March 14, 2023

For-Profit College Operators Will Pay $28 Million After Students Were Locked Out

For-Profit College Operators Will Pay  Million After Students Were Locked Out

Education Corporation of America (ECA), a collapsed for-profit college operation that once ran several chains of career schools spread across 70 campuses, has agreed to pay $28 million to settle claims that it shut down its campuses abruptly, without a teach-out plan that would give students fair opportunities to continue their studies elsewhere. The case was brought by one John F. Kennedy, an attorney whom a federal court in Georgia had appointed in 2018 as the receiver for the company. He claimed that ECA executives acted out of greed.

The settlement was first reported by Higher Ed Dive, which said, citing Kennedy, that the payment would be distributed among ECA’s nearly 2,000 creditors, as well as former students.

According to a court filing from Kennedy, insurance companies will actually pay the bill. 

ECA shut down all but one of its campuses at the end of 2018. In March 2021, Kennedy sued three former ECA executives: chairman Avy Stein, CEO Stu Reed, and chief financial officer Chris Boehm.  Stein and Boehm were also principals of a private equity firm called Willis Stein & Partners, which was the majority shareholder of ECA. All three men are parties to the new settlement. 

Stein is now co-chairman, and Boehm is a senior executive, at another firm, Cresset, where Stein’s bio explains, “Deeply committed to giving back, Avy is an active philanthropist and civic leader.”

But former students who attended ECA-owned institutions may wonder if that lofty description could possibly pertain to the owner of the schools they attended.

ECA’s schools — which included Virginia College as well as the Brightwood schools, formerly called Kaplan College and Kaplan Career Institute, which were purchased in 2015 from Graham Holdings — tended to offer low-quality, high-priced education programs that left many ex-students deep in debt, jobless, worse off than when they started

The force behind this troubling college operation, Avy Stein, had been one of the most aggressive lobbyists against efforts by the Obama administration to hold predatory colleges accountable for ripping off students. According to the New York Times, Stein, in a meeting, promised to “make life rough” for then-Senator Tom Harkin (D-IA) if he proceeded with oversight of for-profit schools. Stein denied saying that.

Stein was also co-chair of the Coalition for Educational Success, a trade group aimed at curbing the Obama administration’s college accountability efforts. The group, considered by some a more aggressive counterpart to the long-time for-profit college lobby group APSCU (now called CECU), included some of the biggest predatory for-profit college companies, including ITT Tech and EDMC, and it was headed, for a period, by relentless Washington lobbyist Lanny Davis.

The group launched an offshoot called the Foundation for Educational Success, which was charged with creating a voluntary code of conduct for the industry as an alternative to government regulation. The foundation and code of conduct were trumpeted in a press release and in a Politico op-ed by two members of the foundation’s new board of advisors, former governors Thomas Kean (R-NJ) and Ed Rendell (D-PA) — neither of which disclosed that the foundation was funded by for-profit colleges or that Kean himself was part of Quad Partners, another private equity firm invested in for-profit colleges. The code of conduct dissolved into mere public relations when the board of advisors and the entire Coalition for Educational Success, without explanation, simply ceased to exist.

The complaint that Kennedy filed against Stein, Reed, and Boehm lays out starkly the allegations of wrongdoing by the former ECA executives:

This case is about how Defendants breached their fiduciary duties and intentionally caused ECA to incur potentially more than a hundred million dollars in liability by refusing to implement a teach-out that would have allowed ECA’s students to complete their education when ECA closed. Defendants knew ECA’s financial deterioration and regulatory challenges would result in ECA’s closure but Defendants still refused to implement or effectuate an orderly teach-out. Defendants did this purely in their own self-interests to reduce their investment firm’s liabilities to ECA and to put their firm in a position to end up owning all of ECA’s profitable schools. ECA ultimately abruptly closed without an orderly teach-out in place. And as a result of Defendants’ schemes and refusal to implement a teach-out, ECA’s 20,000 students were thrown out on the street with no way to complete their education and ECA was left with massive closed school loan discharge liability.

Stein and the others denied the charges, but the litigation produced some compelling evidence. For example, as U.S. District Judge Tilman Self III later recounted, in October 2018, as ECA was falling deeper and deeper into peril, Roger Swartzwelder, the company’s general counsel, “sent Stein a memorandum informing him that closing ECA’s schools with no teach-out plans exposed ECA to ‘enormous financial liabilities’ to the tune of $125,000,000-$150,000,000; invited ‘civil and criminal actions[;] career limitations[;] and other dire consequences.'” But Stein and his underlings failed to implement a teach-out plan, Kennedy alleged, because ECA was seeking to avoid facing tens of millions in liability for cancelled student loans in the event it closed. 

The ECA schools closed in December 2018 after their accreditor, ACICS, terminated approval of Virginia College and some Brightwood campuses, citing concerns about “student progress, outcomes … student satisfaction, certification and licensure, and staff turnover.” Loss of accreditation means an end to eligibility for federal student aid, once any appeals are exhausted — a fatal outcome for many for-profit schools, which are heavily dependent on taxpayer dollars to survive. (ACICS itself announced last year that it would shut down after the U.S. Department of Education cancelled its status as a recognized accreditor, citing years of lax enforcement.) By the time ACICS acted, the attorneys general of Pennsylvania and Maryland were also examining allegations of abuses at the ECA schools.

A few weeks before ECA’s campuses closed, Judge Self appointed Kennedy  as receiver. A number of collapsing for-profit colleges have chosen the route of receivership, rather than bankruptcy, presumably because under the law, bankruptcy triggers an end to federal student aid for the school, while receivership does not.

Among the creditors seeking a piece of what was left of ECA’s assets was none other than Avy Stein’s firm Willis Stein, which wanted $15 million.

But in March 2021, Kennedy filed the lawsuit against Stein and his lieutenants, alleging breach of fiduciary duty and unlawful self-dealing.  The former ECA executives moved to dismiss, but in October of that year Judge Self rejected their effort. In so doing, Judge Self recited Kennedy’s allegations, including the claim that, as ECA was failing, Willis Stein maneuvered to convert its stake in ECA from equity — which would get last priority payback in the event of bankruptcy or receivership — to secured debt, which would get top priority.  Then, according to Kennedy, Stein — who was, again, not only a Willis Stein principal but also ECA’s chairman — pushed to erase ECA’s restructuring plan to allow Willis Stein to purchase the most profitable ECA campuses using its secured debt, rather than selling them to a third party to reduce the company’s debt.

The settlement agreement, preceded by a motion from Kennedy justifying it, is here. Insurance companies that carried directors and officers insurance for ECA and its executives will pay the $28 million.  Stein, Reed, and Boehm exit without any future liability. ECA got hundreds of millions in taxpayer and student dollars over the years for sub-standard educational programs, the executives got paid, and they all walk away. 

The new $28 million recovery had other costs. Kennedy, who is also a Republican Georgia state senator, was, with the approval of Judge Self, at least at one point paying himself some $50,000 a month to serve as receiver and handle the wind-down of a college funded with our federal tax dollars, and he was paying an outside law firm tens of thousands more each month. 

Department of Education records obtained through the Freedom of Information Act by the Century Foundation, and provided to Republic Report in 2019, showed that Kennedy and ECA chief financial officer Mike Ranchino had met with Trump education secretary Betsy DeVos’s top higher education aide, Diane Auer Jones, on November 30, 2018, to press their case for keeping federal student grants and loans flowing to some ECA campuses, allowing them to stay open. Although Jones, a former top executive at another predatory for-profit college operation, Career Education Corporation, led the DeVos Department’s effort to trash all accountability measures for bad-behaving colleges, apparently even she did not buy what ECA and Kennedy were selling at that point, and the Department instead maintained tightened controls on ECA’s access to taxpayer dollars, thus prompting ECA to shutter its schools.

But mismanagement by Jones and the DeVos education department had helped create the mess, including the fact that, despite obvious signs of trouble at ECA, the Department never secured a letter of credit from the company as collateral against collapse (except, in 2019, with respect to ECA’s only remaining school, New England College of Business and Finance). 

On December 30 of last year, the Biden Justice Department made a last-minute effort to be heard regarding the impending settlement between receiver Kennedy and ECA, arguing that it needed more time to evaluate what was going on.  Judge Self denied the motion, noting that the government had never filed a claim in the case and had had plenty of notice and opportunity to get involved. 

The federal government appears to have filed its first claim in the ECA receivership matter only last month — seeking about $2 million for “Student Federal Pell Grant.” That’s a tiny amount, given the tens of millions that ECA’s predatory and reckless behavior has cost U.S. taxpayers. The Department in 2019 estimated the cost of cancelling the loans of the locked out students — called a closed school discharge — was about $185 million. 

UPDATE 06-15-23:

We have now learned that two weeks before we posted this article, the ECA receiver John Kennedy sued the National Fire Insurance Company of Pittsburgh seeking $5.73 million for alleged denial of coverage on a “commercial crime insurance” policy held by ECA. Kennedy alleges that the insurer “refused to pay a cent for ECA’s losses, even in instances where witnesses caught ECA employees in the act of stealing ECA equipment—but were unable to prevent the theft—and coverage was undeniable.”

According to Kennedy’s complaint, there was much employee looting when the schools shut down. At the Virginia College campus in Birmingham, Alabama, Culinary School, on the last day of school in December 2018, two ECA employees witnessed a third, Jared Danks, removing culinary equipment, worth about $400,00, from the premises into a truck. When confronted Danks said, allegedly, “that everyone else was taking equipment, so why was it a problem that he did it.”  That same month, at the Brightwood College campus in Charlotte, the landlord saw people removing furniture, computers, and other property. The receiver alleges that the campus president there “colluded with the unidentified thieves to accomplish the thefts.” The complaint further alleges, “At many other locations, such as the Virginia College – Birmingham, Cosmetology School, the ECA employees charged with closing the locations did so haphazardly without the proper use of security as instructed by ECA management. The improper closure allowed unidentified employees to remove ECA equipment at will.”

This week, the insurance company filed a response, claiming the policy only applied to three of the 21 ECA campuses, because the receiver allegedly failed to document that the thefts at other 18 locations were committed by employees, and denying coverage even as to alleged thefts at the remaining three locations.