A New Bankruptcy Subchapter for Institutions of Higher Education: A Path but not a Destiny.

• Author: Miller, Robert W.

TABLE OF CONTENTS Introduction I. The Importance of Title IV to IHEs II. Treatment of Debtor-IHEs and Title IV Funds by the Bankruptcy Code and the HEA III. The Erosion of the Policy Backing for the Chapter 11 Restructuring Exclusion IV. Current Bankruptcy Options for IHEs A. Chapter 7 B. Chapter 11 V. Rationale for the Option for IHEs to Reorganize in Bankruptcy A. Academic Support for Chapter 11 Restructurings B. The Limitations of 363 Sales for IHEs VI. Receiverships A. Federal Court IHE Receiverships B. State Court IHE Receiverships VII. Out-of-Court Workouts VIII. The Importance of Cash Flow Restructuring IX. A Subchapter as a Solution A. Railroads: The Original Subchapter of the Bankruptcy Code B. Health Care Businesses: Piecemeal Approach C. Benefits of a Subchapter X. An IHE Subchapter A. Non-Subchapter Amendments B. The Subchapter's Composition 1. Prepetition RSA 2. Reconciling Conflicts Between Other Regulatory Regimes and the Bankruptcy Code 3. Student Interest 4. Administrative Expense Priority for Student Claims 5. Plan Confirmation and 363 Sale Conclusion INTRODUCTION

Having weathered what is hopefully the worst of the COVID-19 pandemic, many IHEs still stand at the edge of a financial precipice. IHEs have long relied upon increased debt financing (2) and ever higher tuition and fees to balance the books in the face of declining undergraduate enrollment. (3) They justify higher costs and bond issuances by offering luxurious amenities, upgraded housing options, state of the art academic buildings, low student to faculty ratios, and broad administrative support. (4) Given their already shaky finances, commentators predicted a COVID-19-fueled cull of IHEs. (5) To their surprise, the IHE closure rate has remained within historical ranges. Even among small liberal arts colleges, a sector identified as particularly distressed, only a few have closed. Most notably Concordia College and Mills College whose campuses were purchased by Iona College and Northeastern University, respectively, and Becker College, whose most popular programs will be covered by neighboring Clark University's establishment of a new department. (6) Credit federal intervention, through the CARES Act and subsequent legislation, (7) for throwing a lifeline to struggling IHEs. Yet, congressional relief is only temporary; decreasing future enrollment and rising tuition discount rates still haunt IHEs' future.

What happens when income decreases while the most significant expenses and liabilities remain the unchanged? Normally, an entity faced with this conundrum would attempt to negotiate a resolution with its creditors in the shadow of a possible bankruptcy filing. (8) Among the bankruptcy-specific tools the entity could threaten to employ are amortization of secured claims, damage caps for onerous executory contracts and unexpired leases, and the discharge of unsecured debts. This is not the reality for IHEs; they cannot threaten to reorganize through bankruptcy. (9) Upon a bankruptcy filing, IHEs' primary sources of income disappear and a reorganization is impossible. The illusory threat of bankruptcy has a knock on effect that undermines IHEs' leverage when negotiating with their creditors generally.

The vast majority of IHEs' income is derived from tuition and fees in the form of federal student aid authorized under the title IV of the Higher Education Act of 1965 (the "HEA"), codified as 20 U.S.C. [section] 1070(a) ("title IV"). The names of the programs and financial products that dispense title IV funds--Pell Grants, Perkins Loans, Stafford Loans, and Grad Plus Loans--are more recognizable. Upon filing bankruptcy, as the law currently exists, the IHE cannot receive any title IV funds. Left without its primary source of income, an IHE cannot reorganize through a bankruptcy proceeding.

Out-of-court workouts with secured lenders offer one alternative. Changing the terms of the debt instruments governing the relationship between the IHE and its lenders will not impact title IV funding. Indeed, it is not coincidental that one of the first "liability management transactions," where a debtor takes advantage of the terms of their existing debt to craft new refinancing solutions outside of bankruptcy, was an IHE. (10) Although these strategies have become more common, even when they are available, an IHE may perceive that the reputational harm will exceed the financial benefits. In any event, the out-of-court restructuring is likely to be far more limited without the coercive tools available in a formal proceeding.

IHEs are not completely bereft of in-court restructuring options (liquidation, going-concern sale, or a reorganization) and this article provides the first comprehensive evaluation of these alternatives to a restructuring under chapter 11. (11) An IHE can still file a chapter 11 bankruptcy and sell its assets free and clear of liens through what is colloquially known as a "363 Sale" (12) while conducting a wind-down of unsold assets, even if it cannot operate. (13) Another option is to conduct a sale or restructuring through a federal or state court receivership. Unlike a bankruptcy filing, a receivership does not necessarily trigger the elimination of title IV funding and some receivers have continued to receive title IV funding. (14) Uncertainty tempers the lure of this possibility because the Department of Education ("DOE"), the agency responsible for oversight of title IV funds, has been unwilling to confirm whether or how a receivership alters an IHE's eligibility to receive title IV funds. (15) Moreover, a receiver cannot muster certain coercive bankruptcy-specific powers to more comprehensively restructure the debtor. To recap IHEs' current options for in-court restructurings, an IHE's assets can be sold but it cannot operate following a bankruptcy filing while a receiver can sell an IHE's assets and potentially operate. Neither option can restructure both an IHE's balance sheet and cash flow statement. Put another way, IHEs cannot wield the discharge and cramdown powers of the Bankruptcy Code and continue as a reorganized as a going-concern (a "Chapter 11 Restructuring"). (16) This article argues that this missing option is both essential for IHEs facing financial distress and consistent with public policies and theoretical frameworks undergirding bankruptcy generally.

This thesis may appear outmoded and unnecessary as 363 Sales are commonplace. (17) Even more damning, the provision that precludes a Chapter 11 Restructuring was enacted prior to the rise of 363 Sales in the early 2000s. (18) If traditional restructurings were previously more popular and Congress still enacted the limitation on title IV funds and eliminated a Chapter 11 Restructuring as an option for IHEs, why should we consider a change today?

My retort is twofold. First, altering the currently legal regime is necessary for not only a reorganization but also a going-concern 363 Sale of an IHE (why I use the broad term Chapter 11 Restructuring). When an IHE is sold in a bankruptcy case, the HEA imposes a two-year waiting period for obtaining access to title IV funds. (19) Given that title IV funds are the lifeblood of an IHE, the waiting period may as well be a hundred years as operations cannot be sustained without these funds. Second, IHEs located outside of urban centers will particularly benefit from a Chapter 11 Restructuring option. (20) The "college town," a phrase rooted in nostalgia, is the reality for hundreds of communities. (21) A Chapter 11 Restructuring could be the best option because a 363 Sale may not be economically feasible if no alternative use for the IHE's campus exists. (22)

Another obvious critique is that students will be reluctant to attend an IHE that has recently filed for bankruptcy. Unlike a single-use product, the service provided by an IHE often extends over four years, plus students also value the IHE's future standing and alumni network. As a result, a bankruptcy's tarnishing of an IHE's reputation could endanger its survival.

Ironically, IHEs' broad-based financial struggles may address this problem. (23) Greater recognition of broad financial distress will shift public perceptions and the "stigma" (24) associated with an IHE filing for bankruptcy will decrease. (25) That being said, IHEs should attempt to mitigate potential reputational risk by swiftly reemerging from a Chapter 11 Restructuring. (26)

The third critique challenges how taxpayers will be protected. The DOE's poor oversight of unscrupulous and fraudulent IHEs motivated the title IV funding exclusion. (27) Indeed, the title IV funding exclusion functions as a blunt underwriting standard. (28) Nonetheless, protecting the taxpayers is particularly salient today as the possibility of greater student loan dischargeability in bankruptcy (29) and blanket amnesty (30) loom large. Any option for a Chapter 11 Restructuring must reflect the public's interest in title IV funds. Yet the demographic challenges facing IHEs are not the product of fraud or wrongdoing; especially today, the exclusion is extremely overinclusive. When admissions and IHE revenues were steadily increasing, coupling financial strength with the ability to operate was more defensible. No more. IHEs, like other would-be-debtors, should have an opportunity undertake a Chapter 11 Restructuring, albeit with sufficient protection of the public's interest in title IV funds.

Turning to the prescription of this article, a new subchapter of the Bankruptcy Code is the appropriate solution. The treatment of two other heavily regulated industries, railroads and healthcare businesses, (31) buttress this conclusion. The 1898 Bankruptcy Act's treatment of railroad debtors attempted to protect the public interest, but it instead creating regulatory delay, which often endangered reorganizations. The subsequent enactment of the original subchapter of the Bankruptcy Code, subchapter IV (which covers...