Perusing recent opinions, we came upon a bankruptcy case in the First Circuit of some interest, In re: Palladino 17-1334.

Steven and Lori Palladino sent their child, Nicole, to Sacred Heart University, a private Roman Catholic university in Connecticut, whose values, according to its web site, include pursuit of truth, promotion of the common good, and recognition of the dignity and worth of every being. The school “embraces a vision for social justice and educates students in mind, body and spirit to prepare them personally and professionally to make a difference in the global community.” (Sacred Heart University Mission Statement)

Unfortunately, Steven and Lori were also running a multimillion dollar Ponzi scheme at the time. They were convicted of fraud  and the SEC obtained a $9.7 million civil judgment against them. They filed for Chapter 7 bankruptcy, and the trustee sought to claw back $64,000+ in tuition they paid to Sacred Heart for Nicole’s education over a two-year period.

The test for such a claw back under bankruptcy law is whether Mom and Dad received “reasonably equivalent value” in exchange for their tuition payments.

The answer, the First Circuit held (CJ Howard writing, joined by Judges Torruella and Lynch), was nope. This result is apparently in line with other circuits. At least where there’s no parental obligation to pay (Nicole was eighteen), educating your kid doesn’t cut it for claw back purposes. While the bankruptcy court had concluded that payment based on the belief that “a financially self-sufficient daughter offered [the parents] an economic benefit,” that argument did not succeed at the appellate level.

So, any of you folks ponying up massive amounts for your kids’ tuition, what’s the moral of the story? That the diploma isn’t worth anything to you, at least from a bankruptcy perspective? Maybe.

But perhaps the best lesson is not to engage in the fraudulent scheme precipitating the need for the claw back.

In the end, the loser is, of course, the school – which is perhaps why Wiggin & Dana filed an amici brief on behalf of many institutions of learning, to no avail.