HTML Document View

Full title: Motion objecting to claim(s) 8 of Wendy Lynne Deadwyler filed by Debtor 1 Minnesota School of Business, Inc.. An affidavit or verification, Proposed order. Hearing scheduled 6/15/2021 at 01:30 PM at Courtroom 2B, 2nd floor, 316 North Robert Street, St. Paul, Judge William J. Fisher. (Andre, Samuel) (Entered: 05/11/2021)

Document posted on May 10, 2021 in the bankruptcy, 15 pages and 0 tables.

Bankrupt11 Summary (Automatically Generated)

By this Motion, the Debtors seek an order disallowing and expunging in whole Claim No. 8 filed against MSB in Case No. 19-33629 (the “Claim”).The parties further agreed that they retained the right to file objections to the allowance of any claims filed by former students in these bankruptcy cases on any basis, including on the grounds that such claims are duplicative of the State’s Claim.The Debtors calculated placement rates consistent with federal law and therefore the State could not pursue claims against the Debtors for misrepresentations under state consumer protection statutes.Minnesota School of Business, Inc. and Globe University, Inc. (the “Debtors”) move the Court for entry of an order disallowing and expunging Claim No. 8 filed against MSB in Case No. 19-33629 (the “Claim”).However, when submitted in a form that does not comply with applicable Bankruptcy Rules, a proof of claim does not constitute prima facie evidence of the validity of the claim amount, and therefore the burden remains on the creditor to prove the claim is valid.

List of Tables

Document Contents

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MINNESOTA Jointly Administered Under Case No. 19-33629 (WJF) In re: Minnesota School of Business, Inc., Case No.: 19-33629 Globe University, Inc., Case No.: 19-33632 Chapter 11 Cases Debtors. NOTICE OF HEARING AND MOTION OBJECTING TO CLAIM (CLAIM NO. 8, CASE NO. 19-33629) TO: The entities identified in Local Rule 9013-3(a)(1): 1. Minnesota School of Business, Inc. (“MSB”) and Globe University, Inc. (collectively, the “Debtors”) move the Court for the relief requested below and give notice of hearing. 2. The Court will hold a hearing on this Motion at 1:30 p.m. on June 15, 2021, 2021, in Courtroom 2B, Warren E. Burger Federal Building and U.S. Courthouse, 316 North Robert Street, St. Paul, Minnesota 55101. The hearing will be held telephonically. Participants may dial in to the hearing using the following instructions: a. Dial 1-888-684-8852; b. When prompted, enter ACCESS CODE: 5988550; c. When prompted, enter SECURITY CODE: 0428. 3. Any response to the Motion must be filed and served not later than June 10, 2021, which is five (5) days before the time set for the hearing (including Saturdays, Sundays and holidays). UNLESS A RESPONSE OPPOSING THE MOTION IS TIMELY FILED, THE COURT MAY GRANT THE MOTION WITHOUT A HEARING.

1

4. This Court has jurisdiction over this Motion pursuant to 28 U.S.C. §§ 157 and 1334, Fed. R. Bankr. P. 5005, and Local Rule 1070-1. This is a core proceeding. 5. This motion arises under 11 U.S.C. §§ 502 and 507, Fed. R. Bankr. P. 3001 and 3007, and Local Rules 3007-1 and 9013-1–3. This motion is filed under Fed. R. Bankr. P. 9014 and Local Rules 9013-1. 6. By this Motion, the Debtors seek an order disallowing and expunging in whole Claim No. 8 filed against MSB in Case No. 19-33629 (the “Claim”). The Claim should be disallowed and expunged for failure to articulate a colorable cause of action against the Debtors or include necessary documentation in the claim.1 BACKGROUND AND PROCEDURAL POSTURE I. The Debtors’ Bankruptcy Cases. 7. The Debtors filed petitions for relief under chapter 11 of the Bankruptcy Code on November 20, 2019. The cases are being jointly administered. 8. The Debtors continued in possession of their respective assets and the management of their business as debtors-in-possession pursuant to Bankruptcy Code sections 1107(a) and 1108 until entry of the Court’s order approving the appointment of the Chapter 11 Trustee James A. Bartholomew (the “Trustee”) on May 13, 2020. 9. The Court filed a Notice of Chapter 11 Bankruptcy Cases (Dkt No. 2) that, among other things, established March 18, 2020 as the deadline by which creditors must file proofs of claim. 1 In this Motion, the Debtors seek the disallowance and expungement of the claim from the claims register. However, through this Motion, the Debtors are not objecting to the Claimant’s potential inclusion in the State’s notice and payment process described herein.

2

II. The State of Minnesota’s Claims Against the Debtors. 10. On March 13, 2020, the State of Minnesota (the “State”) filed Claim No. 952 against the Debtors (the “State’s Claim”).3 The State’s Claim provides that it has “statutory and parens patriae authority to enforce and pursue remediation for violations of Minnesota’s consumer-protection laws.” (Claim No. 95 at 4.) As further stated in the State’s Claim, the State pursued and obtained restitution orders against the Debtors, and the State is charged with sending notices and claim forms to eligible students. (Id. at 6–16.) In short, the restitution claims belong to, and are pursued by the State of Minnesota. 11. The State’s Claim against the Debtors is based on violations of Minnesota’s consumer protection laws and is further broken down into two categories: a. Violations of the CFA and DTPA. These claims relate to “false and misleading representations to prospective students, concerning, among other things, the employability of graduates of Debtors’ criminal-justice program.” (States Claim at 2.) b. Violations of Minnesota’s anti-usury and lender-licensing statutes. These claims relate to high-interest loans made by the Debtors to their students in excess of Minnesota’s usury rate and without a required lending license. (Id.) 12. Prior to the filing of these bankruptcy cases, the Hennepin County District Court in the State of Minnesota in Court File No. 27-CV-14-12558 (the “Hennepin County Lawsuit”) entered the Findings of Fact, Conclusions of Law, and Order (the “State Court Order”). A true 2 The State filed Claim No. 95 against Minnesota School of Business in Case No. 19-33629, and Claim No. 9 against Globe University, Inc. in Case No. 19-33632. 3 Pursuant to a settlement agreement approved by the Court on December 22, 2020, the State’s Claim is currently allowed in the amount of $35,000,000. (Dkt. Nos. 322, 336.)

3

and correct copy of the State Court Order is attached to the Declaration of James C. Brand in Support of Motion Objecting to Claim (Dkt. No. 398) as Exhibit A. As part of the State Court Order, the Hennepin County District Court found that the Debtors committed fraud as to the Debtors’ former criminal-justice degree students and consequently ordered injunctive relief, civil penalties, fees and costs, and restitution. (Ex. A at 131–32.) The Minnesota Supreme Court subsequently upheld the restitution order. State by Ellison v. Minn. Sch. of Business, Inc., 935 N.W.2d 124, 140 (Minn. 2019). 13. The Debtors were also found liable for usurious and illegal lending to students. Following an interlocutory appeal from a summary judgment ruling on the illegal lending claim, the Minnesota Supreme Court issued a decision in July 2018 rejecting the Debtors’ arguments that they were exempt from Minnesota’s 8%-usury cap and holding Debtors liable for illegal lending. State v. Minnesota Sch. of Bus., Inc., 899 N.W.2d 467 (Minn. 2017). After a remedies trial on the State’s illegal-lending case, the Hennepin County District Court ordered refunds of interest paid by student borrowers on illegal loans. (See Dkt. No. 57 at 6.) The District Court, however, denied restitution for principal paid on illegal loans, along with pre-judgment interest, civil penalties, and recovery of payment of the State’s costs and fees. (Id.) On appeal in June 2019, the Minnesota Court of Appeals held that full refunds (including for principal payments), prejudgment interest, and civil penalties and costs and fees should have been awarded. State v. Minnesota Sch. of Bus., Inc., No. A18-1761, 2019 WL 2333921, at *7–13 (Minn. Ct. App. June 3, 2019), review denied (Aug. 20, 2019). 14. As described in the State’s Agreement Resolving Claim Objections with the Debtors, the State’s Claim represents the full and final allowed claim of the State based on its judgment against the Debtors. (See Dkt. No. 322 at 8–9.) The State’s Claim represents the full

4

amount owed by the Debtors to the State on behalf of its upheld fraud and usurious lending claims brought against the Debtors on behalf of their former students. (Id.) The parties further agreed that they retained the right to file objections to the allowance of any claims filed by former students in these bankruptcy cases on any basis, including on the grounds that such claims are duplicative of the State’s Claim. (Id. at 9.) 15. While the State was successful in some aspects of the Hennepin County Lawsuit, the State Court Order specifically rejected other claims and made findings that are binding on the parties here. As part of the Hennepin County Lawsuit, the State also asserted in separate counts that the Debtors misrepresented: (i) their former students’ ability to transfer credits earned while enrolled with the Debtors to other schools (Ex. A at 117); (ii) their job placement rates and career services to their students (id. at 125); (iii) their accreditation (id. at 119); and (iv) the sales aspects and selectivity process of their admissions process by holding out their admissions representatives as “counselors” or “advisors” when they were instead allegedly salespeople (id. at 120). 16. The Hennepin County District Court specifically rejected each of these claims and instead held that: a. “Whether a student’s credits are likely to transfer depends on the school to which the student intends to transfer” and that any affirmative statements made by the Debtors’ admissions representative to the contrary were not authorized by the Debtors. (Id. at 118.) The Court therefore found that the Debtors timely, effectively, and clearly advised their students that transfer of credit was up to the receiving institution, and consequently that the Debtors did not deceive their

5

students regarding the students’ abilities to transfer credits to other education institutions. (Id. at 119.) b. The Debtors calculated placement rates consistent with federal law and therefore the State could not pursue claims against the Debtors for misrepresentations under state consumer protection statutes. (Id. at 126). c. That no evidence established that the Debtors’ placement rates were false or misleading or that the Debtors did not, in fact, provide career services to their students. (Id. at 127-128.) d. That the Debtors consistently and accurately identified themselves as nationally accredited educational institutions to their students, whereas no evidence illustrated that the Debtors misrepresented their accreditation status to their students. (Id. at 119–20.) e. That the Debtors’ admissions representatives acted consistent with their titles and that insufficient evidence existed showing that the Debtors systematically misrepresented the selectivity of their admissions process. (Id. at 121, 124–25.) These findings have not been overturned and are binding on the parties. III. The Claim Is Filed On An Objectionable Basis. 17. The Claim was filed on December 5, 2019, by Wendy Lynne Deadwyler (the “Claimant”). Pursuant to the claim form, the Claim seeks an unsecured claim in the amount of $0.00 from MSB for “Education”. The Claim fails to attach any supporting documentation. 18. The Claimant was a prior student of the Debtors originally enrolled in their Associate in Applied Science Degree: Management Accounting starting on March 31, 2008. The Claimant transferred from the program on June 25, 2010. The Claimant also enrolled in the

6

Debtors’ Bachelor of Science Degree: Information Technology program on March 31, 2008; the Claimant withdrew from the program on October 28, 2010. Later, the Claimant re-enrolled in the Debtor’s Associate in Applied Science Degree: Paralegal program on July 14, 2014. The Claimant’s enrollment with the Debtors ended on December 15, 2014, at which time the Claimant withdrew from the institution. 19. As part of their enrollment with the Debtors, the Claimant signed enrollment agreements; under those agreements, the Claimant waived any claims against the Debtor if not asserted via arbitration within twelve months of the date of the claim arose and waived any claims for a refund of tuition or fees for any quarter if the Claimant completed 60 percent of the quarter. The Debtors explicitly disclaimed any guarantee of employment for the Claimant in the enrollment agreements. 20. The Claim asserts, without any legal or factual basis, that the Debtors are liable in some undisclosed manner (but in the amount of $0) relating to the Claimant’s education. RELIEF REQUESTED 21. The Debtors seek an order disallowing and expunging the Claim. 22. Pursuant to Local Rule 9013-2(a), this Motion is verified and is accompanied by a memorandum, proposed order, and proof of service. 23. The Debtors give notice pursuant to Local Rule 9013-2(c) that, if an evidentiary hearing is held as to this Motion, they may call (i) the Chapter 11 Trustee James Bartholomew, or (ii) Jeanne Herrmann, the former chief operating officer of the Debtors, to testify regarding the facts set out in this Motion. WHEREFORE, the Debtors respectfully request that the Court enter an order: A. Disallowing and expunging the Claim; and B. Granting such other and further relief as the Court deems just and equitable.

7

Dated: May 11, 2021 /e/ Samuel M. Andre Clinton E. Cutler (#0158094) James C. Brand (#387362) Samuel M. Andre (#0399669) FREDRIKSON & BYRON, P.A. 200 South Sixth Street Suite 4000 Minneapolis, MN 55402-1425 (612) 492-7000 ATTORNEYS FOR THE DEBTORS

8

9

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MINNESOTA Jointly Administered Under Case No. 19-33629 (WJF) In re: Minnesota School of Business, Inc., Case No.: 19-33629 Globe University, Inc., Case No.: 19-33632 Chapter 11 Cases Debtors. MEMORANDUM OF LAW IN SUPPORT OF MOTION OBJECTING TO CLAIM (CLAIM NO. 8, CASE NO. 19-33629) Minnesota School of Business, Inc. and Globe University, Inc. (the “Debtors”) move the Court for entry of an order disallowing and expunging Claim No. 8 filed against MSB in Case No. 19-33629 (the “Claim”). The supporting facts are set forth in the verified motion (the “Motion”). All capitalized terms herein have the meaning ascribed to them in the Motion. For the reasons set forth below, the Claim should be disallowed and expunged in its entirety. BACKGROUND The Debtors refer to the facts stated in the Motion. LEGAL STANDARD A proof of claim filed in a bankruptcy proceeding is deemed allowed unless a party in interest objects. 11 U.S.C. § 502(a); see also Gran v. IRS (In re Gran), 964 F.2d 822, 827 (8th Cir. 1992). If an objection is filed, the objector must come forward with evidence rebutting the claim. Gran, 964 F.2d at 827; In re Oriental Rug Warehouse Club, Inc., 205 B.R. 407, 410 (Bankr. D. Minn. 1997). If the objecting party produces such evidence, the burden of proof shifts to the claimant to produce evidence of the validity of the claim. Gran, 964 F.2d at 827; Oriental Rug, 205 B.R. at 410. “In other words, once an objection is made to the proof of claim,

10

the ultimate burden of persuasion as to the claim’s validity and amount rests with the claimant.” Oriental Rug, 205 B.R. at 410 (internal citations omitted). Section 502(b)(1) of the Bankruptcy Code in particular provides, in relevant part, that a claim may not be allowed to the extent that “such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law . . . .” 11 U.S.C. § 502(b)(1). OBJECTION A. The Claim Does Not Assert a Valid Claim Against the Debtors. The Debtors object to the allowance of the Claim because the Claimant failed to assert a valid basis for a claim against the Debtors, and any underlying cause of action is likely barred at least in part by the applicable statute of limitations. As seen from the Claim itself, the Claimant failed to articulate any colorable cause of action against the Debtors under applicable law. Instead, the Claim simply states that the basis for the claim is “Education”. The Claim appears to assert, without any legal or factual basis, that the Debtors are liable in some undisclosed manner (but in the amount of $0) relating to the Claimant’s education. Even if the Claimant could articulate a cause of action against the Debtors, the Claimant waived any such cause of action pursuant to their enrollment agreements with the Debtors by failing to assert any such claim since the time of their enrollment. Additionally, the longest statute of limitations that would likely apply to any claim held by the Claimant against the Debtors would be six years. See Minn. Stat. § 541.05 (providing six-year statute of limitations for contract, statutory, or fraud liability, amongst others). Because the Claimant’s enrollment with the Debtors began on March 31, 2008 (over 10 years before the Petition Date), a majority of her enrollment with the Debtor occurred prior to October 28, 2010, and because the State discovered and pursued its claims against the Debtors beginning no later than July 2013 (over six

11

years before the Petition Date), the Claimant’s unclear and unsubstantiated cause of action against the Debtors is likely barred at least in part by the applicable statute of limitations and should be disallowed and expunged. Further, the Claim fails to comply with Official Form 410, as required by Bankruptcy Rule 3001(a), and therefore is not entitled to a presumption of prima facie validity. In general, the evidentiary effect of a proof of claim properly filed in accordance with applicable Bankruptcy Rules constitutes “prima facie evidence of the validity and amount of the claim.” Fed. R. Bankr. P. 3001(f). The burden “then shifts to the objector to establish that the claim fits within one of the exceptions set forth in [§] 502(b) . . . .” In re Dove-Nation, 318 B.R. 147, 152 (B.A.P. 8th Cir. 2004). However, when submitted in a form that does not comply with applicable Bankruptcy Rules, a proof of claim does not constitute prima facie evidence of the validity of the claim amount, and therefore the burden remains on the creditor to prove the claim is valid. AFY v. N. Plains Feeders, Inc., 482 B.R. 830, 839–40 (D. Neb. 2012) (quoting In re Porter, 374 B.R. 471, 483 (Bankr. D. Conn. 2007); see Caplan v. B-Line (In re Kirkland), 572 F.3d 838, 840–41 (10th Cir. 2009); In re Duke and King Acquisition Corp., No. 10-38652, Dkt. No. 571 (Bankr. D. Minn. Jul. 2, 2012) (granting liquidating trust’s objections based upon lack of adequate supporting documentation). If the claimant fails to identify any evidence supporting its claim following objection, the proof of claim may properly be denied in its entirety. AFY, 374 B.R. at 845; see also In re Duke and King Acquisition Corp., Dkt. No. 571. Bankruptcy Rule 3001(a) requires that a filed proof of claim must “conform substantially to the appropriate Official Form.” Fed. R. Bankr. P. 3001(a). The appropriate Official Form is Official Form 410, which requires the claimant “[a]ttach redacted copies of any documents that support the claim, such as promissory notes, purchase

12

orders, invoices, itemized statements of running accounts, contracts, judgments, mortgages, and security agreements.” Official Form 410. If such documents are not available, the claimant must explain as much in an attachment to the proof of claim. Id. If a proof of claim is submitted that does not conform substantially to Official Form 410 and its requirements, the proof of claim does not comply with Bankruptcy Rule 3001(a). See Fed. R. Bankr. P. 3001(a). The Claim is not entitled to a presumption of prima facie validity because it fails to articulate a claim against the Debtors or to attach supporting documentation or information that explains the basis for the amount claimed against the Debtors. See In re Moore & Moore Trucking, LLC, No. 20-10925, 2020 WL 6122753, at *3 (Bankr. E.D. La. Sept. 14, 2020) (stating a proof of claim without supporting documentation does not receive prima facie validity); In re Brown, 603 B.R. 786, 792 (Bankr. D.S.C. 2019) (same). Without a presumption of validity, the Claimant must offer some additional evidence to survive this objection. Unless the Claimant responds to this Motion by articulating a basis for the Claim and providing evidence in support, the Claimant will have failed to meet their burden and the Claim should be disallowed and expunged in its entirety. B. Other Potential Claims Against the Debtors Should Be Disallowed Pursuant to the Findings of the Hennepin County District Court. From the face of the Claim, it is impossible to determine the basis for the Claim. To the extent the Claimant is asserting that the Debtors are liable for the Claimant’s cost of tuition with the Debtors based on theories that were rejected by the State Court Order, the Claim should be disallowed. The findings in the State Court Order are binding on not only the State, but the former students as well. A final judgment or consent decree entered in in a parens patriae suit brought by a state on behalf of its citizens is conclusive as to those citizens and is binding on their rights. See U.S. E.P.A. v. City of Green Forest, Ark., 921 F.2d 1394, 1404 (8th Cir. 1990);

13

Alaska Sport Fishing Ass’n v. Exxon Corp., 34 F.3d 769, 773 (9th Cir. 1994) (finding private citizens barred under res judicata from asserting claims brought by state in a parens patriae suit where state brought claims on their behalf and issues in controversy in both suits were substantially identical); United States v. Olin Corp., 606 F. Supp. 1301, 1308 (N.D. Ala. 1985) (finding plaintiffs barred by res judicata in suing for public nuisance after final judgment in parens patriae suit brought by state on their behalf). The Debtors should not be forced to again defend themselves against claims previously and finally decided in the State Court Lawsuit. CONCLUSION For all of the foregoing reasons, the Debtors respectfully request that the Court grant the relief requested in the Motion. Dated: May 11, 2021 /e/ Samuel M. Andre Clinton E. Cutler (#0158094) James C. Brand (#387362) Samuel M. Andre (#0399669) FREDRIKSON & BYRON, P.A. 200 South Sixth Street Suite 4000 Minneapolis, MN 55402-1425 (612) 492-7000 ATTORNEYS FOR THE DEBTORS

14

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MINNESOTA Jointly Administered Under Case No. 19-33629 (WJF) In re: Minnesota School of Business, Inc., Case No.: 19-33629 Globe University, Inc., Case No.: 19-33632 Chapter 11 Cases Debtors. ORDER GRANTING MOTION OBJECTING TO CLAIM (CLAIM NO. 8, CASE NO. 19-33629) This case is before the court on Minnesota School of Business, Inc. (“MSB”) and Globe University, Inc.’s (collectively, the “Debtors”) Motion Objecting to Claim (Claim No. 8, Case No. 19-33629) (the “Motion”). Based on the Motion and the file, IT IS ORDERED: 1. The motion is granted. 2. Pursuant to section 502(b) of the Bankruptcy Code, Claim No. 8, Case No. 19-33629, is hereby disallowed and expunged in its entirety. 3. The disallowance and expungement of Claim No. 8 does not constitute any admission or finding with respect to any other claim in these cases. 4. The Debtors and the Trustee are authorized to take any and all actions that are necessary and appropriate to give effect to this Order. DATED: ______________________________ William J. Fisher United States Bankruptcy Judge

15