example, state law required the expenditure.
Cf. Geltzer v. Xaverian High Sch. (In re Akanmu), 502 B.R. 124
(Bankr. E.D.N.Y. 2013). Here, however, no legal obligation exists
in Massachusetts for parents to support adult children at all.
Sacred Heart invokes a "societal expectation" that parents will
pay college tuition for their adult children, but, and again, this
does nothing for the creditors.
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that is the end of the matter. See TVA v. Hill, 437 U.S. 153, 194
(1978).5
The judgment of the bankruptcy court is reversed and the
case remanded for further proceedings consistent with this
decision. It is so ordered.
5 Because we find that DeGiacomo is entitled to avoid the
tuition payments under § 548(a)(1)(B)(i), we do not reach his
argument under Mass. Gen. Laws ch. 109A, § 5(a)(2).
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