Daily Progress, Jacksonville, TX

December 13, 2012

LMC: Loss of Title IV funding automatic with college bankruptcy proceedings

"If you declare bankruptcy you are out of the program forever."

Ben Tinsley
Jacksonville Daily Progress

JACKSONVILLE —

In August, the U.S. Department of Education revoked Lon Morris College's Title IV status, permanently stripping LMC's access to Higher Education Act funding — including federal Pell grants, teacher education assistance, SMART grants, work study and federal student loans.

LMC was faced with the permanent loss of help that has become invaluable — crucial even — to itself and many educational institutions around the country. Having already started bankruptcy proceedings, the Lon Morris College estate closed the college's doors.

The funding loss was devastating — especially to the many who had hoped LMC would recover from its financial problems and regain its status as a place of education.

But could the funding loss have been avoided?

Accounts in LMC's proposed liquidation plan filed in federal bankruptcy court indicate Chief Restructuring Officer Dawn Ragan was under the impression she could both declare bankruptcy AND keep the college's Title IV status. Ragan has not returned multiple messages for comment.

The plan also indicates Ragan started entertaining the idea of bankruptcy almost as soon as she was hired as CRO — months before the U.S. Department of Education felt it necessary to intervene.

Additionally, the CRO seemed to disbelieve the legal precedent cited in the letter from Mary Grant, director of the DOE's administrative actions and appeals service group.

Grant's letter to LMC cited specific law: "Section 102 (a) of the HEA (Higher Education Act) specifically provides that an institution that has filed for bankruptcy is not an eligible institution for purposes of participating in financial assistance programs authorized by Title IV or the HEA."

An education expert said it's well-known that Title IV revocation is automatic when bankruptcy is declared by an institution such as Lon Morris.

"The law is awfully clear — if you declare bankruptcy, you are out of the Title IV program," said Dennis M. Cariello of New York City. "Bankruptcy simply is not an option if you hope to continue operating as a school."

It was different about 20 years ago, but then the law was changed to prevent parties who file bankruptcy from relying on non discrimination provisions of the federal bankruptcy code to be allowed back under federal funding, said Cariello, chairman of the Regulatory Compliance and Strategies section of DLA Piper’s Education and Education Services industry sector group.

Which is exactly what Ragan attempted to do. LMC attorneys struggled against the order, characterizing the department of education's revocation as "illegal" under the bankruptcy code.

LMC "sought emergency relief from the bankruptcy court to reverse the decision as an illegal revocation of a license solely because of bankruptcy," the proposed liquidation plan shows.

Ultimately, Judge Bill Parker of the U.S. Bankruptcy Court for the Eastern District of Texas upheld the U.S. Department of Education's ruling. Which was to be expected because the matter is pretty cut and dried, Cariello said.

"Bankruptcy simply not an option if you hope to continue operating as as school," he said.

Records indicate Ragan started floating the idea of bankruptcy almost as soon as she was hired by Lon Morris College. After starting at LMC she quickly came to the conclusion money was needed to address everything of concern — to keep the college operating, to conduct a sale, or even to fund bankruptcy proceedings, documents show.

"The reorganization analysis concluded that the college could not continue to operate and must be sold, ideally as a going concern, otherwise an asset sale," reads the liquidation proposal's account of Ragan's activities in May.

Ragan initially flirted with the idea of declaring Chapter 7 Bankruptcy, but decided to go with Chapter 11 after Amegy Bank, a senior secured LMC lender, agreed to provide the college with a $750,000 "debtor in possession" loan, court documents show.

She used the loan money to file for Chapter 11 in July and to try to sell the college as a whole, court records show. Operations were modified, athletic programs were eliminated, and unfunded scholarship aid was eliminated as well, so LMC could remain "cash neutral," according to reports.

The impact of losing Title IV was an enormous blow to LMC, one from which it could not recover. Lon Morris was one of thousands of schools in the United States that participate in federal student aid programs, according to the federal student aid website.

Each year, roughly $150 billion is awarded to as many as 14 million students around the country by the U.S. Department of Education for low interest loans, grants, and work study funds. Tuition and fees, transportation, books, supplies, and room and board all are covered by such federal student aid.

Ultimately, the decision to declare bankruptcy ensured that Lon Morris College will never function as its own institution again.

"Could someone buy it and obtain Title IV eligibility? Sure," said Cariello. "Could another party come in and obtain accreditation with that as its platform and create a new situation? Sure. Or a bigger school could buy it and fold it in. The value is tied to the footprint. Starting from scratch is a difficult process. Attaining regional accreditation is a difficult process."

When news circulated that Lon Morris had declared Chapter 11 bankruptcy, some of Cariello's clients in higher education took interest, wondering if the school might somehow be allowed to retain its federal funding, he said.

"They were a lot more comfortable when Lon Morris lost Title IV," Cariello said. "Looking at the bare regs, if you declare bankruptcy you are out of the program forever."

Ragan and LMC bankruptcy estate attorney lawyer Hugh Ray III of Houston's McKool Smith firm did not immediately respond to messages for comment.

A request for comment was made to Amegy through their attorneys. In a return email, James Matthew Vaughn of Porter Hedges LLP in Houston said he had forwarded the request to Amegy officials. They had not responded as of Thursday.