Lisa Schlehuber saw lots of opportunity to grow the Eli Lilly Federal Credit Union after she left a finance job at the Indianapolis-based drugmaker to become its CEO in 2005.
The organization had long been “inwardly focused,” she told Credit Union Times in 2007 and as a result 80 percent of Eli Lilly and Co.’s employees already did business with it. With that market largely tapped out, Schlehuber looked outward, partnering with other credit unions to offer a range of products and services through so-called credit union service organizations, or CUSOs.
One of those deals haunts the credit union to this day—a partnership with six other credit unions announced in 2009 to provide loans to students attending ITT Technical Institute campuses across the country. The credit unions stepped up at a time the financial crisis had shut down the market for the traditional private education loans that historically filled the gap between what students received in federal student loans and grants and the actual cost of tuition.
The loans performed horrendously, leading the Lilly credit union to record a $26 million loan loss allowance—which represented 70 percent of the loans it issued under the program. The allowance, recorded for 2012, caused it to suffer a $14 million overall loss that year.
Now, the bankruptcy trustee charged with scraping together assets for creditors of the now-defunct for-profit education company is making the top brass of the credit union—which was renamed Elements Financial in 2015 to reflect its broadened focus—relive the nightmare.
The lenders have been angling for a recovery in the bankruptcy, asserting they are owed $157 million as a result of unfulfilled commitments by ITT to step in and make payments itself if losses surpassed certain thresholds.
But Trustee Deborah Caruso is turning the tables. Caruso disclosed in court filings that she is considering suing the credit unions and the advisory firm that crafted the program. In addition to seeking to invalidate their $157 million claim, Caruso alleges the defendants received tens of millions of dollars in “fraudulent transfers” that must be repaid and that they owe tens of millions of dollars in additional damages for aiding and abetting fraud and breaches of fiduciary duty by ITT’s top brass, CEO Kevin Modany and Chief Financial Officer Daniel Fitzpatrick.
According to a 75-page draft complaint filed with the court, the fraudulent-transfer claims stem in part from Caruso’s charge that payments the lenders received occurred at a time ITT already was insolvent or that the payments made it so.
Her aiding-and-abetting counts are based on her claim that defendants “knew or should have known” that ITT’s public disclosures about the loan program were misleading and concealed that liabilities on the loan guarantees were “escalating exponentially.” That was happening because ITT was making only minimum payments on the guarantees—a practice akin to paying only the minimum balance on a high-interest credit card.
In 2015, the Consumer Financial Protection Bureau and the Securities and Exchange Commission filed fraud lawsuits against Modany and Fitzpatrick alleging, among other things, that they used deception to hide from investors how poorly the loan program was performing. Those suits, which remain pending, don’t name the credit unions as defendants.
The credit unions contend there is no basis for making them defendants now.
“We have reviewed the trustee’s latest draft proposed complaint, and it has no merit; we believe that filing it would violate the trustee’s obligation to have a good-faith basis supporting her factual and legal allegations,” Richard Bernard, a partner at Foley & Lardner in New York City, said in an email.
“The CUSO and the other proposed defendants at all times have acted properly and in good faith, and to the extent that ITT or its management has engaged in any wrongful conduct, the CUSO and the other proposed defendants are victims of, not accessories to, that misconduct.”
Caruso, an attorney with Rubin & Levin in Indianapolis, filed the draft complaint in an effort to block the credit unions’ efforts to seize $8.8 million in cash in an ITT account. The credit unions contend the money belongs to them, but Caruso argues the court should keep it out of reach until it rules on the trustee’s broader claims against the credit unions.
ITT dismissed its 8,000 employees and shut down its 130 ITT Technical Institutes in 38 states on Sept. 6. It filed for Chapter 7 bankruptcy 10 days later, listing assets of $389 million and liabilities of $1.1 billion.
Caruso is considering filing a range of lawsuits to benefit creditors, including one against ITT brass. That case, if successful, might allow her to tap into ITT’s $40 million in directors-and-officers liability insurance coverage.•