Attorney Peter Charles Lown of the Georgia Law Firm of Harrington & Lown has decided to stop working on the SSH matter and refer all of his SSH clients to the Law Offices of Michael Berger. Mr Lown represented approximately 40 SSH clients, making him the attorney with the third largest group of SSH clients, behind the Law Offices of Michael Berger and the Dan Reed/Harward & Associates firm. On Tuesday, March 18, Mr. Lown sent the following e-mail to all of his SSH clients:
"Folks:
I have been continuing my investigation and research on the evolving situation with Silver State post bankruptcy. In this vein, I have reviewed and spoken to two other law firms stepping up to represent former Silver State students, the Brown, Dean law firm in Texas and the Berger law firm in California. At this point I feel you will be better represented by one of the other firms and it is my recommendation that you all sign-up with the Berger Law firm without delay. I have reviewed Mr. Berger’s qualifications and discussed his litigation plan with him. I believe Mr. Berger is eminently qualified to handle this litigation and he has now signed up over 400 other students. There is considerable strength in numbers, and Mr. Berger has already made a considerable investment in the case. I also met two of his attorneys at the bankruptcy 341 hearing and they were very aggressive and on target in their questioning. I will be refunding any remaining trust funds and I plan to have the meeting with you scheduled for April 6th at the usual location in Casa Grande.
Pete
Peter Charles Lown
HARRINGTON & LOWN
9425 South Main Street
Jonesboro, GA 30236-6023
Tel.: 404-520-0171
Fax: 404-506-9149"
Earlier that same day, Mr. Lown sent me the following e-mail:
"Michael:
Thank you for taking the time to speak with me today. With the information you have provided regarding your plan for litigation against the various parties involved the Silver State operation and your substantial client base, I am convinced that you are best positioned to represent former Silver State students in attempting to make them whole. I will be recommending that the 40 clients Randall Stone and I represent in Arizona retain your firm to continue their litigation with Silver State. I am very pleased that someone of your ability and determination has come forward to help these people.
I am looking forward to working with you.
Pete
Peter Charles Lown
HARRINGTON & LOWN
9425 South Main Street
Jonesboro, GA 30236-6023
Tel.: 404-520-0171
Fax: 404-506-9149"
Thursday, March 20, 2008
Friday, March 14, 2008
Geo’s and Gail’s report on the Silver State Helicopters, LLC 341(a) hearing on 3/10/08 at 3pm
Georgeann Nicol and Gail Higgins of the Law Offices of Michael Jay Berger represented all of our SSH clients at the 341a hearing of Sliver State Helicopters, LLC in Las Vegas, NV at 3pm on 3/10/08. Here is Geo and Gail’s report:
The hearing started out in the Bankruptcy court at 300 S. Las Vegas Blvd. but because over 300 people (mostly former SSH students) were in attendance, the meeting was moved across the street to a hearing room in the District Court building, (which was still filled to capacity).
Silver States was represented by its Attorney Jeanette McPherson, its Chief Accountant James Little, Stenning Schupert, a representative of EOS, and EOS’s attorney Mark First. Stenning Schueppert is the Corporate Secretary of both Silver State Services (hereinafter SSS) and Silver State Helicopters (hereinafter SSH). He is the person that signed the bankruptcy petition for SSS and the bankruptcy petition for SSH. We were there on behalf of approximately 300 students who attended the hearing and all our other clients who could not make the hearing. Local media was also in attendance.
Prior to the hearing, the atmosphere was one of excitement and hopefulness that some answers might be forth coming today. Side note: there were several clever t-shirts worn by the former SSH students reflecting their feelings about this situation.
The Trustee began the hearing by advising everyone of the rules of the hearing, i.e. no cell phones, no talking … unless asking questions, and about the time limit for questions of the Debtor’s representatives.
The Trustee announced one very important piece of information. In the future, there will be a web link to the Silver State information that will be accessible to everybody. (We noted that he recently filed a request with the Court to be allowed to Limit Notice - his mailings were costing $3,000 a pop, and would quickly eat up available funds.) The direct link is: www.silverstatehelicoptersbankruptcy.com. This will save individuals from having to pay for PACER access to the Bankruptcy Court’s website.
The Trustee noted that there were actually two bankruptcy cases, SSH , the case that we are all familiar with, and SSS, the holding company for SSH. (Note: In a short discussion after the Hearing, the Trustee informed us that he is “Consolidating” these two cases. That means that all the Proofs of Claim that the Debtor’s attorney “mistakenly” filed in the wrong case will be automatically applied to the proper case. This is a good thing.)
The Trustee had a few simple questions for the representative of SSS and the Trustee’s counsel had a couple of follow up questions and then the Trustee concluded that hearing.
The Trustee then began the 341(a) hearing for the case we are all interested in, SSH. He asked the usual questions, who are you , how are you the person most knowledgeable for SSH, and so on. It should be noted that Mr. Schueppert explained essentially that the EOS contingent decided to file the Bankruptcy and that Jerry Airola refused to sign the paperwork, so Schueppert signed the paperwork on orders from the Board of Directors of SSS. Consequently, most of Schueppert’s answers to questions were “To the Best of My knowledge.”
This Q&A period went on for approximately 10 minutes. We learned that the person ‘most knowledgeable’ for SSH was: new to the entire operations because he: “had no knowledge of any real substantive SSH information prior to August of 2007.” He testified that EOS purchased 60% of SSH for $30,000,000.00 in November of 2007. When asked by the Trustee what precipitated this chapter 7 filing, he said the following three things:
1 - No more school loans were going to be funded by Citibank and Citibank was the only remaining bank writing student loans for SSH;
2. Enrollment was down, hence the income would be limited; and
3. The 01/31 sale of the Commercial side of SSH had not gone through as planned - hence no commercial contracts.
He testified that the decision to file Bankruptcy was made on Feb 4, the day of filing.
He testified that prior to EOS purchasing the 60% of SSH, excuse me: “investing in SSH,” EOS looked into the following issues: the lawsuits, the commercial activities, and the student enrollment/ the cash flow of SSH. They made a plan with Airola for the Recapitalization of SSH .
Schueppert testified that EOS had never been involved in any type of aviation company and had never been involved with any school. Based on an outside audit which Shueppert claimed was done by an independent company, EOS concluded that this would be a good investment for EOS clients and they consummated the deal in November of 2007. Of the $30,000,000.00, EOS gave Jerry Airola and Steve Pickett $13,000,000.00 cash, $13,000,000.00 supposedly went into SSH operating funds and the balance of $4,000,000.00 was for fees for the transaction itself. (Comment: EOS probably took its profit right there). (It should be remembered that this was a transaction for Jerry’s stock and ownership of SSH - it supposedly did not affect SSH directly.)
Jerry Airola and Steve Pickett failed to attend the 341(a) hearing. ORIX, the secured lender on the birds, had previously scheduled a 2004 examination of Airola, which he also did not attend, despite a Court Order that he appear. A new 2004 exam for Airola has been ordered by the Court, - set for a date to be determined. Airola must attend this examination or be subject to a Bench Warrant for his arrest.
The Trustee’s counsel broke in from time to time and asked his own questions.
After the Trustee and Trustee’s counsel asked questions for about 15 minutes, the floor was thrown open to questions from various creditors and creditors’ reps. For the next 2.5 hours, SSH’s representative had to respond to questions pertaining to the following subjects: The relationship between AES, EOS and SSH. Why did EOS file bankruptcy so quickly after buying 60% of SSH? Did EOS know about helicopters that were still flying out of the Cheyenne airport in Vegas? What was the explanation for the $180,000.00 paid to various law firms and PR firms on the exact day of the filing? It was noted by the Trustee’s attorney that these funds were probably not all earned and some of these fees should likely come back into the estate. We agree.
There were also several student and their parents who expressed their general outrage at the representatives of EOS.
The Trustee allowed the expression of their feelings and did not ask them to tone it down, nor did he ask marshals to escort them from the room. (To our knowledge the only one excluded was a cell phone violator).
Conspicuously absent at the 341(a) meeting was James Harward and Dan Reed of Harward and Associates. Also absent was any representative from the law firm of Brown & Dean.
During his testimony, the representative for EOS revealed that the reason SSH was longer using AES was because AES was caught receiving kickbacks from student loan funding in another school and thus could no longer write this type of loan. This confirmed our research and we will be posting more on this later.
Mr. Schueppert testified that EOS did not attempt to push through more students and more student loans prior to filing the bankruptcy. This is in direct contradiction to information that we have from several sources.
Gail believes that EOS’s plan was to carve out the commercial aspects of SSH and sell them off, and then close down the school. EOS advertises that it handles companies in “ownership transition” and does “recapitalizations.” We will post information on EOS separately.
Our plan right now to: 1) try to get the loans declared null and void and to 2) try to get monies returned to those who have already paid in, is underway.
The hearing started out in the Bankruptcy court at 300 S. Las Vegas Blvd. but because over 300 people (mostly former SSH students) were in attendance, the meeting was moved across the street to a hearing room in the District Court building, (which was still filled to capacity).
Silver States was represented by its Attorney Jeanette McPherson, its Chief Accountant James Little, Stenning Schupert, a representative of EOS, and EOS’s attorney Mark First. Stenning Schueppert is the Corporate Secretary of both Silver State Services (hereinafter SSS) and Silver State Helicopters (hereinafter SSH). He is the person that signed the bankruptcy petition for SSS and the bankruptcy petition for SSH. We were there on behalf of approximately 300 students who attended the hearing and all our other clients who could not make the hearing. Local media was also in attendance.
Prior to the hearing, the atmosphere was one of excitement and hopefulness that some answers might be forth coming today. Side note: there were several clever t-shirts worn by the former SSH students reflecting their feelings about this situation.
The Trustee began the hearing by advising everyone of the rules of the hearing, i.e. no cell phones, no talking … unless asking questions, and about the time limit for questions of the Debtor’s representatives.
The Trustee announced one very important piece of information. In the future, there will be a web link to the Silver State information that will be accessible to everybody. (We noted that he recently filed a request with the Court to be allowed to Limit Notice - his mailings were costing $3,000 a pop, and would quickly eat up available funds.) The direct link is: www.silverstatehelicoptersbankruptcy.com. This will save individuals from having to pay for PACER access to the Bankruptcy Court’s website.
The Trustee noted that there were actually two bankruptcy cases, SSH , the case that we are all familiar with, and SSS, the holding company for SSH. (Note: In a short discussion after the Hearing, the Trustee informed us that he is “Consolidating” these two cases. That means that all the Proofs of Claim that the Debtor’s attorney “mistakenly” filed in the wrong case will be automatically applied to the proper case. This is a good thing.)
The Trustee had a few simple questions for the representative of SSS and the Trustee’s counsel had a couple of follow up questions and then the Trustee concluded that hearing.
The Trustee then began the 341(a) hearing for the case we are all interested in, SSH. He asked the usual questions, who are you , how are you the person most knowledgeable for SSH, and so on. It should be noted that Mr. Schueppert explained essentially that the EOS contingent decided to file the Bankruptcy and that Jerry Airola refused to sign the paperwork, so Schueppert signed the paperwork on orders from the Board of Directors of SSS. Consequently, most of Schueppert’s answers to questions were “To the Best of My knowledge.”
This Q&A period went on for approximately 10 minutes. We learned that the person ‘most knowledgeable’ for SSH was: new to the entire operations because he: “had no knowledge of any real substantive SSH information prior to August of 2007.” He testified that EOS purchased 60% of SSH for $30,000,000.00 in November of 2007. When asked by the Trustee what precipitated this chapter 7 filing, he said the following three things:
1 - No more school loans were going to be funded by Citibank and Citibank was the only remaining bank writing student loans for SSH;
2. Enrollment was down, hence the income would be limited; and
3. The 01/31 sale of the Commercial side of SSH had not gone through as planned - hence no commercial contracts.
He testified that the decision to file Bankruptcy was made on Feb 4, the day of filing.
He testified that prior to EOS purchasing the 60% of SSH, excuse me: “investing in SSH,” EOS looked into the following issues: the lawsuits, the commercial activities, and the student enrollment/ the cash flow of SSH. They made a plan with Airola for the Recapitalization of SSH .
Schueppert testified that EOS had never been involved in any type of aviation company and had never been involved with any school. Based on an outside audit which Shueppert claimed was done by an independent company, EOS concluded that this would be a good investment for EOS clients and they consummated the deal in November of 2007. Of the $30,000,000.00, EOS gave Jerry Airola and Steve Pickett $13,000,000.00 cash, $13,000,000.00 supposedly went into SSH operating funds and the balance of $4,000,000.00 was for fees for the transaction itself. (Comment: EOS probably took its profit right there). (It should be remembered that this was a transaction for Jerry’s stock and ownership of SSH - it supposedly did not affect SSH directly.)
Jerry Airola and Steve Pickett failed to attend the 341(a) hearing. ORIX, the secured lender on the birds, had previously scheduled a 2004 examination of Airola, which he also did not attend, despite a Court Order that he appear. A new 2004 exam for Airola has been ordered by the Court, - set for a date to be determined. Airola must attend this examination or be subject to a Bench Warrant for his arrest.
The Trustee’s counsel broke in from time to time and asked his own questions.
After the Trustee and Trustee’s counsel asked questions for about 15 minutes, the floor was thrown open to questions from various creditors and creditors’ reps. For the next 2.5 hours, SSH’s representative had to respond to questions pertaining to the following subjects: The relationship between AES, EOS and SSH. Why did EOS file bankruptcy so quickly after buying 60% of SSH? Did EOS know about helicopters that were still flying out of the Cheyenne airport in Vegas? What was the explanation for the $180,000.00 paid to various law firms and PR firms on the exact day of the filing? It was noted by the Trustee’s attorney that these funds were probably not all earned and some of these fees should likely come back into the estate. We agree.
There were also several student and their parents who expressed their general outrage at the representatives of EOS.
The Trustee allowed the expression of their feelings and did not ask them to tone it down, nor did he ask marshals to escort them from the room. (To our knowledge the only one excluded was a cell phone violator).
Conspicuously absent at the 341(a) meeting was James Harward and Dan Reed of Harward and Associates. Also absent was any representative from the law firm of Brown & Dean.
During his testimony, the representative for EOS revealed that the reason SSH was longer using AES was because AES was caught receiving kickbacks from student loan funding in another school and thus could no longer write this type of loan. This confirmed our research and we will be posting more on this later.
Mr. Schueppert testified that EOS did not attempt to push through more students and more student loans prior to filing the bankruptcy. This is in direct contradiction to information that we have from several sources.
Gail believes that EOS’s plan was to carve out the commercial aspects of SSH and sell them off, and then close down the school. EOS advertises that it handles companies in “ownership transition” and does “recapitalizations.” We will post information on EOS separately.
Our plan right now to: 1) try to get the loans declared null and void and to 2) try to get monies returned to those who have already paid in, is underway.
Monday, March 10, 2008
San Diego Union Tribune Writes About The Plight of the SSH Students
JACIE LANDEROS / Union-Tribune
Left in the lurch
Lenders expect students to repay private loans even if school goes bankrupt
By Bruce V. Bigelow
UNION-TRIBUNE STAFF WRITER
March 9, 2008
Hector Leon was a freshly divorced father with two small children when he
decided in 2006 to enroll in a helicopter flight school offered at El Cajon's
Gillespie Field by Nevada-based Silver State Helicopters.
The flight school required all students to pay the full amount of their
$69,900 tuition up front. Leon said Silver State made it easier by arranging
a private student loan for the full amount, with payments deferred until six
months after graduation.
“When I heard their ads, which said you could make upwards of $150,000 to
$180,000 a year, I thought it was the way to get a better income and provide
a better life for my two kids,” the San Diego resident said.
But Leon's helicopter dreams began to spin out of control when he learned
on Super Bowl Sunday that Silver State had ceased operations and was filing
for bankruptcy liquidation in Las Vegas.
The privately held company has refused to comment since itsFeb. 4 Chapter
7 filing, when it issued a brief statement that blamed its abrupt liquidation
on “a rapid, unprecedented downturn in the U.S. credit markets.”
The credit squeeze “severely curtailed the availability of student loans” Silver
State said, “and resulted in a sharp and sudden downturn in new student
enrollment.”
By some accounts, Silver State's bankruptcy was triggered after a major lender informed the company it would no
longer make loans to its students.
Now Leon and some 2,500 other Silver State students nationwide
are facing a double bind not of their making: fighting for scraps of
their paid tuition in Silver State's bankruptcy while battling
lenders who insist the students are still on the hook for repaying
the loans. “My first reaction was a sick feeling,” said Leon, 36.
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CHARLIE NEUMAN / Union-Tribune
A bankruptcy notice was taped to the door at Silver
State Helicopters, which required students to pay
tuition upfront.
CHARLIE NEUMAN / Union-Tribune
Local Silver State students are among
those battling lenders who insist that the
students are on the hook for repaying
their loans.
To consumer rights advocates, the situation is reminiscent of a
wave in trade school scams and student loan abuses in the 1980s
and early 1990s. They suggest Silver State may be an early
casualty as credit woes squeeze lenders and pose problems that
may be especially painful for students at postsecondary vocational
schools and private, for-profit educational institutes.
“The new twist this time around is that most of them have these
private student loans,” said Deanne Loonin, a staff attorney at the
National Consumer Law Center in Boston. Students today “don't
have the same protections and remedies” available 20 years ago, when most education loans were federally
backed, Loonin said.
For one thing, the federal Bankruptcy Act of 2005 made it far more difficult for individuals to discharge a student
loan in personal bankruptcy.
A California law established to protect students at private postsecondary and vocational schools expired June 30,
2007. Gov. Arnold Schwarzenegger vetoed legislation to renew the program, calling the existing statutes
“fundamentally flawed.”
At the time the law expired, California had about 2,400 postsecondary
schools, including technical-training institutes, cosmetology, culinary and
truck-driving schools, as well as educational chains operated by Corinthian
Colleges, Career Education Corp. and others.
Since then, there has been little if any state oversight.
The company at the center of the latest controversy was founded in 1999 in
Henderson, Nev., by Jerry Airola, who rapidly expanded Silver State's
business to at least 33 flight schools nationwide. In addition to its school in
El Cajon, the company operated in six other California cities: Long Beach,
Camarillo, Chino, Los Banos, Oakland and Sacramento.
Many, if not most, of Silver State's students received private student loans to
cover all or part of their $70,000 enrollment. But because Silver State did
not participate in federal education aid programs, its students were
ineligible for federally guaranteed student loans.
After Silver State's bankruptcy, many students learned that private student
loans usually cannot be discharged if their school goes out of business –
unlike federally guaranteed education loans.
Shortly after the bankruptcy, San Diego-based Student Loan Xpress, which
worked closely with Silver State's California flight schools, indicated it had
no plans to write off its loans to Silver State borrowers.
In a statement, Student Loan Xpress urged students to contact Silver State's bankruptcy attorney to file individual
claims for a refund on the “unearned” portion of their paid tuition.
“We also encourage those students whose tuition was financed by SLX to contact us to implement mutually
satisfactory repayment plans,” the lender said.
Students may have little recourse, but Elena Ackel of the Legal Aid Foundation of Los Angeles offered one sliver
of hope, known as “the FTC rule.”
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The rule, based on a Federal Trade Commission regulation, gives consumers the right to legally raise a financial
claim against a lender in cases where a seller and lender have a business arrangement, Ackel said. It applies to
private, for-profit schools and educational lenders.
To Loonin, Silver State exemplifies the sort of hidden risks the credit crunch has forced into the open as the cost
of education has skyrocketed in the United States.
She views private student loans as one of the biggest hazards because they aren't subject to the rate caps that fix
the interest rates on most federally backed loans at 6.8 percent.
In a recent study of 28 representative loans, Loonin found the average initial rate was 11.5 percent, and the
highest was nearly 19 percent. Most had origination charges that added, on average, 4.5 percent to the loan
amount.
Private loans, which were once used chiefly by graduate students, have grown dramatically, from about 5 percent
of all student loans a decade to nearly 25 percent today, Loonin said.
In 2005-06, students took out $17.3 billion in private loans, compared with $1.3 billion a decade earlier,
according to the College Board.
The dramatic growth in private student loans is due chiefly to the enormous profitability of the lightly regulated
industry, Loonin said.
As in the subprime mortgage market, one of the biggest factors driving profitability has involved packaging
student loans and selling them to hedge funds, mutual funds and other investors as “asset-based securities.”
Selling “securitized” student loans has been a key source of revenue for many lending companies, especially those
not affiliated with banks.
In a recent report issued by the National Consumer Law Center, Loonin and co-author Julia Devanthery found
the market for such securitized student loans jumped from $9.4 billion in 2005 to $16.6 billion in 2006 – a 76
percent increase.
But Wall Street lost its appetite for such deals as investors' bets on securitized subprime mortgages began turning
into disastrous losses last year. The resulting credit squeeze has prompted many lenders to make drastic cutbacks
and sever their ties with financially troubled schools, which apparently is what happened at Silver State.
Some lenders also have raised their loan requirements, left less-profitable loan programs and, of course,
increased their interest rates and fees.
“It all helps unmask the larger problem, which is that students are having trouble affording the cost of education,”
Loonin said. “We've masked that problem by throwing all these predatory loans at them.”
She contends that many postsecondary schools mislead students through aggressive marketing that makes
exaggerated promises about high-paying careers without disclosing the exorbitant costs of their classes or the
burdensome nature of private student loans.
Like a receding tide, the industry's cutbacks have exposed some hazards that students face. But nowhere has this
reef been exposed more clearly than in Silver State's bankruptcy.
In the hierarchy of bankruptcy law, students rank as unsecured creditors who stand near the end of the line of
people who hope to get their money back. Silver State has said in its filings that it does not expect any proceeds
will be left over from its liquidation to reimburse such creditors.
Still, Michael Berger, a Beverly Hills bankruptcy lawyer who is intervening on behalf of hundreds of students in
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California and elsewhere, said there are fraudulent aspects of the case he intends to challenge.
“We have students who got their loans funded the day before the bankruptcy, the day of the bankruptcy and the
day after the bankruptcy,” Berger said.
He also asserted that federal investigators and attorneys general in several states, including California, have
launched inquiries into Silver State's operations.
Meanwhile, Leon and other students say they are learning details about their loans – such as higher interest rates
– that they knew nothing about before now.
Leon said the interest rate on the $69,900 loan he signed in 2006 was supposed to be 10 percent. But after
looking over his paperwork, Leon discovered that his rate had jumped to 14 percent and that another lender,
American Education Services, was servicing his loan.
Another Silver State student, Tony Vaca of Long Beach, said as many as 70 Silver State students in California also
have discovered to their surprise that someone had co-signed their student loans, presumably to help them
qualify. But the co-signer's name was not familiar to any of them – and they all had the same co-signer.
Vaca and Leon said they plan to attend a key creditors meeting in Silver State's bankruptcy case that is set for
tomorrow afternoon in Las Vegas, and they plan to fight however they can.
“A lot of students are just sort of throwing up their hands ... not knowing that those $70,000 student loans are
going to be following them around for the rest of their lives,” Vaca said.
Bruce Bigelow: (619) 293-1314; bruce.bigelow@uniontrib.com
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© Copyright 2007 Union-Tribune Publishing Co. ? A Copley Newspaper Site
Left in the lurch
Lenders expect students to repay private loans even if school goes bankrupt
By Bruce V. Bigelow
UNION-TRIBUNE STAFF WRITER
March 9, 2008
Hector Leon was a freshly divorced father with two small children when he
decided in 2006 to enroll in a helicopter flight school offered at El Cajon's
Gillespie Field by Nevada-based Silver State Helicopters.
The flight school required all students to pay the full amount of their
$69,900 tuition up front. Leon said Silver State made it easier by arranging
a private student loan for the full amount, with payments deferred until six
months after graduation.
“When I heard their ads, which said you could make upwards of $150,000 to
$180,000 a year, I thought it was the way to get a better income and provide
a better life for my two kids,” the San Diego resident said.
But Leon's helicopter dreams began to spin out of control when he learned
on Super Bowl Sunday that Silver State had ceased operations and was filing
for bankruptcy liquidation in Las Vegas.
The privately held company has refused to comment since itsFeb. 4 Chapter
7 filing, when it issued a brief statement that blamed its abrupt liquidation
on “a rapid, unprecedented downturn in the U.S. credit markets.”
The credit squeeze “severely curtailed the availability of student loans” Silver
State said, “and resulted in a sharp and sudden downturn in new student
enrollment.”
By some accounts, Silver State's bankruptcy was triggered after a major lender informed the company it would no
longer make loans to its students.
Now Leon and some 2,500 other Silver State students nationwide
are facing a double bind not of their making: fighting for scraps of
their paid tuition in Silver State's bankruptcy while battling
lenders who insist the students are still on the hook for repaying
the loans. “My first reaction was a sick feeling,” said Leon, 36.
SignOnSanDiego.com > News > Business -- Left in the lurch 3/9/08 1:35 PM
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CHARLIE NEUMAN / Union-Tribune
A bankruptcy notice was taped to the door at Silver
State Helicopters, which required students to pay
tuition upfront.
CHARLIE NEUMAN / Union-Tribune
Local Silver State students are among
those battling lenders who insist that the
students are on the hook for repaying
their loans.
To consumer rights advocates, the situation is reminiscent of a
wave in trade school scams and student loan abuses in the 1980s
and early 1990s. They suggest Silver State may be an early
casualty as credit woes squeeze lenders and pose problems that
may be especially painful for students at postsecondary vocational
schools and private, for-profit educational institutes.
“The new twist this time around is that most of them have these
private student loans,” said Deanne Loonin, a staff attorney at the
National Consumer Law Center in Boston. Students today “don't
have the same protections and remedies” available 20 years ago, when most education loans were federally
backed, Loonin said.
For one thing, the federal Bankruptcy Act of 2005 made it far more difficult for individuals to discharge a student
loan in personal bankruptcy.
A California law established to protect students at private postsecondary and vocational schools expired June 30,
2007. Gov. Arnold Schwarzenegger vetoed legislation to renew the program, calling the existing statutes
“fundamentally flawed.”
At the time the law expired, California had about 2,400 postsecondary
schools, including technical-training institutes, cosmetology, culinary and
truck-driving schools, as well as educational chains operated by Corinthian
Colleges, Career Education Corp. and others.
Since then, there has been little if any state oversight.
The company at the center of the latest controversy was founded in 1999 in
Henderson, Nev., by Jerry Airola, who rapidly expanded Silver State's
business to at least 33 flight schools nationwide. In addition to its school in
El Cajon, the company operated in six other California cities: Long Beach,
Camarillo, Chino, Los Banos, Oakland and Sacramento.
Many, if not most, of Silver State's students received private student loans to
cover all or part of their $70,000 enrollment. But because Silver State did
not participate in federal education aid programs, its students were
ineligible for federally guaranteed student loans.
After Silver State's bankruptcy, many students learned that private student
loans usually cannot be discharged if their school goes out of business –
unlike federally guaranteed education loans.
Shortly after the bankruptcy, San Diego-based Student Loan Xpress, which
worked closely with Silver State's California flight schools, indicated it had
no plans to write off its loans to Silver State borrowers.
In a statement, Student Loan Xpress urged students to contact Silver State's bankruptcy attorney to file individual
claims for a refund on the “unearned” portion of their paid tuition.
“We also encourage those students whose tuition was financed by SLX to contact us to implement mutually
satisfactory repayment plans,” the lender said.
Students may have little recourse, but Elena Ackel of the Legal Aid Foundation of Los Angeles offered one sliver
of hope, known as “the FTC rule.”
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The rule, based on a Federal Trade Commission regulation, gives consumers the right to legally raise a financial
claim against a lender in cases where a seller and lender have a business arrangement, Ackel said. It applies to
private, for-profit schools and educational lenders.
To Loonin, Silver State exemplifies the sort of hidden risks the credit crunch has forced into the open as the cost
of education has skyrocketed in the United States.
She views private student loans as one of the biggest hazards because they aren't subject to the rate caps that fix
the interest rates on most federally backed loans at 6.8 percent.
In a recent study of 28 representative loans, Loonin found the average initial rate was 11.5 percent, and the
highest was nearly 19 percent. Most had origination charges that added, on average, 4.5 percent to the loan
amount.
Private loans, which were once used chiefly by graduate students, have grown dramatically, from about 5 percent
of all student loans a decade to nearly 25 percent today, Loonin said.
In 2005-06, students took out $17.3 billion in private loans, compared with $1.3 billion a decade earlier,
according to the College Board.
The dramatic growth in private student loans is due chiefly to the enormous profitability of the lightly regulated
industry, Loonin said.
As in the subprime mortgage market, one of the biggest factors driving profitability has involved packaging
student loans and selling them to hedge funds, mutual funds and other investors as “asset-based securities.”
Selling “securitized” student loans has been a key source of revenue for many lending companies, especially those
not affiliated with banks.
In a recent report issued by the National Consumer Law Center, Loonin and co-author Julia Devanthery found
the market for such securitized student loans jumped from $9.4 billion in 2005 to $16.6 billion in 2006 – a 76
percent increase.
But Wall Street lost its appetite for such deals as investors' bets on securitized subprime mortgages began turning
into disastrous losses last year. The resulting credit squeeze has prompted many lenders to make drastic cutbacks
and sever their ties with financially troubled schools, which apparently is what happened at Silver State.
Some lenders also have raised their loan requirements, left less-profitable loan programs and, of course,
increased their interest rates and fees.
“It all helps unmask the larger problem, which is that students are having trouble affording the cost of education,”
Loonin said. “We've masked that problem by throwing all these predatory loans at them.”
She contends that many postsecondary schools mislead students through aggressive marketing that makes
exaggerated promises about high-paying careers without disclosing the exorbitant costs of their classes or the
burdensome nature of private student loans.
Like a receding tide, the industry's cutbacks have exposed some hazards that students face. But nowhere has this
reef been exposed more clearly than in Silver State's bankruptcy.
In the hierarchy of bankruptcy law, students rank as unsecured creditors who stand near the end of the line of
people who hope to get their money back. Silver State has said in its filings that it does not expect any proceeds
will be left over from its liquidation to reimburse such creditors.
Still, Michael Berger, a Beverly Hills bankruptcy lawyer who is intervening on behalf of hundreds of students in
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California and elsewhere, said there are fraudulent aspects of the case he intends to challenge.
“We have students who got their loans funded the day before the bankruptcy, the day of the bankruptcy and the
day after the bankruptcy,” Berger said.
He also asserted that federal investigators and attorneys general in several states, including California, have
launched inquiries into Silver State's operations.
Meanwhile, Leon and other students say they are learning details about their loans – such as higher interest rates
– that they knew nothing about before now.
Leon said the interest rate on the $69,900 loan he signed in 2006 was supposed to be 10 percent. But after
looking over his paperwork, Leon discovered that his rate had jumped to 14 percent and that another lender,
American Education Services, was servicing his loan.
Another Silver State student, Tony Vaca of Long Beach, said as many as 70 Silver State students in California also
have discovered to their surprise that someone had co-signed their student loans, presumably to help them
qualify. But the co-signer's name was not familiar to any of them – and they all had the same co-signer.
Vaca and Leon said they plan to attend a key creditors meeting in Silver State's bankruptcy case that is set for
tomorrow afternoon in Las Vegas, and they plan to fight however they can.
“A lot of students are just sort of throwing up their hands ... not knowing that those $70,000 student loans are
going to be following them around for the rest of their lives,” Vaca said.
Bruce Bigelow: (619) 293-1314; bruce.bigelow@uniontrib.com
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