Christopher Kephart
Thanks to a relatively obscure federal statute, with rules written during the Clinton administration regarding the discharge of federal student loans, taxpayers must be on alert and students receiving federal student aid need to pay attention. The 2015 Chapter 11 bankruptcy filing by Corinthian Colleges, Inc. has opened the door for a potential $3.5 billion taxpayer bailout of existing Corinthian Colleges student loans. This story of how the voluntary filing for bankruptcy by a for-profit university appears to be more politics than process.
On April 26, 2015, Corinthian Colleges, Inc. ceased operations and suspended classes at substantially all of its facilities. Corinthian, the nation’s largest for-profit career college, was accused of falsifying job placement statistics and graduation rates, which resulted in the Department of Education’s suspending Corinthian’s access to federal dollars. The lack of federal funds forced Corinthian to “close its doors.” The closures left some 16,000 students in the cold while strapping those same students with millions of dollars in student loan debt.
The Department of Education not only discontinued federal funding, but also levied fines against Corinthian in the tens of millions. Corinthian filed a voluntary petition for Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Delaware on May 4, 2015. The United States Trustee appointed an official committee of unsecured creditors. The presiding Judge, the Honorable Kevin J. Carey, also ordered the appointment pursuant to Bankruptcy Code section 1102 of a separate (and far less common) official committee to represent student claimants. Corinthian’s Chapter 11 Plan for Liquidation, which was confirmed by the Bankruptcy Court on August 28, 2015, used some of the bankrupt company’s funds to create a $4.3 million Student Reserve Fund for the benefit of those students. The attorney for the student committee, Scott Gautier, may have been satisfied with the $4.3 million trust fund in the bankruptcy proceeding, but he indicated that this was only the beginning of the battle. His real goal was to have the nearly $2.5 billion in estimated Corinthian student debt set aside. According to Gautier, the $4.3 million was to be used at the direction of the student committee members to fund the anticipated fight with the federal government regarding total debt forgiveness for a broad range of former Corinthian students.
Corinthian funded its operations with both federal and private student loans. Contemporaneously and in conjunction with the bankruptcy proceeding, debt relief was afforded to current and former students in the form of a reduction of outstanding private loans made by Corinthian. This occurred when Educational Credit Management Corporation Group (“ECMC”), a corporation that specializes in student debt management, purchased several of Corinthian’s campuses. As part of the negotiations for the purchase of Corinthian, the Consumer Financial Protection Bureau (“CFPB”) secured $480 million in private loan reductions based upon the contention that these loans were a product of predatory lending. However, the ultimate goal of an increasing number of Corinthian student activists was the realization of total debt forgiveness. These activists, dubbed the “Corinthian 15” consisted of a group of former students who refused to pay their federal loans. Their efforts were supported by an “Occupy Wall Street spinoff” called The Debt Collective. As the Corinthian 15 continued to make noise, a group of democratic U.S. Senators, nine state attorneys general, and a coalition of student, educational and labor groups also pushed for the broad relief of federal student loans.
With mounting political and populist pressure, the Department of Education made the decision to fast track debt forgiveness for those students who attended closed Corinthian campuses. It is anticipated that this streamlined debt forgiveness will alone cost taxpayers nearly $544 million. Additionally, Corinthian students who believed they were defrauded, regardless of whether or not their specific school closed, were able to petition the Department for debt forgiveness. The Department of Education adopted, as their standard of review for the petition of debt forgiveness, the rarely used “defense to repayment” provision found in the administrative rules of Title 20 of the education code. The statute allows a borrower to petition for debt forgiveness if the student believes she was “defrauded by [her] college under state law.”
The question going forward is what would likely constitute fraud under the defense to repayment statute. The State of California has given guidance through the review of the Corinthian petitions. As an example, The Department of Education “determined that students who relied on misrepresentations found in published job placement rates for many [Corinthian] programs qualify to have their federal direct student loans discharged.” Therefore, the Department will likely look to predatory lending practices, misrepresentation of graduation rates, and misrepresentation of job placement statistics as a standard for considering a student’s defense to repayment. Although reliance on the misrepresentation is part of the analysis, with the political winds blowing in favor of student debt relief, that burden of proving reliance may become nothing more than a subjective fait accompli analysis.
So, taxpayers beware. The Chapter 11 bankruptcy of a for-profit university has morphed into a potential student debt forgiveness Pandora’s Box. Corinthian engaged in predatory lending with its private loans. Those loans were partially forgiven by the private buyer of the loans and other Corinthian assets (the window of forgiveness extended back to June 2014), in connection with the purchase and sale transaction negotiated between the buyer and Corinthian. Now, the $4.3 million student trust established by Corinthian’s confirmed liquidating plan gives hope to those students who took federal student loans or whose private loans fall outside of the June 2014 window. The student committee has the financial ammunition to either litigate or negotiate further debt forgiveness. Given the current negative populist sentiment surrounding student debt, there may be little to stop the momentum of the aggrieved former Corinthian students from successfully eliminating their federal student debt.
Chris Kephart is an evening division student at Widener University Delaware Law School and a Staff Editor of the Delaware Journal of Corporate Law. He also serves as a Judicial Intern to Justice James T. Vaughn, Jr. of the Delaware Supreme Court.
Suggested Citation: Christopher Kephart, The U.S. Government and Corinthian Colleges, Inc.: Picking Winners and Losers, Del. J. Corp. L. (Nov. 29, 2015), www.djcl.org/blog.