The United States District Court for the Western District of Texas Affirms the Bankruptcy Court Ruling Avoiding “Fraudulent Transfers” Worth $5.1 Million Under Loan – Repurchase Obligation
August 9, 2021, Western District of Texas – Dickinson of San Antonio, Inc. d/b/a Career Point (“Debtor”), formerly a for-profit college for nurses, filed a voluntary petition for bankruptcy in the United States Bankruptcy Court for the Western District of Texas on October 31, 2016. Trustee John Patrick Lowe brought suit against Tango Delta Financial, Inc. f/k/a American Student Financial Group, Inc. (“ASFG”), Cottingham Management Company, LLC (“Cottingham Management”), and Cottingham Apex Texas Fund, LLC (“Cottingham-Texas”), alleging various causes of action against each entity in a 29-count complaint. The Trustee demanded repayment of over $8 million in Program Subsidy Loans (“PSLs”) made by Debtor to Cottingham-Texas. The Trustee also sought to disallow a claim by ASFG for over $12 million based on Debtor’s contractual obligations to repurchase certain student loans. Additionally, the Trustee claimed that $5.1 million paid to ASFG under a loan- repurchase obligation constituted a “fraudulent transfer” and should be returned.
The Bankruptcy Court held that the PSL made by the Debtor violated the U.S. Department of Education’s 90/10 Rule. The District Court affirmed the Bankruptcy Court’s ruling as it found that there is a plausible basis for the bankruptcy court’s finding in the trial record. The Court found that ASFG created the loan scheme solely to evade punishment for failing to comply with the DoE’s 90/10 Rule as testified by the manager of Cottingham Texas. Next, the District Court also affirmed the Bankruptcy Court’s avoidance of ASFG’s security interest under 11 U.S.C. § 544(b)(1) because it found that ASFG did not repay to the estate the proceeds of a “fraudulent transfer” under the Texas Transfer Act (“TUFTA”).
The Court next ruled that although the transfers of funds at issue were not made from the Debtor to ASFG, it is not necessarily the case that Debtor had no interest in the funds that were transferred. The Court pointed out that the Fifth Circuit has held that the owner of the property is determined by possession and control. In the case at bar, the Court found that money was funneled from Debtor to ASFG through a third party. Further, numerous ASFG executives testified that the loan scheme was designed to transfer funds from Debtor to ASFG without the DoE’s knowledge. The Court held that the Bankruptcy Court’s factual findings of a transfer of the Debtor’s property and the intent to defraud Debtor’s creditors were not clearly erroneous and affirmed on this issue.
Tango Delta Fin., Inc. v. Lowe (In re of San Inc.), 2021 U.S. Dist. LEXIS 148502