What the ITT Tech bankruptcy trustee wants
By Michael Stratford
10/25/16 10:00 AM EDT
With help from Caitlin Emma, Kimberly Hefling and Benjamin Wermund
FIGHT OVER ITT TECH CONTINUES IN BANKRUPTCY: The trustee appointed to liquidate ITT Tech’s assets and help divvy them up among creditors wants to put the brakes on just about everything as she dissects the carcass of the crumbled for-profit college. Deborah Caruso, the trustee < partner with Rubin & Levin, P.C. >, earlier this month asked a federal judge to freeze all FOIA and other requests about ITT and slap a hold on all federal and state lawsuits against the company — a move that two state attorneys general argue would deprive defrauded students of one potential avenue for debt relief. And, in a move criticized by the SEC, she seeks to halt that agency’s pending civil fraud charges against two ITT executives. Here’s a rundown of some of those issues playing out ahead of an expected court hearing next week:
A push to keep the government’s records about ITT Tech secret, at least for now: Caruso has asked a federal judge to prevent any government agencies from fulfilling FOIA requests or records requests relating to ITT Tech. Caruso says a court order is needed to block public disclosure of information about ITT Tech because “such requests would impermissibly threaten the property of the estate.”
The bankruptcy trustee said she was particularly worried about a FOIA request from an unnamed news organization that seeks the Consumer Financial Protection Bureau’s communication with ITT Tech. Without knowing “how such disclosure could negatively impact the estates,” Caruso said that a temporary stay on FOIA requests would allow her “to carry out my duties without distraction, and increased expense, of responding to third party requests.”
Stopping federal and state lawsuits against ITT Tech: Caruso is also asking a federal judge to block all pending lawsuits against ITT Tech. That includes suits filed by Massachusetts and New Mexico, both of which accused ITT of violating consumer protection laws.
Those states are pushing back. They argue that their cases against ITT Tech should proceed, in part to help build up a body of evidence of fraud against the company that former students could use to have the federal Education Department forgive their loans. Department officials have said that a court finding of wrongdoing is the most straightforward path to getting a “borrower defense-to-repayment claim” approved.
“Our case against ITT is necessary to help former students access the relief they deserve from unaffordable loans,” Jillian Fennimore, a spokeswoman for Massachusetts Attorney General Maura Healey, told Morning Education. Similarly, James Hallinan, a spokesman for New Mexico Attorney General Hector Balderas, said their office is resisting the trustee's “efforts to seek a long-term stay of our litigation because we want to continue to move our case forward and seek relief for New Mexico students who were harmed by ITT's practices.”
The Consumer Financial Protection Bureau’s lawsuit against ITT Tech, alleging predatory lending practices, is in the crosshairs as well — but the agency hasn’t responded in court and a spokeswoman declined to comment on the pending litigation.
Will the federal fraud cases against ITT executives continue? Caruso is also seeking to block the SEC from continuing its prosecution of civil fraud charges against former chief executive officer Kevin Modany and former chief financial officer Daniel Fitzpatrick. She argues the continuation of the cases could reduce the amount of money available to ITT’s estate because the company’s insurance policy is paying for the executives’ defenses.
The SEC hasn’t directly responded to that effort in the bankruptcy case, but its attorneys hit back against it in a filing in the court where the fraud charges are pending. They argue that ITT’s bankruptcy shouldn’t shield its two former executives from facing SEC charges and that “there are strong policy reasons” to allow the case to continue. “This type of law enforcement action is exactly the kind that the Bankruptcy Code” allows to continue, the SEC wrote, “so that bankruptcy courts do not become ‘haven[s] for wrongdoers.’”
U.S. Bankruptcy Judge James M. Carr of the Southern District of Indiana, who is overseeing the case, will take up these issues at a hearing scheduled for Nov. 2.