Court Approves Trustee’s Settlement with US Government Closing the Bankruptcy of For-Profit, Post-Secondary Schools Operator, Florida Career College

Court Approves Trustee’s Settlement with US Government Closing the Bankruptcy of For-Profit, Post-Secondary Schools Operator, Florida Career College

Clingman & Hanger Management Associates, LLC  and Amini LLC today announced the approval of a settlement agreement with the US Department of Education (DOE), clearing the way for a final resolution of the complex bankruptcy of FCC Holdings, Inc.  Prior to its 2014 bankruptcy, FCC operated 41 for-profit schools under the trade names Florida Career Colleges and Anthem Schools. 

After the successful resolution of litigation against FCC’s directors and officers, creative tax work and Friday, December 4, 2020’s approval of a settlement with the DOE, Clingman & Hanger is in position to make a final distribution to FCC’s unsecured creditors and close this complex bankruptcy case.  

The effect of the DOE’s claim at $8 million, when added to the $15 million recovery obtained in 2018 from settling with FCC’s directors and officers, as well as monies recouped from tax refunds, will allow the liquidating trust to make an estimated 8.2% distribution to unsecured creditors.

The attorneys at Amini LLC have served as litigation counsel to Clingman & Hanger since their appointment in 2015 and handled the D&O litigation as well as the resolution of the DOE’s bankruptcy claim. 

FCC filed for chapter 11 bankruptcy protection after the DOE restricted FCC’s ability to draw down Title IV funds based upon alleged improprieties in the company’s Title IV program.  Subsequently, the DOE filed a claim for over $37 million in the bankruptcy case.  

In March 2015, the Bankruptcy Court confirmed a chapter 11 plan for FCC, which placed all of its assets into a liquidating trust and appointed Clingman & Hanger as the liquidating trustee.  At the time, the trust held only a minimal amount of cash to investigate potential recovery actions and complete case administration.   

In announcing the US Bankruptcy Court decision, Teresa Hanger, of Clingman & Hanger said, “We are very excited about The Honorable Christopher S. Sontchi ‘s approval of our settlement.  Thanks to the efforts and the perseverance of the Amini LLC lawyers, Bijan Amini, Avery Samet, and Lita Beth Wright, who partnered with us from the very beginning to Friday’s action, we are finally able to wind down this chapter 11 case, make a final distribution to unsecured creditors, and apply for the final decree. The distribution rate of 8.2% is an unusually high payout for a bankruptcy case that literally had no funds for creditor distributions at plan confirmation.”  

“At the beginning there was very little cash on hand to conduct an investigation.  We had to pursue every possible lead and legal vehicle to identify sources of recovery for FCC’s creditors.  It was complicated and arduous, but working together with Clingman & Hanger, we prevailed, and we are very gratified by this final resolution of this very complex bankruptcy case,” Amini LCC’s Avery Samet explained.

The D&O Litigation

FCC obtained approximately 90% of its revenue from the DOE in Title IV funds paid to satisfy student tuition obligations.  It engaged in pre-drawing federal funds for student loans based on projected student enrollments but was unable to substantiate student eligibility and disbursements for all of the funds it drew.  By early 2014, the DOE warned FCC about the overdraws and in March demanded that FCC submit proof of disbursement of all funds drawn or return any excess, which at that point exceeded $15 million. FCC attempted to raise additional capital to repay the imbalance, but in the meantime the Department of Education revoked FCC’s ability to pre-draw. FCC promptly collapsed as it missed payroll, fired its Chief Executive Officer, and uncovered millions of additional funds required to be returned to the DOE. Hemorrhaging cash, cut-off from its ordinary cash flow and incapable of even identifying its ultimate liability to the Title IV program, FCC was forced into a fire sale, obtaining under $4 million for assets previously valued in excess of $150 million.

After an initial investigation, the attorneys at Amini LLC, then at Storch Amini PC, commenced an action in the United States District Court for the Southern District of Florida against certain officers for breaching their fiduciary duties to FCC.  Shortly before the case was ready for trial, they obtained a settlement for $15 million with the defendants.  The Delaware Bankruptcy Court approved that settlement in July 2018.

The DOE Settlement

Next, Clingman & Hanger engaged the attorneys at Amini to resolve the $37.7 million proof of claim filed by the Department of Education.  The DOE principally sought the disgorgement of $32 million in Pell Grants drawn by FCC during the 2013-2014 school year, on account of FCC’s failure to complete a close-out audit.  Clingman & Hanger objected to the government’s claim, on the ground that it sought to “assess … a claim against the Debtor” in violation of Bankruptcy Code section 362a and because the subject regulations did not give rise to a right to payment as of the petition date of the amounts claimed by the DOE.  They also objected to the portion the claim seeking to recover costs of funds. 

Following the filing of the objection, Clingman & Hanger began discussions with the Department of Justice, acting on behalf of the Department of Education, about their respective positions. In early November 2020, the United States Department of Justice agreed, subject to approval of the Court, to allowance of the DOE’s Claim in the reduced amount of $8,045,462.78, effectively agreeing to comprise the claim at 9.7% of the disputed portion, and the exchange of mutual releases as provided in the Settlement Agreement, which was approved by the Court. This settlement has increased the distribution rate to unsecured creditors by more than 160%.

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