Wall Street Journal: Article
ITT Educational Debuts in Bankruptcy Court
The bankruptcy court session was the first word on ITT’s status
By Peg Brickley
Sept. 28, 2016 6:07 p.m. ET
ITT Educational Services Inc. made its first appearance in bankruptcy court on Wednesday, after a sudden shutdown cast 40,000 students and 8,000 employees adrift.
Judge James Carr of the U.S. Bankruptcy Court in Indianapolis is presiding over a cleanup effort for one of the country’s largest for-profit school operators, which closed its doors abruptly Sept. 6 after federal authorities barred it from receiving taxpayer-backed student loans.
The company, which operated the ITT Technical Institutes chain of schools, filed for chapter 7 bankruptcy earlier this month, abandoning 130 campuses across the country. Wednesday’s bankruptcy court session was the first word on ITT’s status.
In the 12 days since Indianapolis lawyer Deborah Caruso < partner at Rubin & Levin, P.C. > , was appointed chapter 7 trustee, she has signed up liquidator Tiger Capital to sell the furniture, computers and other assets, set up a website and a hotline to keep ex-students and employees in the loop on developments and hired A&G Realty Partners to start marketing ITT’s 30 parcels of owned real estate. She has also chosen an outside company to get 15 years of student transcripts online within a week, started locking down personal data scattered across the country in more than 100 servers, and negotiated with secured lender Cerberus Capital Management for money to pay for it all, her lawyers told Judge Carr.
Top ITT executives walked away after the company collapsed into chapter 7 bankruptcy. As trustee, Ms. Caruso steps into the shoes of ITT’s departed leaders, dismantling the company while making decisions about who should be sued, and how ITT will answer to suits already under way.
ITT has battled allegations of fraud involving improper recruiting practices, sloppy lending and misleading information about the salaries graduates could expect.
On Wednesday Judge Carr fired off questions about the massive accounts receivable sitting on ITT’s books, including money allegedly owed by students who signed up for loans, started school, and then dropped out.
Someone, the judge suggested, might take issue with attempts to collect those debts. An assortment of state attorneys general attended the court session, and one of them signaled the state legal chiefs are preparing to weigh in on the propriety of chasing former students for payment.
Judge Carr also probed for information about ITT’s insurance coverage, which is often a key source of recovery in bankruptcy.
There is about $40 million worth of insurance, an ITT lawyer told the judge. Some $10 million, however, has already been used to pay for lawyers to defend the company and its former leaders in lawsuits.
Former Chief Executive Kevin Modany and Chief Financial Officer Daniel Fitzpatrick are battling Securities and Exchange Commission civil fraud charges, which they deny.
In addition to the SEC case, which involves allegedly covered-up losses on loans, ITT was sued by the Consumer Financial Protection Bureau, which accused it of saddling students with loans the company knew they could never repay. Filed in 2014, that case survived a motion to dismiss and could mean the federal agency will also step in to question collection efforts.
At Wednesday’s hearing, lawyers working on the case tallied up estimates of what ITT has on the plus side of its ledger, including less than $1.5 million in cash, real estate worth from $75 million to $120 million, a potential $8 million tax refund and unspecified legal claims.
Additionally ITT left behind a pension plan that could be overfunded by $20 to $30 million, lawyers said.
The pileup of assets means Cerberus, which is owed $21 million to $25 million, will likely be paid all it is owed.
But there are a lot of other bills stacked up at the failed company. Ex-employees who were laid off en masse without the notice required under federal law could qualify for top-drawer treatment in the bankruptcy, depending on where they worked and how many people were employed at their work site. They have already sued.