| Commitments and Contingencies | 16. Commitments and
Contingencies
As part of our normal operations, one of our insurers issues surety
bonds for us that are required by various education authorities
that regulate us. We are obligated to reimburse our insurer for any
of those surety bonds that are paid by the insurer. As of
December 31, 2014, the total face amount of those surety bonds
was approximately $19,000. As of December 31, 2014, we also
had caused approximately $2,352 of letters of credit to be issued
to our workers’ compensation insurers and one of our state
regulatory agencies.
Our institutions’ failure to submit their 2013 audited
consolidated financial statements and the 2013 compliance audits of
their administration of the Title IV Programs in which they
participate (“Compliance Audits”) to the ED by the due
date resulted in sanctions imposed by the ED on our institutions
that included, among other things, our institutions having to
submit a letter of credit payable to the ED. We caused the ED
Letter of Credit in the amount of $79,708 to be issued on
October 31, 2014. The term of the ED Letter of Credit ends on
November 4, 2019. As of December 31, 2014, the total
amount of the outstanding letters of credit that we have caused to
be issued was $82,060.
The ED Letter of Credit provides that the ED may draw on the ED
Letter of Credit upon certification by the ED that the drafted
funds will be used for one or more of the following purposes:
• to pay refunds of institutional or
non-institutional charges owed to or on behalf of current or former
students of our institutions, whether our institutions remain open
or have closed;
• to provide for the
“teach-out” of students enrolled at the time of closure
of our institutions; and
• to pay any liabilities owing to the
ED arising from acts or omissions by our institutions, on or before
the expiration of the ED Letter of Credit, in violation of
requirements set forth in the HEA, including the violation of any
agreement entered into by our institutions with the ED regarding
the administration of Title IV Programs.
Lease Commitments.
• most of those leases will be renewed
or replaced by other leases in the normal course of business;
• we may purchase the facilities
represented by those leases; or
• we may purchase or build other
replacement facilities.
There are no material restrictions imposed by the lease agreements,
and we have not entered into any significant guarantees related to
the leases. We are required to make additional payments under the
operating lease terms for taxes, insurance and other operating
expenses incurred during the operating lease period.
Rent expense under our operating leases was:
• $46,268 in the year ended
December 31, 2014;
• $53,212 in the year ended
December 31, 2013; and
• $50,817 in the year ended
December 31, 2012.
Future minimum rental payments required under our operating leases
that have initial or remaining non-cancelable lease terms in excess
of one year as of December 31, 2014 are as follows:
2015 $ 41,207
2016 36,226
2017 27,617
2018 21,529
2019 15,235
2020 and thereafter 8,144
$ 149,958
Future minimum rental payments related to equipment leases are not
significant.
Claims and Contingencies.
The following table sets forth the components of our recorded
liability related to our claims and contingencies and where the
amounts were included on our Consolidated Balance Sheets as of the
dates indicated:
As of December 31,
2014 2013
CUSO RSA $ 0 $ 116,923
Other 15,574 8,957
Total $ 15,574 $ 125,880
Other current liabilities $ 14,976 $ 25,893
Other liabilities 598 99,987
Total $ 15,574 $ 125,880
Other current liabilities primarily represented our estimate of the
loss that we believed we would realize during the 12- month period
following the dates indicated. The amounts included in Other
liabilities primarily related to our estimated contingent liability
for the CUSO RSA as of December 31, 2013 (prior to the CUSO
Consolidation) and represented our estimate of the loss that we
believed we would realize after the 12-month
The following table sets forth the activity with respect to our
recorded liability related to our claims and contingencies in the
periods indicated:
Year Ended December 31,
2014 2013
Balance as of January 1 $ 125,880 $ 126,978
Increases (decreases) from:
Additional accruals:
CUSO RSA 2,019 90,964
Other 36,634 18,768
Payments, other, net of recoveries owed of $475 and $574 (1) (29,542 ) (14,730 )
Payments under CUSO RSA, net of recoveries of $466 and (2) (9,139 ) (2,600 )
Payments under PEAKS Guarantee, net of estimated recoveries of $0
and $1,408 (159,255 ) (1,005 )
Payments on Behalf of Borrowers (1,832 ) (11,499 )
Settlement payment – 2007 RSA 0 (46,000 )
Elimination of PEAKS Trust intercompany transactions (3) 161,087 11,118
Elimination of PEAKS Guarantee accrual (4) 0 (46,114 )
Elimination of CUSO intercompany transactions (5) 4,583 0
Elimination of CUSO RSA accrual (6) (114,861 ) 0
Balance as of December 31 $ 15,574 $ 125,880
(1) Consists of payments for legal and
other contingencies, net of recoveries from charged-off loans made
under the CUSO Program that were owed, but had not been remitted,
to us.
(2) Consists of payments made under the
CUSO RSA, net of recoveries from charged-off CUSO Student Loans
that we received or offset against payments owed under the CUSO
RSA.
(3) We consolidated the PEAKS Trust in
our consolidated financial statements as of February 28, 2013
and, as a result, we eliminated from our consolidated financial
statements the amount of payments under the PEAKS Guarantee and
Payments on Behalf of Borrowers that we made following the PEAKS
Consolidation. See Note 9 – Variable Interest Entities, for a
further discussion of the PEAKS Consolidation.
(4) As a result of the PEAKS
Consolidation, we eliminated from our consolidated financial
statements the contingent liability related to the PEAKS Guarantee
that we had previously recorded.
(5) We consolidated the CUSO in our
consolidated financial statements as of September 30, 2014
and, as a result, we eliminated from our consolidated financial
statements the amount of payments under the CUSO RSA that we made
following the CUSO Consolidation. See Note 9 – Variable
Interest Entities, for a further discussion of the CUSO
Consolidation.
(6) As a result of the CUSO
Consolidation, we eliminated from our consolidated financial
statements the contingent liability related to the CUSO RSA that we
had previously recorded.
We had guaranteed the repayment of private education loans made by
a lender to our students in 2007 and early 2008 (the “2007
RSA”) that the lender charged off above a certain percentage
of the total dollar volume of private education loans made under
the 2007 RSA. In January 2013, we paid $46,000 in a settlement to
absolve us from any further obligations with respect to our
guarantee obligations under the 2007 RSA, which amount is included
in the Settlement payment – 2007 RSA line item in the year
ended December 31, 2013 in the table above.
Prior to the CUSO Consolidation, in order to determine the amount
of the contingent liability to record related to our guarantee
obligations under the CUSO RSA, we utilized estimates of, among
other things, the projected repayment performance of the private
education loans made under the CUSO Program, which projections
involved numerous assumptions. We consulted with third-party
consumer credit consulting firms in developing certain repayment
assumptions. Based on those projections and other factors, we
estimated the amount of payments that we expected to make and the
amounts that we expected to be repaid to us.
In connection with determining the amount of the contingent
liability to record related to our guarantee obligations under the
CUSO RSA prior to the CUSO Consolidation, we also considered the
payment options available to us under the CUSO Program, including
our ability to make Discharge Payments under the CUSO RSA. To the
extent that we projected that we would have sufficient funds
available to make Discharge Payments under the CUSO RSA, we
incorporated an assumption that we would make Discharge Payments
into our estimate of the amount of payments that we expected to
make when determining the contingent liability. If we did not
believe that we would have sufficient funds available to make
Discharge Payments, we assumed that we would make Regular Payments
to satisfy our obligations under the CUSO RSA. We discounted the
amount of those expected future monthly Regular Payments at a
risk-free rate of interest. Making Discharge Payments results in us
paying a lesser amount than we otherwise would have been required
to pay under our guarantee obligations in future periods under the
CUSO RSA and, therefore, results in an estimated contingent
liability amount that is less than if we had assumed that we would
make Regular Payments in future periods.
Under the CUSO RSA, we are entitled to all amounts that the CUSO
recovers from loans in a particular loan pool made under the CUSO
Program that have been charged off, until all payments that we made
under the CUSO RSA with respect to that loan pool have been repaid
to us by the CUSO. We discounted the amounts of recoveries that we
expected would be repaid to us under the CUSO RSA at a risk-free
rate of interest. The difference between the amount of the
discounted guarantee payments that we expected to make and the
discounted amount that we expected would be repaid to us under the
CUSO RSA is recorded as the amount of our estimated contingent
liability related to our guarantee obligations under the CUSO RSA,
prior to the CUSO Consolidation.
In connection with estimating our recorded liability for claims and
contingencies as of December 31, 2014 and 2013, we considered
whether additional losses for claims and contingencies were
reasonably possible, could be estimated and might be material to
our financial condition, results of operations or cash
flows. As with any estimate, as facts and circumstances
change, the recorded liability and estimated range of reasonably
possible losses could change significantly. With respect to legal
proceedings, we determined that we cannot provide an estimate of
the possible losses, or the range of possible losses, in excess of
the amount, if any, accrued, for various reasons, including but not
limited to some or all of the following:
• there are significant factual issues
to be resolved;
• there are novel or unsettled legal
issues presented;
• the proceedings are in the early
stages;
• there is uncertainty as to the
likelihood of a class being certified or decertified or the
ultimate size and scope of the class;
• there is uncertainty as to the
outcome of pending appeals or motions; and
• in many cases, the plaintiffs have
not specified damages in their complaint or in court filings.
We have presented legal and professional fees related to certain
lawsuits, investigations and accounting matters as a separate line
item in our Consolidated Statements of Operations. The amounts
included in this line item represent expenses for various lawsuits,
investigations and accounting matters that we believe are not
representative of those normally incurred in the ordinary course of
business. Certain of those lawsuits and investigations are
described in detail, below. The expenses for the accounting matters
included in this line item relate primarily to services identified
as relating to accounting for, and the audit work performed in
connection with, the consolidation of the PEAKS Trust and the
restatement of our 2013 quarterly consolidated financial
statements.
Guarantees. PEAKS Guarantee
and Purchase Obligation .
We concluded that we were required to consolidate the PEAKS Trust
in our consolidated financial statements beginning on
February 28, 2013. See Note 9 – Variable Interest
Entities, for a further discussion of the PEAKS Consolidation. As a
result, the assets and liabilities of the PEAKS Trust have been
included on, and all intercompany transactions have been eliminated
from, our Consolidated Balance Sheets as of December 31, 2014
and 2013. While we no longer record a contingent liability for the
PEAKS Guarantee on our Consolidated Balance Sheet beginning on
February 28, 2013, our obligations under the PEAKS Guarantee
remain in effect.
PEAKS Program Payments in 2014
• the $40,000 payment we made in March
2014 pursuant to the PEAKS Letter Agreement, which is considered to
be a payment under the PEAKS Guarantee;
• the payments totaling approximately
$51,700 that we made from July 2014 through September 2014 to
satisfy our obligation under the PEAKS Guarantee with respect to
the increased minimum required Asset/Liability Ratio in prior
periods;
• payments totaling approximately
$64,900 that we made from October 2014 through December 2014 to
satisfy our obligations under the PEAKS Guarantee with respect to
the increased minimum required Asset/Liability Ratio in current and
prior periods;
• payments totaling approximately
$2,700 that we made from March 2014 through September 2014 to
satisfy our obligations under the PEAKS Guarantee with respect to
interest owed on the PEAKS Senior Debt and administrative fees and
expenses of the PEAKS Trust; and
• Payments on Behalf of Borrowers of
approximately $1,800 that we made in January 2014.
See also “— PEAKS Program and CUSO RSA Payments in
Certain Periods
Projected PEAKS Guarantee Payments
The estimated amount and timing of future payments and recoveries
with respect to the PEAKS Guarantee discussed above and elsewhere
in this report are only estimates, are based on numerous
assumptions and are subject to change. As with any estimate, as
facts and circumstances change, the estimated amounts and timing
could change. We made a number of assumptions in preparing the
estimates, which assumptions may not be correct. The assumptions
included, among other things, the following:
• the repayment performance of the
PEAKS Trust Student Loans, the proceeds from which will be used to
repay the PEAKS Senior Debt and to pay the fees and expenses of the
PEAKS Trust, and the performance of which also affects the
Asset/Liability Ratio;
• the fact that those loans will
consist of a large number of loans of individually immaterial
amounts;
• the fact that the interest rate on
the PEAKS Senior Debt is a variable rate based on the LIBOR plus a
margin; and
• the amount of fees and expenses of
the PEAKS Trust, much of which is based on the principal balance of
the PEAKS Trust Student Loans.
CUSO RSA .
Pursuant to the CUSO RSA, we are required to maintain collateral to
secure our guarantee obligation in an amount equal to a percentage
of the outstanding balance of the private education loans disbursed
to our students under the CUSO Program. As of December 31,
2014 and 2013, the total collateral maintained in a restricted bank
account was approximately $8,600. This amount was included in
Collateral deposits on our Consolidated Balance Sheets as of each
of those dates. The CUSO RSA also requires that we comply with
certain covenants, including that we maintain certain financial
ratios which are measured on a quarterly basis and deliver
compliance certificates on a quarterly basis setting forth the
status of our compliance with those financial ratios. If we are not
in compliance with those covenants at the end of each fiscal
quarter, we are required to increase the amount of collateral
maintained in the restricted bank account to a predetermined
amount, until the end of a succeeding quarter at which we are in
compliance with those covenants. The predetermined amount is based
on the percentage of the aggregate principal balance of the private
education loans made under the CUSO Program that exceeds a certain
percentage as of the end of each fiscal quarter.
Under the CUSO RSA, we have the right to elect to make Discharge
Payments with respect to private education loans made under the
CUSO Program that have been charged off. The effect of a making a
Discharge Payment related to a private education loan is to reduce
the aggregate amount that we may have to pay under our guarantee
obligations with respect to that loan. We have claimed as an offset
against amounts owed to us under the Revolving Note amounts that
would have the effect of discharging our obligations with respect
to certain charged off loans under the CUSO RSA. In addition, in
the years ended December 31, 2014 and 2013, we made Discharge
Payments to the CUSO. Making Discharge Payments results in us
paying amounts to the CUSO in advance of when a guarantee payment
would be due, which would negatively impact our liquidity in a
particular period, but results in us paying a lesser amount than we
otherwise would have been required to pay under our guarantee
obligation in future periods under the CUSO RSA. See Note 9 –
Variable Interest Entities, for a further discussion of Discharge
Payments.
We concluded that we were required to consolidate the CUSO in our
consolidated financial statements beginning on September 30,
2014. See Note 9 – Variable Interest Entities, for a further
discussion of the CUSO Consolidation. As a result, the assets and
liabilities of the CUSO have been included on, and all intercompany
transactions have been eliminated from, our Consolidated Balance
Sheet as of December 31, 2014. While we no longer record a
contingent liability for the CUSO RSA on our Consolidated Balance
Sheet beginning on September 30, 2014, our obligations under
the CUSO RSA remain in effect.
CUSO RSA Payments in 2014.
• Regular Payments of $7,028;
• a Discharge Payment of $2,577 that we
made pursuant to the Fourth Amendment to CUSO RSA (as defined
below); and
• $466 in recoveries from charged-off
loans that were owed to us from the CUSO and that we applied to
reduce the amount payable by us to the CUSO pursuant to our offset
right.
In the year ended December 31, 2014, the CUSO did not remit to
us $475 of recoveries from charged-off loans that were owed to us.
See also “— PEAKS Program and CUSO RSA Payments in
Certain Periods
CUSO RSA Amendments.
On March 17, 2015, we entered into a Fifth Amendment to the
CUSO RSA with the CUSO (the “Fifth Amendment to CUSO
RSA”). The Fifth Amendment to CUSO RSA provides that we are
not required to comply with certain financial ratio covenants under
the CUSO RSA that we otherwise would not have been in compliance
with from June 30, 2013 through: (i) March 31, 2015
related to our debt service ratio, and (ii) December 31,
2015 related to our current ratio. Additionally, the Fifth
Amendment to CUSO RSA provides that for any fiscal quarter end in
which the CUSO (or its owned or managed assets) are consolidated
into our financial statements that the financial covenant and
persistence percentage provisions and the corresponding compliance
certificate requirements will be based on our relevant quarterly
and annual reports that we file with the SEC, but excluding the
effects of any such consolidation. Furthermore, any financial
statements for periods ending prior to March 17, 2015 that we
are required to deliver to the CUSO, but have not been delivered as
of that date, must be delivered to the CUSO on or before
May 31, 2015. In lieu of an increase in the required
collateral under the CUSO RSA, we made a payment of $2,709 to the
CUSO on March 19, 2015 pursuant to the Fifth Amendment to CUSO
RSA, which payment was considered a Discharge Payment under the
CUSO RSA.
Projected CUSO RSA Payments
Year Estimated Regular Estimated Estimated Estimated
2015 $ 11,723 $ 2,709 (1) $ 14,432 $ (1,393 )
2016 15,895 0 15,895 (1,479 )
2017 17,615 0 17,615 (1,545 )
2018 and later 0 78,747 78,747 (1,580 )
$ 45,233 $ 81,456 $ 126,689 $ (5,997 )
(1) Represents the Discharge Payment of
$2,709 that we made on March 19, 2015 pursuant to the terms of
the Fifth Amendment to CUSO RSA.
We believe that the vast majority of the $78,747 of estimated
payments projected to be paid after 2017 will be made by us in
2018. The estimated future payment amounts and timing related to
the CUSO RSA assume, among other factors, that we do not make any
Discharge Payments in 2015, 2016 or 2017 (other than the Discharge
Payment made in March 2015 pursuant to the terms of the Fifth
Amendment to CUSO RSA) and do make Discharge Payments to the
fullest extent possible in 2018 and later years. If we do not make
the Discharge Payments as assumed in 2018 and later years, we
estimate that we would make approximately $100,273 of Regular
Payments in 2018 through approximately 2026. Of this amount,
approximately $18,600 to $20,000 would be paid annually in each of
2018 through 2021, and approximately $22,700 in the aggregate,
would be paid in 2022 through 2026.
The estimated amount and timing of future payments and recoveries
with respect to the CUSO RSA discussed above are only estimates,
are based on numerous assumptions and are subject to change. As
with any estimate, as facts and circumstances change, the estimated
amounts and timing could change. We made a number of assumptions in
preparing the estimates, which assumptions may not be correct. The
assumptions included, among other things, the following:
• the repayment performance of the
private education loans made under the CUSO Program;
• the timing and rate at which those
private education loans will be paid;
• the changes in the variable interest
rates applicable to those private education loans;
• the amounts and timing of collections
in the future on those private education loans that have been
charged off; and
• our ability to utilize the available
options for payment of our obligations under the CUSO RSA.
PEAKS Program and CUSO RSA Payments in Certain
Periods.
Year Ended December 31,
Type of Payment (Receipt) 2014 2013
Guarantee:
PEAKS Program $ 159,255 $ 2,413 (1)
CUSO RSA Regular Payments 6,562 (2)(3) 1,791
CUSO RSA Discharge Payments 2,577 912
Payments on Behalf of Borrowers 1,832 11,499 (4)
CUSO RSA-Recoveries from Charged-Off Loans 0 (103 )
Total $ 170,226 $ 16,512
(1) Of this amount, $854 was paid prior
to the PEAKS Consolidation.
(2) This amount is net of $466 of
recoveries from charged-off loans owed to us that we offset against
the amount we owed under the CUSO RSA.
(3) Of this amount, $4,556 was paid prior
to the CUSO Consolidation.
(4) Of this amount, $532 was paid prior
to the PEAKS Consolidation.
The CUSO did not remit to us, and we did not offset payments under
the CUSO RSA for, the following amounts of recoveries from
charged-off loans that were owed to us:
• $475 in the year ended
December 31, 2014; and
• $574 in the year ended
December 31, 2013.
We recorded the amount of recoveries from charged-off loans that
were owed to us, but not paid or offset, as of December 31,
2013 in Prepaid expenses and other current assets on our
Consolidated Balance Sheet. The amounts of recoveries from
charged-off loans that were owed to us by the CUSO as of
December 31, 2014 were not reflected on our consolidated
financial statements, since those amounts were intercompany
transactions that were eliminated from our financial statements as
a result of the CUSO Consolidation.
We also offset the following amounts owed by us under the CUSO RSA
against amounts owed to us by the CUSO under the Revolving Note,
instead of making additional payments in those amounts:
• $0 in the year ended
December 31, 2014; and
• $8,472 in the year ended
December 31, 2013.
We recorded all of the amounts that we claimed as offsets against
amounts owed to us under the Revolving Note in Other current
liabilities on our Consolidated Balance Sheet as of
December 31, 2013. The amounts that we claimed as offsets
against amounts owed to us under the Revolving Note as of
December 31, 2014 were not recorded on our consolidated
financial statements, since those amounts were intercompany
transactions that were eliminated from our financial statements as
a result of the CUSO Consolidation.
In the first quarter of 2013, we notified the CUSO that:
• we had determined that the CUSO was
in default of its obligations to us under the loan and security
agreement pursuant to which the Revolving Note was issued (the
“CUSO Loan Agreement”);
• as a result of that default, all
amounts under the Revolving Note were immediately due and payable;
and
• we would not make payments under the
CUSO RSA until we received credit for the full amount due us under
the Revolving Note, based on the provisions of the CUSO Loan
Agreement and the CUSO RSA that allow us to set off amounts owed by
us under the CUSO RSA against amounts owed to us by the CUSO under
the Revolving Note.
At that time, the outstanding amount of the Revolving Note due to
us was approximately $8,200, representing principal and accrued
interest. In response to our notification, the CUSO:
• denied that it had defaulted under
the CUSO Loan Agreement and, therefore, our ability to accelerate
the payment of the Revolving Note; and
• refused our demand to immediately pay
the Revolving Note in full.
As a consequence, over the period from February 2013 through August
2013, we offset our then current payment obligations under the CUSO
RSA and the amount of Discharge Payments we elected to make during
that period against all of the CUSO’s obligations owed to us
under the Revolving Note (the “Offset”).
We understand that the CUSO’s position is that the Offset was
improper, because:
• it has not defaulted under the CUSO
Loan Agreement; and
• even if it had defaulted under the
CUSO Loan Agreement, the assets of the CUSO against which we could
offset or exercise our other remedies, were limited.
We further understand the CUSO’s position to be that, because
the Offset was improper, we are in default under the CUSO RSA. In
April 2013, the CUSO notified us that it had taken control of the
restricted account containing the cash collateral that we deposited
to secure our obligations under the CUSO RSA (the
“Collateral”). At that time, the amount of funds in
that account was approximately $8,600. To our knowledge, the CUSO
has taken no further action related to the Collateral. We believe
that our good faith exercise of our right of offset provided for in
the CUSO Loan Agreement and the CUSO RSA does not constitute an
event of default under the CUSO RSA, and that the CUSO’s
seizure of control of the restricted account containing the
Collateral constitutes an additional default by the CUSO. We cannot
assure you, however, that the Offset will ultimately be determined
to have been proper. In the event of a default by us under the CUSO
RSA related to the Offset, we may be required to pay to the CUSO
approximately $9,200, net of approximately $1,049 of recoveries
from charged-off loans that are owed, but have not been paid, to
us. If, instead, the CUSO was to withdraw Collateral in that amount
from the restricted bank account, we would be required to deposit
that amount of cash in the account to maintain the required level
of Collateral.
Assessment of Guarantee Contingent
Liability.
In order to estimate the amount of the contingent liability, we
made certain assumptions with respect to the performance of the
CUSO Student Loans over the life of those loans. The life of a CUSO
Student Loan may be in excess of ten years from the date of
disbursement. Therefore, our estimates were based on assumptions
for periods in excess of ten years, and those assumptions included,
among other things, the following:
• the repayment performance of the CUSO
Student Loans, which includes both payments on non-defaulted loans
and recoveries from defaulted, or charged-off, loans;
• the timing and rate at which the CUSO
Student Loans will be paid;
• the changes in the variable interest
rates applicable to the CUSO Student Loans;
• the amounts and timing of collections
that will be collected in the future on CUSO Student Loans that
have defaulted; and
• our ability to utilize the available
options for payment of our obligations under the CUSO RSA.
Because the amount of the contingent liability takes into
consideration the projected repayment performance of the CUSO
Student Loans that could extend for ten or more years, and the
repayment performance data develops over a period that is several
years from the date the loans were originated, we continually
refined our assumptions based on new data and information. We
consulted with third-party consumer credit consulting firms in
determining certain repayment performance assumptions.
The projected future payments that we expected to make under the
CUSO RSA were based on a methodology to forecast future default
rates and amounts, which methodology utilized the historical amount
of CUSO Student Loans that had defaulted. The historical default
experience by itself, however, may not be indicative of the future
default performance of the CUSO Student Loans. Therefore, we made
certain assumptions regarding the expected future default
performance of the loans. In estimating the projected future
amounts that we expected to be repaid to us by the CUSO from
recoveries from charged-off loans, we considered the actual
collections on defaulted loans made under the CUSO Program, as well
as other factors. As the CUSO Student Loans matured, additional
data related to the repayment performance of the loans and other
information regarding the loans became available to us that we
utilized to estimate the related contingent liability. The
assumptions used for our projections of future payments and
recoveries have changed significantly over time as actual repayment
performance became known, which resulted in changes to the
estimated contingent liability.
We also considered our ability to utilize Discharge Payments for
payment of our obligations under the CUSO RSA in our estimates of
the contingent liability. Making Discharge Payments results in an
estimated contingent liability amount that is less than if we had
assumed we would make Regular Payments in future periods. As
circumstances and our future cash flow projections changed over
time, we adjusted our assumptions related to our ability to make
Discharge Payments, which resulted in an increase in our estimated
contingent liability amount in certain periods.
In addition, in certain prior reporting periods, there were
disruptions in the servicing of a portion of the CUSO Student
Loans, as well as indications that servicing activities were not
being performed as required by the applicable servicing agreement,
which we believe had a negative impact on the repayment performance
of those loans. We cannot predict with any certainty whether other
servicing disruptions or servicing issues will occur in the
future.
Litigation
On December 22, 2008, we were served with a qui tam action
that was filed on July 3, 2007 in the United States District
Court for the Southern District of Indiana by a former employee
(“relator”) on behalf of herself and the federal
government under the following caption: United States of America ex
rel. Debra Leveski v. ITT Educational Services,
Inc. et
seq
• treble the amount of unspecified
funds paid to us for federal student grants;
• treble the amount of unspecified
default payments, special allowance payments and interest received
by lenders with respect to federal student loans received by our
students;
• all civil penalties allowed by law;
and
• attorney’s fees and costs.
A qui tam action is a civil lawsuit brought by one or more
individuals (a qui tam “relator”) on behalf of the
federal or state government for an alleged submission to the
government of a false claim for payment. A qui tam action is always
filed under seal and remains under seal, until the government
decides whether to intervene in the litigation. Whenever a relator
files a qui tam action, the government typically initiates an
investigation in order to determine whether to intervene in the
litigation. If the government intervenes, it has primary control
over the litigation. If the government declines to intervene, the
relator may pursue the litigation on behalf of the government. If
the government or the relator is successful in the litigation, the
relator receives a portion of the government’s recovery.
On August 8, 2011, the district court granted our motion to
dismiss all of the relator’s claims in the Leveski Litigation
for lack of subject-matter jurisdiction and issued a judgment for
us. On February 16, 2012, the relator in the Leveski
Litigation filed a Notice of Appeal with the 7 th th th th
We have defended, and intend to continue to defend, ourselves
vigorously against the allegations made in the complaint.
On March 11, 2013, a complaint in a securities class action
lawsuit was filed against us and two of our current executive
officers in the United States District Court f |
