Is receivership a better option for struggling higher education institutions?
Given the ever-rising demand for higher education in the United States, it is not surprising that a number of smaller, more rural, or poorly managed university systems are encountering financial distress as larger or more prestigious institutions take over the market. Many of these schools also receive federal student financial aid funding from the United States Department of Education (DOE) pursuant to Title IV of the Higher Education Act , and they must comply with certain federal regulations to maintain that funding. However, struggling educational institutions that receive such funding cannot just file for bankruptcy to obtain relief from debt obligations and restructure; an institution’s eligibility to receive Title IV funding terminates immediately upon a bankruptcy filing.
Under Title IV, an “institution of higher education” means an institution that meets the three following requirements:
- Maintenance of state licensure.
- Accreditation by an agency recognized by the DOE.
- Certification by the DOE that the institution is “financially responsible” and “administratively capable.”
The DOE evaluates these requirements not just once, but every year, and a university must also meet a number of requirements to show that it is “financially responsible.” These requirements include, among other things appropriate return of certain funds pursuant to Title IV, maintaining equity and reserve to certain requirements, including net income ratios, and keeping up with a specific cash reserve. If the university fails any of these requirements, the DOE may require the posting of a letter of credit against certain Title IV obligations. Therefore, a university may be at risk of losing its Title IV funding before it even reaches bankruptcy.
Because of the potential impact of a bankruptcy filing on a university’s source of funding, educational institutions or their creditors that are financially struggling sometimes seek to have a receiver appointed for the institution.1
However, the appointment of a federal receiver is not an independent cause of action; it is only ancillary remedy for some other claim.2 This means that a higher educational institution seeking a receiver may either seek the appointment of a state court receiver through a state court statute or arrange for some other claimant against the institution to request the appointment of a federal receiver.
Even if a receiver is successfully appointed, however, an educational institution may still lose Title IV funding soon after the appointment of a receiver if the university cannot meet the DOE annual financial requirements under the receivership proceeding. If the university is in true financial distress, it will likely not be able to meet these requirements without a significant outside investment or sale process. Such a loss of Title IV funds could crater a university’s ability to maintain revenue and provide for its students – even during a supposed restructuring plan. Therefore, if an institution loses Title IV funding, bankruptcy may ultimately be the most viable option for the resolution of the claims of the DOE, the students, and all other parties in interest.
Further, if a unversity is set to lose its Title IV funding anyways due to its inability to meet the DOE’s financial responsibility requirements, it may be worthwhile to consider a restructuring or liquidation plan that involves bankruptcy; a bankruptcy process may provide a more streamlined process as compared to the uncertainty of a receivership.
For example, ITT Educational Services, a large network of for-profit schools, is currently being liquidated in chapter 7 bankruptcy. When the students filed a class action complaint against the chapter 7 trustee, the bankruptcy court eventually approved a settlement under which the students claims were allowed and will be paid pro rata with other unsecured claims.3 In the bankruptcy case of Corinthian Colleges, certain assets of the university were placed into a liquidation trust to provide for specified claims, and a separate trust was created for students and governmental claims.4
While it may seem counterintuitive, because a struggling higher educational institution remains subject to strict DOE-instituted financial regulations during any receivership or restructuring proceeding, the structured process of a bankruptcy may ultimately be a better option for an institution that is already at risk of losing its Title IV funding.
1. See, e.g., Educ. Corp. of Am. v. United States Dep’t of Educ., No. 18-CV-01698, 2018 WL 5786077, at *2 (N.D. Ala. Nov. 5, 2018) (noting that plaintiff “contends that it cannot seek protection by ‘a traditional bankruptcy filing’ from these lawsuits because, under the HEA, a bankruptcy filing disqualifies an institution from participating in Title IV funding programs”).
2. See Nat'l P’ship Inv. Corp. v. Nat'l Hous. Dev. Corp., 153 F.3d 1289, 1291 (11th Cir. 1998).
3. See In re ITT Educational Services, Inc., No. 17-07207 (Bankr. S.D. Ind. 2017).
4. See In re Corinthian Colleges, Inc., No. 15-10952 (Bankr. D. Del. 2015).