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In re Palladino

United States Court of Appeals, First Circuit

November 12, 2019

SACRED HEART UNIVERSITY, INC., Appellee. MARK G. DEGIACOMO, Chapter 7 Trustee for the Estate of Steven Palladino and Lori Palladino, et al., Appellant,


          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.

          Before Howard, Chief Judge, Torruella and Lynch, Circuit Judges.

         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.


         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. 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 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 ยง 548(a)(1)(B)(i)'s reasonably equivalent value standard. The bankruptcy court then acted sua sponte to certify its decision for direct appeal to this court ...

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