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Settlement in for-profit college case secured

Robins Kaplan has announced that it has secured a large settlement in a case against a for-profit college’s directors and officers. Creditors and former students will now have some funds to access following the closure of the colleges.

Education Corporation of America (ECA) was a privately held company that once operated for-profit colleges across America. At its height, it ran over 70 campuses in 18 states, with 20,000 students enrolled. The campuses included Brightwood College and Virginia College.

Under the Obama administration, federal investigations exposed severe problems in the for-profit education industry. A gainful employment rule, enacted in 2014, terminated federal funding to for-profit colleges if the average debt ratio of their graduates stayed above a set limit for two years out of a period of three straight years. Under the Trump administration, former Education Secretary Betsy DeVos announced that this rule would be rescinded.

However, this did not shield ECA from scrutiny. On Dec. 4, 2018, the Accrediting Council for Independent Colleges and Schools suspended ECA’s accreditation. It cited major concerns about student progress, outcomes, certification and licensure, and staff turnover. After the accreditation suspension, ECA shuttered its doors practically overnight. Students, many of whom took out thousands in loans to get their degrees, suddenly were left with no opportunity to finish their degrees and no information about where they could continue their educations.

The collapse of ECA is not the first demise of for-profit colleges. Corinthian Colleges and ITT Technical Institute also failed. However, ECA either did not take heed the warnings or understood but prioritized money.

ECA had financial issues for quite some time. Financial problems surfaced originally in 2014. In September of 2018, the company announced that it would be closing a third of its campuses by early 2020, citing low student enrollment. The company entered into a court-approved receivership at this point. Despite knowing the colleges were insolvent, plaintiffs allege that ECA did nothing to avoid the ultimate disorganized closure. ECA also refused to implement a teach-out, where existing students could have completed their education before closure.

John F. Kennedy was appointed by the court to be the receiver for the company. In March 2021, Kennedy sued CFO Chris Boehm, CEO Stu Reed, and Chairman Avy Stein. Kennedy alleged breach of fiduciary duties of loyalty and good faith, breach of the fiduciary duty of care, and self-dealing.

Michael Collyard, partner at Robins Kaplan, served as co-lead counsel on this case.

Michael Collyard

Michael Collyard

“We alleged that the defendants knew ECA was in dire financial condition, but put the financial interests of a private equity fund they were involved with ahead of ECA’s (and ECA’s students’) best interests,” Collyard said.

ECA will pay $28 million. More accurately, the insurance companies that carrier directors’ and officers’ insurance for ECA will pay the $28 million. The settlement was filed in December. It became finalized this month.

There were no assets in the estate other than its claims prior to the settlement. “This settlement is important because the claims at issue comprised the largest single source of money that could be made available to compensate ECA’s approximately 2,000 creditors, including former students,” Collyard said.

“This settlement doesn’t impact student loan forgiveness,” Collyard clarified. The closure resulted in over $100 million in student loan discharges.

Kennedy will distribute the funds. “A claims process will be set up through ECA’s Receivership,” Collyard explained.

“This case is a great example that with some creativity, justice can be served even where there are essentially no assets to an estate other than the claims the receiver has the right to bring,” Collyard said.

Counsel for the individual defendants did not immediately return request for comment.

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