ITT Tech's Bankruptcy Trustee Seeks to Fend Off SEC, CFPB

The bankruptcy trustee sifting through the wreckage left when the ITT Technical Institute chain of schools collapsed says the Consumer Financial Protection Bureau and other government agencies are getting in her way.

Deborah Caruso, the trustee, wants the CFPB sidelined by court order, along with the Securities and Exchange Commission and attorneys general for Massachusetts and New Mexico, as well as others that sued the troubled for-profit educational company before it filed for bankruptcy last month.

On Tuesday in U.S. Bankruptcy Court in Indianapolis, Judge James Carr set the matter for a hearing Nov. 2. Ms. Caruso is asking for an injunction barring government agencies from continuing their legal march on ITT Tech. Additionally, she wants a halt to lawsuits aimed at the company's former executives.

Ms. Caruso is particularly concerned about a Freedom of Information Act request to the CFPB, which seeks information that ITT Tech indicated it would rather not see become public, court papers say.

Ms. Caruso's lawyers say they haven't had a chance to evaluate the "threatened production" of information ITT Tech handed over to the CFPB. However, the information being sought by an unidentified news organization likely constitutes property of the bankruptcy estate, they contend.

According to the trustee, she needs breathing room to assess ITT Tech's legal and financial picture.

The CFPB and SEC declined to comment Tuesday on the motion, which was filed Monday in bankruptcy court.

"The Office of Attorney General Hector Balderas is doing all it can to ensure that New Mexico students and families who were harmed by ITT's unlawful practices and subsequent closure are protected and given every opportunity to transition their education and pursue loan forgiveness," James Hallinan, a spokesman for the New Mexico attorney general's office, said Tuesday. "We continue to evaluate the best options for representing the State of New Mexico and its families in the pending litigation and in ITT's bankruptcy."

ITT Tech's parent company, ITT Educational Services Inc., closed its doors abruptly and filed for bankruptcy after federal authorities cut off its access to taxpayer-backed student loans. The action followed years of litigation and accusations of fraud from the CFPB, SEC and others.

Ms. Caruso's lawyers say if the lawsuits are allowed to continue, she will have to spend time fielding requests for documents and attempting to safeguard the $40 million worth of insurance that is one of the major sources of value in the case.

Litigation reprieves are a normal part of most corporate bankruptcies, provided by law to allow distressed companies time to reorganize, or at least get their affairs in shape for an orderly liquidation.

ITT Tech's bankruptcy has the trustee and her advisers scrambling to make sense of a failed business that, until Sept. 6, served nearly 40,000 students, employed 8,000 people and operated 137 locations.

In ITT Tech's case, the onslaught of fraud litigation could have an unusual side effect that could help some students resist attempts by ITT Tech to collect alleged debts from them. The CFPB, for example, sued back in 2014 seeking to block the education company from trying to collect some private loans from students.

According to the CFPB suit, ITT Tech knew federal loans would not cover its entire tuition, so it offered cash-strapped students zero-interest temporary loans to cover the gap. Students unable to pay off the temporary loans in nine months—most ITT Tech students, the CFPB said—were then pushed into pricey private loans.

The private loans only appeared to be offered by third parties, the suit says, noting that ITT Tech was behind the private loan system.

If bankruptcy stalls the CFPB litigation, individual students that could be hit with demands for payment from the bankruptcy trustee will be on their own when it comes to challenging the validity of the loans.

Uncollected student debts are one of ITT Tech's major assets, lawyers said at a hearing early in the proceeding.

Write to Peg Brickley at peg.brickley@wsj.com

(END) Dow Jones Newswires

October 11, 2016 16:05 ET (20:05 GMT)

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