Ministry of Education will hold owners and investors accountable for college and university bonds

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On March 23, 2022, the U.S. Department of Education (ED) announcement its intention to hold business owners, investors, and controlling parties of private higher education institutions directly responsible for the conduct of the school.

This announcement means that the ED can take direct administrative action against the school’s corporate owners for the school’s liabilities, and other third parties can sue the corporate owners under various laws such as the federal misrepresentation, unfair and deceptive acts and practices, or other laws. consumer protection laws. Although the new ED policy applies to all private post-secondary institutions, the policy targets proprietary colleges and universities, which are typically owned or controlled by publicly traded companies or private equity firms.

To receive federal student financial assistance under the Higher Education Title IV of 1965, as amended, a participating school must enter into the ED Program Participation Agreement, or PPA. (See 34 CFR § 668.14.) A PPA describes the conditions with which the school must comply or risk termination of ED funding.

As acknowledged in the guidelines, the ED required that a PPA be signed only by an authorized representative of the school itself. With the new policy, however, the executive director could require the signature of any entity that has “or could have a direct or indirect effect on the administrative capacity or the financial responsibility of the establishment”. The ED has previously selectively required the owner companies of certain owner colleges and universities to approve an appendix to a PPA, including a Provisional Program Participation Agreement (PPPA) or a Temporary Provisional Program Participation Agreement (TPPPA) . The appendix states that corporate owners agree to be held jointly and severally liable for the conduct of the schools they own or control.

The ED announced for the first time that it will use a rebuttable presumption to assume that entities have a direct or indirect effect on a school if they:

  • are the sole member of the institution or have a direct or indirect 100% equity or voting rights in the institution;
  • hold less than 100% ownership, but otherwise exercise (directly or indirectly) substantial control over the institution (“Substantial control is generally presumed to be any direct or indirect ownership, membership or voting interest of 50% or longer in the institution, including in combination with other interest holders, whether by affiliation, contract, power of attorney or other arrangement”); or
  • provide audited financial statements or other financial presentations on behalf of the institution.

If the ED requires an entity to sign a PPA, that entity’s signature will be a necessary condition of the ED’s approval or continued participation in Title IV programs. To this end, the ED essentially creates a second rebuttable presumption that an entity will be required to sign a PPA in the following situations:

  • whether the institution has had a composite financial responsibility score of less than 1.5 since its last certification (initial or recertification);
  • if the establishment is in provisional status of certification by the ED;
  • whether the establishment is on HCM2;
  • if the establishment undergoes a change of ownership;
  • whether the ED has approved a significant number of borrower defense applications or bogus certifications for the institution, or whether there are a significant number of these types of applications under review which, if approved, would result in significant liability risk;
  • whether the ED has recently identified systemic or significant audit or program review findings, or has outstanding debts resulting from an audit or program review; or
  • whether the institution or any of its officers or interest holders has consented to or been the subject of a judgment of fraud or misrepresentation entered against it by a federal or state court, a foreign court or an arbitration body.

Like the first rebuttable presumption, the second is also non-exhaustive, and entities otherwise not covered by a clearly delineated presumption could still be required to sign a PPA.

The ED will not require the signature of a Covered Entity in all circumstances. Instead, when the school is ready for its next recertification, the ED will determine whether the entity should still be required to be a co-signer with the school. Additionally, the new guidelines provide that the Secretary of Education may exercise discretion as to whether an alternative to a signature is available, such as a letter of credit.

The ED intends to apply the new guidelines immediately PPAs issued on or after March 23, 2022 relating to ownership, reinstatements and initial certification. The new guidelines will apply to PPAs issued after July 1, 2022 that relate to recertification. The ED may also, with immediate effect, apply the guidelines to PPAs for schools that have already been notified of the new signing requirement.

Although the ED announcement has the appearance of a new set of requirements for PPA signatures, it is important to note that the announcement – at least for now – is only guidance. and does not, in itself, have the force of law. Notably, the guidance lacks the typical ED disclaimer that guidance documents do not have the force of law and are not intended to bind the public or regulated entities in any way. Since the advice is presented as if it Is have the effect of binding law, the ED announcement may arguably violate the Administrative Procedure Act, which requires federal administrative agencies to notify the public of proposed rules and allow public comment before these rules come into force. Since a guidance document may set out an agency’s interpretation of a law or regulation to provide clarity, the ED will likely state that this The guidelines are only an interpretation of the regulations governing PPAs, which state that a PPA may include “any additional terms specified in the Program Participation Agreement that the Secretary requires the institution to adhere to.” (See 34 CFR § 668.14(a)(1).)

Ironically, the ED recently faced – and was intimidated by – similar litigation challenging its directions. In June 2020, the plaintiffs filed a class action lawsuit, challenging a guidance document based on a rebuttable presumption about loan relief for student borrowers. (To see Pratt vs. Devos, No. 1:20-cv-1501, U.S. District Court, District of Columbia.) In November 2021, plaintiffs voluntarily dismissed the action following the ED’s decision to rescind its partial relief methodology to the following allegations that this methodology, with its rebuttable presumption, violated the Administrative Procedure Act. Nevertheless, the ED retreads fragile ground with its announcement on March 23 of a rebuttable presumption in the context of PPAs.

Additionally, Title IV requires the ED to go through negotiated rulemaking to promulgate regulations that have the force of law, and the ED’s Program Participation Agreements Policy, 34 CFR § 668.14, is promulgated under Title IV. The ED recently ended negotiations and proposed an even more damaging policy regarding the liability of business owners and private equity firms during negotiations. The ED may go through the development of notice and comment rules to promulgate regulations that implement its policy position, but it has yet to issue a notice of proposed rulemaking setting out its official proposal with respect to joint and several liability of private school business owners.

Depending on how it attempts to enforce these guidelines, the ED may run afoul of a key statutory limitation on the Secretary of Education’s power to impose liability on persons who exercise “substantial control over » a qualified school. (See 20 USC § 1099c(e)(4).) Title IV specifically states that the Secretary of Education can not hold individuals accountable if the institution has not been the subject of a termination action in the past five years and has met additional requirements to comply with Title IV. (See 20 USC §§ 1099 (e)(4)(B)-(D).) At least one federal district court interprets this Title IV provision as permitting the ED to hold corporations liable but prohibiting the ED to hold individuals accountable unless certain circumstances have been met. For more details, see Florida Coastal Sch. Of Law., Inc. v. CardonaNo. 3:21-cv-721, Order, 44-45 (MD Fla. Aug. 9, 2021).

The guidance may also, in certain circumstances, conflict with the existing 2019 Borrower Defense of Reimbursement and Institutional Liability Regulations, 84 Fed. Reg. 49,788, 49,860-78 (September 23, 2019), which set forth the specific mandatory and discretionary trigger events that allow the DR to require a letter of credit. For example, financial liability regulations specifically require that an institution actually incurs liability as a result of a settlement, final judgment or final decision arising from any administrative or judicial action, in accordance with 34 CFR § 668.171(c)(1)(i)(A), while the ED guidelines allow the ED to act when there are a significant number of Borrower Defense Claims or false certifications which, if approved, would result in significant liability risk.

In these uncertain times, owner schools and their corporate owners would be wise to seek advice before entering into a PPA, TPPPA or PPPA that holds a corporation or individual jointly and severally liable.

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