LINCOLN EDUCATIONAL SERVICES CORP 10-Q

Item 1. LEGAL PROCEEDINGS On June 22, 2022, the DOE and plaintiffs in a lawsuit before a federal court in California submitted a proposed settlement agreement to the court. The plaintiffs contend, among other things, that the DOE has failed to timely decide and resolve borrower defense to repayment applications submitted to the DOE. If approved, the settlement would result in full discharge and refund payments to covered student borrowers who have asserted a borrower defense to repayment to the DOE and whose borrower defense claims have not yet been granted or denied on the merits. The lawsuit (Sweet v. Cardona, No. 3:19-cv-3674 (N.D. Cal.)) is a class action filed against the DOE in the U.S. District Court for the Northern District of California submitted by a group of students, none of whom attended any of our institutions. We were not a party to the lawsuit when it was filed. The plaintiffs requested the court to compel the DOE to start approving or denying the pending applications. The court granted class certification and defined the class of plaintiffs generally to include all people who borrowed a Title IV Direct loan or FFEL loan, who have asserted a borrower defense to repayment claim to the DOE, and whose borrower defense claim has not been granted or denied on the merits. We have not received notice or confirmation directly from the DOE of the number of student borrowers who have submitted borrower defense to repayment claims related to our institutions. 39 Index The proposed settlement agreement includes a long list of institutions, including Lincoln Technical Institute and Lincoln College of Technology, and, under the proposed settlement, the DOE would agree to discharge loans and refund all prior loan payments to each class member with loan debt associated with an institution on the list (which includes our institutions), including borrowers whose applications the DOE previously denied after October 30, 2019. The DOE and the plaintiffs stated in a court filing that this provision is intended to provide for automatic relief for students at the listed schools, which they estimate to total 200,000 class members. We anticipate that the DOE believes that the class includes the borrowers with claims to which we have submitted responses to the DOE although it is possible that the class also includes borrowers with claims for which we have not received notice from the DOE or an opportunity to respond. The parties also stated that the DOE has determined that attendance at one of the institutions on the list justifies presumptive relief based on strong indicia regarding substantial misconduct by the institutions, whether credibly alleged or in some instances proven, and the high rate of class members with applications related to the listed schools. The proposed settlement agreement provides a separate process for reviewing claims associated with schools not on the list. It is unclear whether the DOE would seek to impose liabilities on us or other schools or take other actions or impose other sanctions on us or other schools based on relief provided to students under the proposed settlement agreement (particularly if the DOE provides relief without evaluating or accounting for legal and factual information provided to the DOE by us and other schools or without providing us and other schools with notice and an opportunity to respond to some of the claims). In July 2022, the Company and certain other school companies submitted motions to intervene in the lawsuit in order to protect our interests in the finalization and implementation of any settlement agreement the court might approve. We noted in the motion that the proposed settlement agreement introduced, for the first time, the prospect that the DOE would “automatically” and fully discharge loans and refund payments to student borrowers without adjudication of the merits of the students’ borrower-defense applications in accordance with the DOE’s borrower-defense regulations and without ensuring that we and other institutions can defend against allegations asserted in individual borrower-defense applications. In addition, we also asserted that it would be unlawful and inappropriate if the DOE sought recoupment against us based on loans that were forgiven under the proposed settlement agreement without providing us an opportunity to address the claims or accounting for our responses to the claims already submitted which we believe is required by the regulations. We also asserted that the lawsuit and the potential loan discharges could result in reputational harm to us and our institutions and could result in other actions against us by other federal and state agencies or by current and former students. The court granted preliminary approval of the proposed settlement agreement on August 4, 2022, and also granted our motion for permissive intervention for the purpose of objecting to and opposing the class action settlement. On September 22, 2022, the DOE and the plaintiffs filed a joint motion for final approval of the settlement. In that joint motion, the DOE and plaintiffs reported that approximately 179,000 new borrower defense applications had been submitted to the DOE as of September 20, 2022. We and the three other intervenor schools filed briefs opposing final approval. The court has scheduled a final approval hearing for November 9, 2022, and we intend to participate in the hearing and present arguments. We cannot predict whether the court will grant or deny final approval of the proposed settlement agreement, or whether the DOE and plaintiffs will make amendments to the proposed settlement agreement. If the proposed settlement agreement, as it is currently drafted, receives final approval by the court, the DOE is expected to automatically approve all of the pending borrower defense applications concerning us that were submitted to the DOE on or before June 22, 2022 and to provide such automatic approval without evaluating or accounting for any of the legal or factual grounds that we provided for contesting the applications that were provided to us. The DOE may or may not seek recoupment from the schools relating to approval of borrower defense applications concerning us. If the DOE approves borrower defense applications concerning us and attempts to recoup from us the loan amounts in the approved applications, we would consider options for challenging the legal and factual basis for attempting to recoup these liabilities. The settlement agreement also requires the DOE to review borrower defense applications submitted after June 22, 2022 and by the date of the final approval of the agreement within 3 years under procedures described in the agreement. If the DOE grants some or all of these applications, the DOE also could attempt to recoup from us the loan amounts in these applications. We cannot predict whether the currently proposed settlement will be approved, what actions the DOE might take if the proposed settlement is approved (including the ultimate timing or amount of borrower defense applications the DOE may grant in the future and the timing or amount of any possible liabilities that the DOE may seek to recover from the Company, if any), or what the outcome of any challenges we might make to such actions will be, but such actions could have a material adverse effect on our business and results of operations. 40 Index In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations, and claims, including, but not limited to, claims involving students or graduates and routine employment matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations, and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, financial condition, results of operations or cash flows.