Future Uncertain for Regulator Lawsuits Against ITT Tech
Posted By Derek Johnson on November 21, 2016 at 8:36 am
When ITT Technical Institute shuttered its doors and declared bankruptcy last September, many students lambasted school officials. They told stories of school administrators who reassured them that there was no need to worry despite media reports. When ITT Tech closed, students and advocates hoped a series of lawsuits filed by federal and state agencies would ensure the company and its executives would not escape financial and legal responsibility.
Those hopes took a serious blow from U.S. District Court Judge James Carr’s ruling to halt ongoing lawsuits filed by the federal Consumer Financial Protection Bureau and Securities and Exchange Commission against the company behind the school. Carr also ruled out the possibility of fines or cash damages though he did say he would consider “nonmonetary sanctions” if and when the plaintiffs resume their lawsuit after the bankruptcy process.
“‘If you want to punish and deter ITT, you ought to be bringing criminal actions,” Carr said.
Shortly after that announcement, court filings for the U.S. Southern District Court of Indiana indicate that New Mexico also has agreed to halt its lawsuit against ITT Educational Services until at least January.
A ‘timeout’ for ITT Tech lawsuits
The lawsuits have been in peril for more than a month. Deborah Caruso, the trustee charged with handling the bankruptcy claim for ITT Tech parent ITT Educational Services, complained to the court in October that the lawsuits by the CFPB and SEC were “getting in her way,” according to the Wall Street Journal and MarketWatch. She requested that separate lawsuits against the school and company executives be halted while she sifts through the company’s financial situation.
David Schilli, an attorney based in North Carolina with more than 20 years of experience in bankruptcy law, says the request was akin to Caruso asking the judge for “a timeout” on the lawsuits so she could focus on the enormous task of the bankruptcy process. “When the bankruptcy was filed and the trustee was appointed, she replaced effectively all the officers, directors and management of the company,” Schilli says. “So all the people who knew anything about the litigation prior to the bankruptcy are no longer in control or in a position of authority to act on the litigation. All that responsibility is transferred over to the trustee.”
As trustee, Caruso’s first obligation is to preserve and protect the value of the company on behalf of its creditors, Schilli says. Assigned to the case in September, she would have been charged with a near-impossible task had the lawsuits gone forward: defending ITT Tech in court while at the same time conducting the bankruptcy process.
“For [her] to be spending time right now paying lawyers to get involved in this litigation when [she has] limited resources, it just doesn’t make sense,” Schilli says.
Regulators, states look to punish ITT Tech
The Consumer Financial Protection Bureau’s lawsuit, filed in 2014, alleges that ITT Tech coerced its students into taking out high-interest private loans, going so far as to pull them from classes or deny transcripts when payment was not made promptly. The private loans were marketed as a temporary credit for students who had already maxed out their federal student loans, and the lawsuit claims ITT Tech officials told investors that they planned to offset any losses from the program through high interest private loans and defaults from students unable to pay.
“Default rates for ITT students on all loans have been high, but ITT itself projected, as far back as May 2011, that more than 60% of the students who had received the private loans would default,” the complaint states. “Simply to enhance its financial statements and appearance to investors, ITT sacrificed its students’ futures by saddling them with debt on which it knew they would likely default.”
Meanwhile, the SEC lawsuit alleges that while this was going on, ITT Educational Services was defrauding investors by concealing and hiding the “extraordinary failure” of two loan programs that doled out a combined $441 in private loans to ITT Tech students. In order to persuade investors to finance these loan programs, ITT Educational Services guaranteed to shield them from liability in the event of high default rates, something that eventually did happen.
“By 2012, the loans made through these programs had performed so abysmally, with extremely high default rates, that ITT’s guarantee obligations began to balloon. The Defendants knew ITT faced looming, massive payments on these guarantees. However, rather than disclosing the significant impact of these guarantee obligations to ITT’s investors, the Defendants engaged in a series of deceptive acts to hide the poor performance of the student loan programs and their financial impact on ITT,” according to the SEC complaint.
Lawyers for the SEC said that ITT Tech also deceived the public at large about the health of the loan programs and their impact on ITT’s financial stability: “The Defendants also made numerous misstatements and omissions – in ITT’s public filings and in conference calls with financial analysts – that similarly concealed the condition of the student loan programs and ITT’s guarantee obligations.”
The effect of the ITT Tech timeout
Schilli says the temporary holds do not spell impending doom for the lawsuits, but it may be difficult to obtain anything meaningful from the cases now that the schools have closed and the judge has ruled out the potential for monetary damages.
“If the objective of that litigation was to protect citizens of the state or consumers from being taken advantage of by ITT and to keep new students from enrolling and incurring substantial debt, then effectively the shutting down of the business had achieved that objective,” he says.