For-Profit College Operator Sues Feds After Non-Profit Status Rejected

Earlier this month, the Department of Education denied non-profit status to a chain of for-profit career colleges, accusing the schools’ operators of trying to avoid accountability with the switch. This week, the Center for Excellence in Higher Education fired back, suing the Department, alleging the government has a political agenda of putting career schools out of business.

The lawsuit [PDF], filed yesterday in a federal court in Utah, probably doesn’t come as a surprise to anyone who saw CEHE’s response to the government’s rejection of the schools’ non-profit status. Earlier this month, CEHE’s top executive told Consumerist the company would “fight this politicized attempt to smear our good colleges and our amazing students.”

According to the complaint, CEHE — which is seeking a court declaration that the colleges are non-profit institutions and should be regulated as such —  the DOE’s decision to deny status was “arbitrary and capricious.”

“The Department has arbitrarily targeted institutions submitting change in ownership applications in instances in which the new owner is a non-profit corporation by treating those institutions as if they were proprietary institutions during the pendency of their applications. This practice is improper and unjust because it is occurring without forewarning and is contrary to the Department’s historic practice. It is being done solely to subject the institutions to more burdensome compliance requirements,” according to the complaint.

The DOE announced on Aug. 11 that it denied the Utah-based career education operator’s request after determining that the transfer would not benefit the public.

In a letter to CEHE CEO Eric Juhlin, the DOE outlined its process for determining whether a school can be converted to non-profit status and ultimately ordering the company to “continue to be accountable to taxpayers, students through federal regulations.”

CEHE is itself a non-profit organization. In 2012, after it acquired a group of colleges — including CollegeAmerica, Stevens-Henager College, and California College San Diego — from the Carl Barney Living Trust for $400 million, CEHE applied to extend this non-profit status to these schools.

However, the DOE ultimately determined that Barney — who became chairman of the board for CEHE — retained significant control over the schools and received income in a way that is not in line with the requirement that the net earnings of a non-profit can not benefit any private shareholder or individual.

If the colleges were granted non-profit status, they would not face the increased scrutiny of Gainful Employment regulations — which require career schools to demonstrate that a sufficient number of their graduates go on to earn a reasonable living — or the “90/10 rule,” which says that for-profit colleges can’t get more than 90% of their operating revenue from federal student aid funding.

The DOE’s rejection of the CEHE request means the four colleges must still meet those standards.

“This should send a clear message to anyone who thinks converting to non-profit status is a way to avoid oversight while hanging onto the financial benefits: Don’t waste your time,” U.S. Education Secretary John B. King Jr. said in a statement at the time.

CEHE alleges in its lawsuit that the DOE’s reasoning and the process to make this determination was drawn-out and unfairly targeted the schools because of their for-profit history.

The college operator argues in the complaint that the DOE strung it along since 2012, requiring it to provide at least four audits, financial statements, and other evidence although it never intended to grant non-profit status to the schools.

In 2015, the company claims the DOE required it to guarantee credit of $42.9 million to protect taxpayers and students in case of financial failure after the Denver branch of CollegeAmerica was sued by the Colorado attorney general’s office.

CEHE claims it made “numerous urgent requests” to meet with Department officials over the nearly four-year classification process, but was repeatedly ignored before learning of the rejected non-profit status through press release earlier this month.

CEHE also takes issue with the DOE’s application of the definition of a “non-profit institution.” The DOE defines a non-profit institution as one that is “owned by one or more non-profit corporations and associations, no part of the net earnings of which benefits any private shareholder or individual.”

CEHE argues that it is operated by a non-profit entity. However, the DOE determined that previous owner Barney still benefited from the colleges financially.

Barney told the New York Times on Wednesday that he doesn’t profit from the schools, which he calls his “baby.”

“I’m out of pocket about $77 million,” he said, of the costs and lost revenue that allegedly resulted from the sale of his colleges. “It was the worst deal I ever made in my life.”

[via The New York Times]

Want more consumer news? Visit our parent organization, Consumer Reports, for the latest on scams, recalls, and other consumer issues.