Lowe v. Am. Student Fin. Grp. (In re Dickinson San Antonio)
| Decision Date | 23 June 2020 |
| Docket Number | ADVERSARY NO. 18-05259-RBK,CASE NO. 16-52492-RBK |
| Parties | IN RE: DICKINSON OF SAN ANTONIO, INC., DEBTOR JOHN PATRICK LOWE, CHAPTER 7 TRUSTEE, PLAINTIFF v. AMERICAN STUDENT FINANCIAL GROUP, INC., ET AL., DEFENDANTS |
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Western District of Texas |
Dickinson of San Antonio, Inc., d/b/a Career Point College (CPC or Debtor), was a for-profit college that derived a significant portion of its revenue from federal student loans and grants. American Student Financial Group, Inc. (ASFG) entered into a complicated transaction with CPC through its principal, Lawrence Earle, which provided a private source of student loan funding to CPC's students. This transaction was designed to allow CPC to skirt the Department of Education's 90/10 rule and claim more money from federal sources than it otherwise would have been able to receive. After self-reporting its non-compliance to the Department of Education, CPC filed for bankruptcy under chapter 11 and soon thereafter converted to chapter 7.
John Patrick Lowe, trustee for the chapter 7 estate (the Trustee), sued ASFG, Cottingham Management Company LLC, Cottingham Apex Texas Fund, LLC (Cottingham-Texas), and Tango Delta Financial, Inc. (the new name under which the principals of ASFG now operate). The complaint was later amended with a sprawling 29-count Second Amended Complaint. Through the live complaint, the Trustee demands repayment of over $8 million in Program Subsidy Loans (PSLs) made by Debtor to Cottingham-Texas, and in turn lent back to ASFG by Cottingham-Texas. In addition, the Trustee seeks to disallow the over $12 million claim of ASFG, which is based on Debtor's contractual obligations to repurchase individual student loans when a student defaulted, or to repurchase all outstanding loans if Debtor materially breached the contracts. The Trustee also claims that the $5.1 million Debtor paid to ASFG under these loan-repurchase obligations constitutes a fraudulent transfer which ASFG must return to the estate.
After a number of dispositive motions and hearings, the case went to a five-day trial involving nearly a hundred exhibits and recorded deposition testimony from Defendants' principals. The Court previously granted partial summary judgment for the Trustee on Counts 1 through 3. The Court will render judgment in favor of the Trustee on most of the remaining counts.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334(b). This matter arises under the Bankruptcy Code in a bankruptcy case referred to this Court by theStanding Order of Reference in this district. This matter is a core proceeding under § 157(b)(2)(B), (F), (H), (K), and (O). Venue is proper under §§ 1408 and 1409. The Court has authority to enter a final judgment under § 157(b)(1) and the parties consented to entry of a final judgment by the bankruptcy court. ECF No. 240 at ¶ 3. This Opinion will constitute the Court's findings of fact and conclusions of law pursuant to FED. R. BANKR. P. 7052, along with the oral findings and conclusions of the Court stated on the record following the close of the evidence.
The Debtor filed its chapter 11 bankruptcy petition on October 31, 2016. The case was converted to chapter 7 on January 11, 2017. The plaintiff in this adversary proceeding is John Patrick Lowe, who was appointed as the Trustee upon the conversion of this case to chapter 7.
Dickinson of San Antonio, Inc. was a Kansas corporation that did business under the name Career Point College. CPC was the 100% owner of Dickinson of Tulsa, Inc. and Dickinson of Austin, Inc. CPC was a wholly owned subsidiary of Edudyne Systems, Inc. ("Edudyne"), which was in turn owned by its principal, Lawrence Earle. CPC was allegedly the alter ego of Edudyne.1 CPC operated a private for-profit college which had nursing, business, and technical programs.
ASFG is a Delaware corporation. On or about December 28, 2016, ASFG changed its name to Tango Delta Financial, Inc. ASFG was in the business of making loans to college students that were guaranteed at least in part by the schools attended by the students. ASFG had four contractswith CPC which spanned from 2013 until petition date. ASFG is owned by Mr. Tim Duoos and was managed by Mr. Kevin Jasper, a lawyer.
Cottingham Management is a California limited liability company and a registered investment advisor. Cottingham-Texas is a California limited liability company that was formed on or about April 25, 2013. ASFG paid $1,422.00 for the formation of Cottingham-Texas. Mr. Stephen Bick is the manager of Cottingham Management, which in turn is the manager of Cottingham-Texas. The Cottingham-Texas Operating Agreement provides that Cottingham Management, the sole manager and member of Cottingham-Texas, will make an initial $10,000 capital contribution to Cottingham-Texas. This capital contribution was never made.
To obtain Title IV funding from the United States Department of Education (DOE), for-profit colleges such as CPC must comply with the Higher Education Act's 90/10 rule codified at 20 U.S.C. § 1094. See Urquilla-Diaz v. Kaplan Univ.
, 780 F.3d 1039, 1055 (11th Cir. 2015). The 90/10 rule provides that at least 10% of a private for-profit school's funding must come from non-government sources, such as private student loan lenders like ASFG. See 20 U.S.C. § 1094(a)(24). The statute requires that the school annually submit a form certifying its compliance with the 90/10 rule with its audited financial statements. The 90/10 calculation must be done using cash-basis accounting. 20 U.S.C. § 1094(d)(1). The statute also provides that any funds "required to be refunded or returned" to the lender must be deducted from the school's "10" revenue calculation. Id. § (d)(1)(F)(iv). Cindy Shoffstall, C.P.A., was CPC's accountant and generated audited financial reports which detailed CPC's compliance with the 90/10 rule. In doing so, Ms. Shofstall calculated in the Higher Education Act reports that CPC was in compliance with the 90/10 rule through June 30, 2015.
Since 2003, ASFG has been in the business of developing and implementing tuition financing programs for post-secondary schools. ASFG offered loans for students to finance tuition and related educational expenses funded by ASFG, banks, licensed lenders, or by the school itself. ASFG subsequently purchased the student loans made by other originating lenders and held the loans for investment purposes. The for-profit schools with which ASFG did business were required to provide some kind of collateral or guaranty of the loans that ASFG would make to the school's students. The principals of ASFG, Mr. Timothy Duoos and Mr. Kevin Jasper, were familiar with the workings of the 90/10 rule.
ASFG's student loan program for private for-profit schools traditionally included: (1) originating student loans that required the for-profit college to provide collateral to secure repurchase obligations in the event that a student defaulted on a loan; (2) originating student loans and requiring the for-profit college to place a percentage of the funds received as a deposit with ASFG (the "Deposit Program"); or (3) originating student loans and requiring the for-profit college to deposit a percentage of the funds with a third-party bank which would then issue a letter of credit to ASFG (the "Letter of Credit Program").
In 2012, ASFG developed a new (fourth) lending program wherein ASFG would lend money to a for-profit school's students and the for-profit school would deposit some percentage of the funds received with an alleged third-party investment fund ("Subsidized Loan Program"). The new lending program offered by ASFG was described in a loan document between ASFG and its own lender, California Bank & Trust. The loan agreement, dated June 1, 2012, detailed the entire transaction, including that the investment fund would lend the money received from theprivate for-profit schools back to ASFG. The original third-party investment fund was Cottingham Apex Fund, LLC, a wholly owned subsidiary of Cottingham Management, LLC.
Under ASFG's original Deposit Program, a financially prudent for-profit college could not count the amount deposited with ASFG towards its ten percent of private funding under the 90/10 rule. Under the Letter of Credit Program, however, the for-profit school could count its revenue towards the 90/10 rule, but the costs of lending for ASFG were much higher than other programs because it involved a third-party bank.
For the funds advanced through the Subsidized Loan Program to be counted as "10" revenue in compliance with the 90/10 Rule, the investment fund (in this case, Cottingham-Texas) was required to be arms-length and truly independent from ASFG. In order to comply with the statute, the private student loan money could not be returned to the lender, ASFG, and also counted as "10" revenue. For-profit schools operating under this Program could only count the funds loaned to Cottingham-Texas as "10" revenue if Cottingham-Texas invested that money at arm's length with banks, investment houses, or any investment other than ASFG.
In early 2013, representatives from ASFG approached CPC about providing private student loans to CPC's students under ASFG's new Subsidized Loan Program. During the negotiation process, ASFG's then chief operating officer Kevin Jasper explained to CPC's attorney that CPC would be required to lend 50% of the student loan proceeds to the Cottingham entity pursuant to the terms of a Master Promissory Note. During the negotiations, CPC's attorney requested that a new entity, Cottingham-Texas, be formed specifically for CPC's participation in the investment fund program. CPC's principal, Lawrence Earle, knew that the...
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