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.