MEMORANDUM OF DECISION ON CROSS MOTIONS FOR SUMMARY JUDGMENT
This is a lawsuit over the meaning of value. It raises the question, when parents pay for the college education of their adult child, do they receive anything of value? To complicate the question, does it matter if the parents happen to be convicted Ponzi sсheme felons who, at the time they paid the tuition, had been engaged in perpetrating the Ponzi scheme? The parties in this adversary proceeding, plaintiff, Mark G. DeGiacomo, the chapter 7 trustee of the bankruptcy estate of Steven and Lori Palladino, and dеfendant, Sacred Heart University (SHU), offer diametrically opposite answers to these questions. They each believe their answers are so clear that I must grant one of them summary judgment.
Here are the undisputed facts and background surrounding this dispute. At all times relevant to this prоceeding, Nicole Palladino was enrolled as an undergraduate accounting major at SHU in Fairfield, Connecticut. She began her freshman year in the fall of 2012 with an expected graduation date in the spring of 2016. While Nicole was an undergraduate she spent summers and othеr time away from school living at home with one or both of the Palladinos.
On July 21, 2014, Steven and Lori Palla-dino each pled guilty to charges of investment fraud for operating a Ponzi scheme through their company, Viking Financial Group, Inc. Steven was sentenced to ten years in state prison and Lori to five years’ probation. On April 1, 2014, the Palladinos filed joint voluntary petitions
Mr. DeGiacomo initiated this adversary proceeding with a four count complaint against SHU seeking tо set aside as fraudulent transfers the $64,696.22 in payments made by the Palladinos on theories of actual and constructive fraud under both Bankruptcy Code § 548 and the Massachusetts Uniform Fraudulent Transfer Act (UFTA), Mass. Gen. Laws ch. 109A, and to recover that sum from SHU for the benefit of the bankruptcy estаte.
Mr. DeGiacomo maintains that during the period between 2012 and 2014, the Palladinos were actively engaged in the Ponzi scheme for which they were ultimately convicted. As a result, he. .invokes the so-called “Ponzi scheme presumption” that all payments by the Palladinos to SHU wеre made with actual intent to hinder, delay, or defraud creditors. In the alternative, Mr. DeGiacomo urges that the payments were constructively fraudulent because the Palladinos received no reasonably equivalent value from SHU in exchange for the payments and the Palla-dinos were insolvent at the time the payments were made.
SHU retorts that the Ponzi scheme presumption is inapplicable to the payments in question, and in any event, SHU believes it has rebutted that presumption with undisputed evidence of its good faith and lack of knowledge as to the Palladinos’ fraudulent conduct. As for Mr. DeGiaco-mo’s assertion of constructive fraud, SHU acknowledges the Palladinos’ insolvency but maintains that the Palladinos did receive reasonably equivalent value in return for their payments.
Claiming there are no material facts in dispute here, each party seeks summary judgment in its favor. Fed.R.Civ.P. 56 governs motions for summary judgment in bankruptcy proceedings, per Fed. R. Bank. P. 7056. McCrory v. Spigel (In re Spigel),
In counts I and III of his complaint, Mr. DeGiacomo asserts that the payments to SHU were actually (as opposed to constructively) fraudulent under Bankruptcy Code § 548(a)(1)(A) and Mass. Gen. Laws ch. 109A § 5(a)(1). He bases his assertion on the Ponzi scheme presumption. This legal construct stands for the proposition that “the existence of a Ponzi scheme establishes that transfers were made with the intent to hinder, delay and defraud creditors.” Picard v. Merkin (In re Bernard L. Madoff Inv. Sec., LLC),
Mr. DeGiacomo urges the broadest possible application of the Pоnzi scheme presumption so that every transfer of property by a Ponzi scheme perpetrator
I adopt SHU’s interpretation of the Ponzi scheme presumption as more reflective of the policies and objectives the presumptiоn is intended to address. “All transfers made in furtherance of that Ponzi scheme are presumed to have been made' with fraudulent intent.” Sec. Inv’r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC,
By definition, a Ponzi scheme is driven further into insolvency with each transaction. Therefore, by the trustee’s reasoning, no one who in any way dealt with, worked for, or provided services to the debtors could prevent avoidance of any transfers they received. The debtors’ landlord, salaried employees, accountants and attorneys, and utility companies that provided services to the debtors all assisted the dеbtors in the furtherance of their fraudulent scheme. In spite of this fact, we do not think that the goods and services that these persons and entities provided were without value or that transfers to them could be set aside as fraudulent conveyances. We see no material distinction between such persons or entities and appellants. All were necessary to the success of the debtors’ scheme.
Merrill v. Allen (In re Universal Clearing House Co.),
Absent the Ponzi scheme presumption, Mr. DeGiaeomo does not press the argument that the Pallаdinos paid SHU with actual intent to defraud their creditors. He does not quarrel with SHU’s position that it had no knowledge of the Palladinos’ fraudulent activity and that it received their payments in good faith. The facts agreed to by the parties establish that the Palladinos made the pаyments for one reason only, to enable their daughter, Nicole,
As indicated at the outset, this litigation is really about value. Were the Palladinos’ payments to SHU constructively fraudulent under Bankruptcy Code § 548(a)(1)(B) and Mass. Gen. Laws ch. 109A § 5(a)(2), as alleged in counts II and IV of Mr. DeGiaeomo’s complaint, because the Palladinos did not receive reasonably equivalent value from SHU in exchange for the payments? There is no dispute thаt but for the question of value, the Palladinos’ payments would qualify as constructively fraudulent. The funds transferred belonged to the Palladinos, the transfers were made within the two and four year statutory lookback periods under the Bankruptcy Code and the UFTA, and the 'Palladinos were insоlvent when the transfers were made.
This is not the first lawsuit brought by a bankruptcy trustee to recover college tuition payments made by a parent for a child. Prior decisions offer conflicting guidance. Courts that have rejected trustees’ efforts to claw back tuition payments view such payments as essential to maintaining the family unit. Sikirica v. Cohen (In re Cohen), Adversary No. 07-02517-JAD,
Ethereal or emotional rewards, such as love and affection,- do not qualify as value for purposes of defeating a constructive fraudulent conveyance claim. Pereira v. Wells Fargo Bank, N.A. (In re Gonzalez),
Like his position on the Ponzi scheme presumption, I find Mr. DeGiacomo’s approach to valuing the Palladinos’ payments to SHU overly rigid. In separate affidavits filed in support of SHU’s motion for summary judgment the Palladinos offer consistent explanations as to why they made the payments to SHU. As stated by Lori Palladino, for example, in her affidavit, Docket Entry 40-3, at ¶¶ 16-17:
As Nicole’s mother, I feel obligated to pay Nicole’s tuition because I am her mother and she shouldn’t have to come out of SHU saddled with thousands of dollars in loans. Assisting Nicole with her loans gives her the best chance of graduating from SHU. Upon graduating, Nicole will be in the best position to go tо graduate school, secure a job and become financially self-sufficient by finding her own place to live, paying her own bills and paying for her own food
If Nicole is unable to graduate from SHU, she will either move back home with me, or she will obtain her own place to livе in which case I will have to payfor her housing, bills and food costs. Either of these options result [sic] in a financial burden on me. The value to my husband and I[sie] in exchange for paying the tuition to SHU is a financially self-sufficient daughter resulting in an economic break to us.
Mr. DeGiacomo does not dispute that the Palladinos’ statements represent their views as to why they paid Nicole’s college costs, but he asserts that those views are irrelevant because they do not establish “concrete” and “quantifiable” value.
I find that the Palladinos paid SHU beсause they believed that a financially self-sufficient daughter offered them an economic benefit and that a college degree would directly contribute to financial self-sufficiency. I find that motivation to be concrete and quantifiable enough. The operative standard used in both the Bankruptcy Code and the UFTA is “reasonably equivalent value.” The emphasis should be on “reasonably.” Often a parent will not know at the time she pays a bill, whether for herself or for her child, if the medical procedure, the music lesson, or the college fee will turn out to have been “worth it.” But future outcome cannot be the standard for determining whether one receives reasonably equivalent value at the time of a payment. A parent can reasonably assume that paying for a child to obtain an undergraduаte degree will enhance the financial well-being of the child which in turn will confer an economic benefit on the parent. This, it seems to me, constitutes a quid pro quo that is reasonable and reasonable equivalence is all that is required.
Summary judgment shall enter in favor of SHU on cоunts II and IV of the complaint.
Notes
. For ease of reference I will refer to Steven and Lori as the Palladinos and to their daughter as Nicole.
. Viking too filed a chapter 7 petition, case no. 14-12116, and its case has been substantively consolidated with the Palladinos’ case.