Here is the Justia summary: “Beginning in December 2006, plaintiffs made several loans to defendant Lee, who is You’s father. Lee defaulted. In July 2013, a judgment was entered against Lee for $1,143,576. No part of the debt has been paid. In October 2016, plaintiffs filed a complaint against Lee and You, seeking to set aside allegedly fraudulent conveyances and an accounting, claiming that in 2013, Lee paid $104,850 to Northeastern University for You’s tuition and other expenses, knowing that he had incurred, or would incur, debts beyond his ability to pay, intending to “hinder, delay, or defraud” his creditors, including plaintiffs. You contended Lee’s transfers were not fraudulent because they did not lack consideration and that You was not a beneficiary of the transfer, having received only the intangible benefits of an education. The court of appeal affirmed the dismissal of the complaint. Noting that there is no authority on whether creditors may attack college tuition payments as fraudulent transfers under the Uniform Voidable Transactions Act (Civ. Code 3439) the court reasoned that a parent can reasonably assume that paying for a child to obtain a degree will enhance the child’s financial well-being which will, in turn, confer an economic benefit on the parent.”
Despite being a lawyer, I am not an expert on creditor-debtor law. But here’s my very basic explanation. The creditors loaned money to the debtor (Lee). Lee did not pay his debts of more than $1 million. Among the amounts he paid out over the years was approximately $104,000 for his son’s education at Northeastern University. The creditors claimed this was a fraudulent transfer and that they should be able to get this money back, either from the Lee or from his son. The court said no.
OK, here is the basic legal concept (and also a gross oversimplification, just in case anyone reads this post and wants to quibble over the details):
Sometimes people who owe money try to shield assets by transferring money to family members or friends to essentially hold for them. For example, a parent might deposit money in their child’s bank account, or into a grandparent’s account. If the point is to just move money around to keep it from the creditors, then it can be deemed a “fraudulent transfer” and the creditor can take action to get it set aside and recover the money.
A “fraudulent transfer” could apply to a gift – but it wouldn’t apply to a legitimate debt. So, for example, if the debtor decides to pay down the mortgage on his house, or chooses to buy a new car for himself for cash … then it’s not a fraudulent transfer. It may be poor judgment, or it may be unethical, but it’s not fraudulent.
So basically, the case is holding that a father paying his son’s tuition (or apparently pre-paying, as the amount was much more than a year’s worth of college) --is not a fraudulent transfer. (Some colleges do have provisions for prepaid tuition, usually with the benefit of locking in the base tuition amount.) It’s just daddy paying for college, and that’s ok. The creditor can’t sue the kid to try to recover the money.
Thanks, @calmom! I think the case is interesting not only for the creditor-debtor law result but also because of the court’s statement, which seems key to this ruling even if not likely to be precedential in other realms, about the value of a college education.
Thanks for the explanations! How would they be expecting that enhancing the child’s financial well-being would confer an economic benefit on the parent?
@sylvan8798 - I think that isn’t unclear at all. Kid gets good job and can pay to support parents, or at least help them out financially. Lots of people do that, even if it is just the college grad who is living at home and pitching in toward rent.
There is no indication that the loans to the father were student loans. (The opinion does not indicate the nature of the underlying loans, but does tell us that the loans were made in December, 2006.)
The father defaulted on the loans and the creditor obtained a money judgment in July, 2013. At about the same time as that judgment was entered, the debtor father apparently prepaid tuition for his son at Northwestern.
Subsequently, in 2016, the creditor tried to go after the son to recover money that the father had spent on behalf of the son, which happened to be for college tuition, in 2013.
Assuming that the father prepaid tuition at Northwestern when the son was age 18, the son would have been about age 11 at the time of the original loan.
Oops, sorry! I think I must have picked up “Northwestern” from post #3…
I agree that they are very different schools.
But I don’t think it makes a difference legally – that is, the law probably would be the same for any legitimate, accredited college, assuming that the payment actually correlates to COA.
However, the difference does shed some light to me on why the creditors might have chosen to go after the son only 3 years down the line. (They filed their lawsuit in October, 2016) Perhaps the son had secured some particularly well-paid co-ops during the course of his studies?
I think these were personal loans to the father from a friend or relative; it is an individual plaintiff, not a bank and it’s a million dollars unsecured loans. The lawsuit is against the son to recover funds used to benefit the son. The court found that the son didn’t have to repay the plaintiff because it wasn’t a fraudulent transfer but more of a support situation. To me, the lump sum prepayment of tuition was done to avoid repaying the loan but the son convinced a court that it was just a payment in the ‘ordinary course’. Guess that’s why I’m not a judge in California because I think it was done exactly to hide assets from creditors. Very few people prepay that much in tuition.
This was a suit to get a portion of the money ($104k) back. The plaintiff is just trying to collect funds to satisfy the judgment. If the father has bank accounts, assets, insurance policies, etc, the plaintiff will go after those too, suing the holders to recover anything they have that the defendant/father gave them, paid to them for the benefit of the .
This really isn’t precedent setting law that education is vital or more important than paying back creditors. It’s one California court’s opinion (and the appeals court agreeing). The court may have felt it wasn’t fair to hold the son responsible for receiving a non-tangible benefit since he couldn’t just ‘sell back’ the education to recover the money. I bet if the son had been given a car or a house bought with the loan money, the court might have found he did need to repay the creditor or at least give back the house or car. I also think that if it was a commercial loan the outcome might have been different, but then again there are very few $1M unsecured personal loans.
The judgment debtor paid tuition of $104,000 to Northeastern University for his son’s tuition payments. Plaintiffs had loaned the judgment debtor about $1,000,000. Judgment debtor paid his son’s tuition knowing that he could not repay Plaintiffs loan to him of $1,000,000. Plaintiffs sought to recover the $104,000 from the son whose tuition was paid by the allegedly fraudulent transfer.
The court held that the transfer was not fraudulent as the benefit of a college education was received by the son & that the parents received an economic benefit by having secured the economic independence of their son.
Plaintiffs failed to sue Northeastern University who received the transferred tuition payment of $104,000. At no time did the son receive or control the funds.
This case is interesting because the judgment creditor could have & should have consulted an “asset protection” attorney.I am handling a matter now after reviewing law in all 50 states regarding protecting a potential judgment debtor. Solution involves education funds, but only effective if established in one of 5 states. (Cannot say more as it might constitute UPL.)
The judgment debtor was lucky because the Plaintiffs’ lawyer, according to the court, failed to sue the correct party–the recipient of the funds = Northeastern University. So the judgment debtor got the same result as if he had done some planning with a lawyer experienced in asset protection.
A key element in this case that both the court & the lawyers did not address (because it was not necessary, but can help CC readers better understand the result) is that the loan was made legitimately. There was no allegation of any type of fraud against the judgment debtor regarding how he obtained the loan. The fraud allegation was not a fraudulent transfer designed to hide funds from the plaintiff judgment creditor. Rather the $104,000 was used to pay a legitimate obligation of the parents (the judgment debtors).
I think it is interesting if it is repeatable. From the POV of schools themselves being the potential next target , they might scrutinise the prepaid aspect more carefully to ascertain the source of the money. Maybe they haven’t gone after NEU yet? If there is any aspect of wire or electronic money movement, who knows what that could end up looking like.
I disagree Sbylla. If schools feel the need to examine where every dime comes from, they just won’t take the prepayment. I suspect there would be so few cases of this that it wouldn’t be worth even asking the question.
If the creditor would have sued Northeastern, Northeastern could have fought it, or returned the money and then sued the father/son for the tuition. The school would have withheld the diploma until the bill was paid.
The money was paid to Northeastern in 2013; but the creditor didn’t sue until 2016 – 3 years down the line. I don’t think there would have been reason to recover the money from Northeastern in any case. The entire system of college financial aid is built on the assumption that parents are responsible for contributing toward their offspring’s college, at least until the child is age 24.
A parent paying college tuition is not giving away assets – they are purchasing an intangible commodity, one which happens to be within the realm of common and usual expenses incurred by parents of college-age offspring. So I think that the creditor was trying to legally argue that the transfer was fraudulent because the son, not the father, was the beneficiary of the payments, so that it was the equivalent of the father simply giving the son $100K to hold in the son’s bank account. So that is why they tried to recover from the son, and not the college.
But the court is saying that when a parent pays for college for their kid, they are not simply giving away their assets.
The judgment was entered just about the time the father paid Northeastern. It is not unusual for the creditor to take a few years to figure out what happened to the money and how to get it back. In this case the amended judgment was in 2013 and the lawsuit to try to college it, I’m sure after researching what had happened to the money, was filed in 2016.
This reminds me of a current situation where NCP Dad is way behind in child support, but want CP mom to pay for expedited minor child’s passport so that dad can take kid on an all-inclusive Caribbean resort!! Naturally Mom is furious that exH has money for trip but not CS. And his expectation that SHE pay for expedited passport just shows how wacky some can think!
