Tango Delta Fin. v. Lowe (In re Dickinson of San Antonio, Inc.), 5:20-CV-00580-XR

CourtUnited States District Courts. 5th Circuit. Western District of Texas
Writing for the CourtXavier Rodriguez United States District Judge
PartiesIn Re Dickinson of San Antonio, Inc. Debtor, v. John Patrick Lowe, Trustee for the Bankruptcy Estate of Dickinson of San Antonio, Inc., Dickinson of Austin, Inc., and Dickinson of Tulsa, Inc., Appellee. Tango Delta Financial, Inc.; Cottingham Management Company, LLC; Cottingham Apex Texas Fund, LLC, Appellants, ADV. PROC. No. 18-05259-RBK
Decision Date09 August 2021
Docket NumberBANKRUPTCY 16-52492-RBK,5:19-CV-01237-XR,5:20-CV-00580-XR,5:19-CV-01238-XR

In Re Dickinson of San Antonio, Inc. Debtor,

Tango Delta Financial, Inc.; Cottingham Management Company, LLC; Cottingham Apex Texas Fund, LLC, Appellants,
v.

John Patrick Lowe, Trustee for the Bankruptcy Estate of Dickinson of San Antonio, Inc., Dickinson of Austin, Inc., and Dickinson of Tulsa, Inc., Appellee.

ADV. PROC. No. 18-05259-RBK

Nos. 5:20-CV-00580-XR, 5:19-CV-01237-XR, 5:19-CV-01238-XR

BANKRUPTCY No. 16-52492-RBK

United States District Court, W.D. Texas

August 9, 2021


Chapter 7

ORDER

Xavier Rodriguez United States District Judge

On this date, the Court considered the above-captioned appeals from the United States Bankruptcy Court for the Western District of Texas. The subject of these appeals is the Bankruptcy Court's judgment granting partial relief to the plaintiff after a five-day trial. For the reasons stated below, the Bankruptcy Court's judgment is AFFIRMED.

BACKGROUND

Dickinson of San Antonio, Inc. d/b/a Career Point (“Debtor”), formerly a for-profit college for nurses, filed a voluntary petition in bankruptcy in the United States Bankruptcy Court for the Western District of Texas on October 31, 2016 (Bankruptcy No. 16-52492-RBK). John Patrick Lowe (“Trustee”) was appointed to administer the Debtor's bankruptcy estate (“Bankruptcy Estate”). On October 27, 2018, the Trustee brought suit in the Bankruptcy Court against Tango Delta Financial, Inc. f/k/a American Student Financial Group, Inc. (“ASFG”), Cottingham Management Company, LLC (“Cottingham Management”), and Cottingham Apex Texas Fund, LLC (“Cottingham-Texas”), alleging various causes of action against each entity in a 29-count complaint (Adversary Proceeding No. 18-05259-RBK). Counts 1, 2, and 3 of the complaint were brought solely against Cottingham-Texas and were disposed of on summary judgment.

The Bankruptcy Court held a trial on the remaining causes of action on January 27, 2020. On June 23, 2020, the Bankruptcy Court entered a Memorandum Decision denying relief on Counts 4, 5, 6, 7, 8, 9, 10, 11, 14, 15, 16, 17, 18, 22, 24, and 28. The court granted relief on Counts 12, 13, 19, 20, 21, 23, 25, 26, 27, and 29, listed below:

Count Cause of Action

12 Equitable Subordination of Claims under 11 U.S.C. § 510(c).

13 Avoidance of Lien under 11 U.S.C. § 544.

19 Avoidance of Fraudulent Transfer under 11 U.S.C. § 548(a)(1)(A).

20 Avoidance of Fraudulent Transfer under 11 U.S.C. § 548(a)(1)(B).

21 Avoidance of Fraudulent Transfer under 11 U.S.C. § 544 and Tex. Bus. & Com. Code § 24.005(a)(1).

23 Avoidance of Fraudulent Transfer under 11 U.S.C. § 544 and Tex. Bus. & Com. Code § 24.006(a).

25 Recovery of Avoided Transfers Pursuant to 11 U.S.C. § 550.

26 Objection to Claim under 11 U.S.C. § 502.

27 Avoidance of Post-Petition Transfer under 11 U.S.C. § 549.

29 Recovery of Attorneys' Fees and Costs.

At trial, the Trustee demanded repayment of over $8 million in Program Subsidy Loans (“PSLs”) made by Debtor to Cottingham-Texas, sought to disallow a claim by ASFG for over $12 million based on Debtor's contractual obligations to repurchase certain student loans, and claimed that $5.1 million paid to ASFG under the loan-repurchase obligation constituted a fraudulent transfer and should be returned. Opinion of the Bankruptcy Court (“BC Op.”) at 2.

ISSUES ON APPEAL

ASFG asserts twenty-six issues on appeal, which fall into six general categories: (1) compliance with the Higher Education Act's 90/10 Rule, which provides that for-profit colleges can only obtain Title IV funding from the United States Department of Education (“DoE”) if at least 10% of the college's funding comes from non-governmental sources[1] (Issues 1-8); (2) alleged fraud on the part of ASFG (Issues 9-11, 17-18); (3) the evidentiary support for Debtor's insolvency (Issues 12-14, 16); (4) the Bankruptcy Court's equitable subordination of ASFG's claim (Issues 20-22); (5) the Bankruptcy Court's judgment against ASFG and in favor of Trustee (Issues 23-24); and (6) the Trustee's use of ASFG's collateral to obtain a judgment against Cottingham-Texas (Issues 25-26). Specifically, ASFG raises the following issues:

1. Did the Bankruptcy Court err in finding that the Program Subsidy Loans made under the Tuition Loan Program Agreement was a scheme to violate the U.S. Department of Education's 90/10 Rule
2. Did the Bankruptcy Court err in finding that 20 U.S.C § 1094(d)(1)(F)(iv) “provides that any funds ‘required to be refunded or returned' to the lender must be deducted from the school's ‘10' revenue calculation”
3. Did the Bankruptcy Court err in finding that “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”?
4. Did the Bankruptcy Court err in finding that “[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”?
5. Did the Bankruptcy Court err in finding that “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”?
6. Did the Bankruptcy Court err in finding that that Cottingham Apex Texas Fund, LLC (“Cottingham-Texas”) was not independent from ASFG and that, without an intermediary who is independent from the lender, the Debtor would be in violation of the 90/10 Rule?
7. Did the Bankruptcy Court err in admitting the opinion testimony of Cindy Shoffstall when it was clear from her testimony that she was not an expert with regard to the 90/10 Rule?
8. Did the Bankruptcy Court err in finding that Cindy Shoffstall “testified she would not have included CPC's investment in Cottingham-Texas in the 90/10 calculation had she been informed about the lending relationship between ASFG and Cottingham; she would have included it in the related party note in her audit of CPC”?
9. Did the Bankruptcy Court err in finding that the Debtor and ASFG entered into the TLPA and the APPA with the intent to defraud the Debtor's creditors?
10. Did the Bankruptcy Court err in finding that “Both CPC's principal, Lawrence Earle, and ASFG actively concealed that the payments to Cottingham-Texas were merely deposits placed with ASFG to secure its lending to CPC's students”?
11. Did the Bankruptcy Court err in finding that “ASFG ‘concealed,' at least from federal reporting, that Cottingham-Texas was not independent”?
12. Did the Bankruptcy Court err in admitting the opinion testimony of Greg Murray with regard to the value of assets on the Debtor's financial statements when Mr. Murray testified that he has no expertise in valuation?
13. Did the Bankruptcy Court err in finding that the Debtor was insolvent based on the opinion testimony of an accountant who based his opinion on the Debtor's financial statements without any evidence of the fair value of the Debtor's assets?
14. Did the Bankruptcy Court err in finding that the Debtor was insolvent at each time that it purchased defaulted loans from ASFG?
15. Did the Bankruptcy Court err in finding that the U.S. Department of Education had a claim in the bankruptcy case that existed when the TLPA was entered into in 2013?
16. Did the Bankruptcy Court err in finding that the Debtor did not receive reasonably equivalent value for the defaulted loans that it purchased from ASFG?
17. Did the Bankruptcy Court err in finding that ASFG did not operate in good faith?
18. Did the Bankruptcy Court err in finding that ASFG did not receive the payments for the purchase of defaulted loans in good faith?
19. Did the Bankruptcy Court err in finding that “ASFG thus has $2.4 million more than it should under the TLPA and APPAs ($8.2 million - $5.8 million = $2.4 million)”?
20. Did the Bankruptcy Court err in construing section 15.1.7 of the TLPA to include a representation and warranty that ASFG would not be in a lending relationship with Cottingham-Texas when (1) the Bankruptcy Court made a factual finding that CPC's principal knew that the funds it loaned to Cottingham-Texas through the Program Subsidy Loans would be loaned by Cottingham-Texas to ASFG, (2) Cottingham-Texas was formed at the request of CPC's attorney for the sole purpose of receiving the Program Subsidy Loans from CPC and loaning the funds to ASFG, and (3) in section 5.1 of the TLPA, the parties jointly acknowledged that one of the purposes of the Program Subsidy Investment by CPC was to subsidize “the capital costs to be incurred by ASFG to originate, make and hold ASFG Tuition Loans and to purchase and hold Bank Tuition Loans”?
21. Did the Bankruptcy Court err in finding that a breach of the warranty in section 15.1.7 of the TLPA excused the performance of the Debtor under the TLPA and the APPAs?
22. Did the Bankruptcy Court err in finding that ASFG engaged in inequitable conduct sufficient to justify equitably subordinating its claim?
23. Did the Bankruptcy Court err in disallowing ASFG's claim under Bankruptcy Code 502(d)?
24. Did the Bankruptcy Court err in entering judgment in favor of Plaintiff?
25. With regard to Appeal No. 5:19-CV-01237, did the Bankruptcy Court err in allowing the bankruptcy trustee to use ASFG's collateral (the master promissory notes) to first obtain a judgment against Cottingham-Texas and then obtain a writ of garnishment and ultimately a judgment against ASFG when ASFG had property rights under non-bankruptcy law to foreclose on the master promissory notes and to offset its liability to Cottingham-Texas?
26. With regard to Appeal No. 5:19-CV-01238,
...

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