For-profit college chain files (for receivership)

Education Corporation of America filed a legal action in federal district court last week claiming financial distress, seeing to enjoin its creditors and restructure its debt. Sounds like Chapter 11, right? But no. ECA can't file a bankruptcy petition, because that would immediately cut off its main funding source, federal student grants and loans. ECA and its subsidiary Virginia College LLC were already facing disaster under the Obama administration's gainful employment rule, but Secretary DeVos suspended that rule giving poorly performing trade schools a new lease on life. At the same time ECA was facing loss of federal student aid because their accreditor, ACICS, was derecognized by the Education Department under the prior administration for its weak oversight of deeply flawed for-profit schools, like Corinthian College. Unsurprisingly, Secretary DeVos is reconsidering the ACICS decision as well. In a story that seems to be repeating for many for-profit colleges, and even law schools, enrollments are plummeting due to a combination of consumer information about poor student outcomes and reluctant but inevitable enforcement by accreditors and regulators. ECA's proposed plan is to close some of its schools and continue operating others. Its very creative complaint asks the court for a nationwide injunction against its landlords and creditors and appointment of a receiver, among other things. Here is the court's temporary restraining order enjoining all landlords and creditors nationwide for 10 days.

While I am generally not in favor of bankruptcy discrimination, the ineligibilty of bankrupt colleges for taxpayer funding is eminently sensible. Given the weakness of institutional gatekeeping and the political challenges to shutting down predatory schools, and the for-profit college business model in which taxpayer grants and loans are used to prepay tuitions for students who are frequently misled about career chances, we don't need bankruptcy to give these failing schools a new lease on life.

UPDATE: After hearing and briefing, the District Court on November 5 dismissed ECA's action, finding there is no justiciable case or controversy. On December 5 ECA announced it will close all 75 campuses, leaving as many as 20,000 students with potential student loan discharge or school defense claims.

Comments

[Matthew Bruckner]

Thanks for blogging about this. I hadn't yet seen the TRO. Interesting that ECA was able to get an TRO, when similar relief would be unavailable under the Bankruptcy Code.

As readers may know, the Code contains various exceptions to the automatic stay, which allow states to pull an institution's license, accreditors to pull their accreditation, and the Secretary of Education to terminate an institution of higher education's eligibility to participate in Title IV's loan and grant programs. See 11 U.S.C. §§ 362(b)(14)-(16).

As for the ineligibility for bankruptcy relief more generally, it seems to me that the solution to the problems you address are not bankruptcy discrimination, but improving institutional gatekeeping for access to Title IV. As for predation, it's surely a problem, but the solution isn't (IMO) to eliminate access to bankruptcy, but to more vigorously protect students from those predatory practices. After all, colleges haven't had access to bankruptcy in decades and predatory practices have only grown.

[Legend]

ECA is owned by Willis Stein and Partners out of Chicago. Run by Stu Reed former CEO of the failed SEARS group. Please help me and the students of ECA by sending all inquires to Stu Reed at [email protected] or calling Willis Stien and Partners at (847) 272-5442