Dogfight Over College Loan Portfolios

     SAN DIEGO (CN) – The American Student Financial Group claims in court that a capital management firm stole its trade secrets, its biggest for-profit college client and its trademark.
     American Student Financial Group Inc., or ASFG, a student loan clearinghouse, and its subsidiary TRD Consulting sued Aequitas Capital Management and ASFG LLC, in Federal Court.
     ASFG claims the defendants pulled a fast one after it approached Aequitas in 2011 to fund the purchase of student loans from Corinthian Colleges, a much-sued chain college.
     Corinthian is not a party to this complaint.
     AFSG claims that Aequitas agreed to fund ASFG’s purchase of Corinthian’s $50 million student loan portfolio and provide up to $250 million for future Corinthian loan purchases.
     As negotiations continued, ASFG says, Aequitas proposed that the two companies “jointly purchase and co-manage [Corinthian’s] Existing Portfolio through a limited liability company to be organized for that purpose, with approximately $50,000,000 of funds to be provided by Aequitas to finance the purchase.”
     ASFG claims that in a noncircumvention agreement of June 8, 2011, Aequitas acknowledged that ASFG introduced the Corinthian deal to Aequitas and provided it with confidential and proprietary information. In exchange, Aequitas agreed that it would not enter into loan purchase transactions with Corinthian for 2 years, according to the complaint.
     As the companies grew closer to inking a partnership agreement-and landing the lucrative Corinthian deal-ASFG president Timothy Duoos made a crucial decision that would eventually form the basis of the company’s lawsuit:
     “In order to leverage ASFG, Inc.’s excellent reputation in the student loan industry and Duoos’s pre-existing relationships with Corinthian decision-makers, and to assure Corinthian of ASFG, Inc.’s involvement in the proposed transactions, ASFG, Inc. verbally, through Duoos, gave its permission for Aequitas to use ASFG, Inc.’s service mark and trade name ‘ASFG’ in the name of the entity [to] be formed for the purpose of consummating the Existing Portfolio purchase and implementing the Tuition Financing Program with Corinthian for the joint benefit of ASFG, Inc. and Aequitas. Such permission was limited to use in connection with Corinthian Loans only,” ASFG says in its complaint.
     As the June 30, 2011 deadline to sign the Corinthian deal approached, Aequitas told ASFG that it would be “unable to raise sufficient capital from its capital sources to provide the necessary funding to purchase Corinthian Loans unless it retained exclusive ownership of, and the exclusive rights to manage, the entity that would purchase and hold the Corinthian Loans,” according to the complaint.
     Faced with the prospect of losing the deal and no time to pursue other funding sources, ASFG claims it agreed it would have no ownership or management rights in the new entity-ASFG LLC-but would receive commissions on every Corinthian transaction, to be characterized as “consulting fees:”
     “The agreement provided that the ASFG consultants would assist Aequitas with the business activities of ASFG, LLC in connection with management of its agreements with Corinthian, in connection with selection, management and monitoring of sub-servicers, and in connection with monthly reporting on the performance of any Corinthian portfolios. In exchange for its services, the ASFG consultants would receive consulting fees … consist[ing] of the following: a. A commission equal to 3 percent of the face amount of the purchase of all Corinthian loans purchased by ASFG, LLC or any other Aequitas affiliate; b. A ‘disposition payment’ to be paid in the event of disposition by Aequitas of its membership interest in ASFG, LLC or any portion of its assets; c. ‘Preference Payments,’ which would be made to the ASFG consultants from the gross receipts of a portfolio according to a formula setting forth the method for determining whether they were to be paid and the amount to be paid (the ASFG consultants were eligible for Preference Payments only in connection with non-recourse loan portfolios; and d. A ‘back-end split,’ consisting of a share of the residual cash after the recovery by Aequitas of its ‘purchase cost’ … in connection with a Corinthian loan portfolio. The back-end split would vary according to a formula set forth in the agreement, depending on whether the loan portfolio was recourse or non-recourse, and on the total ‘gross receipts’ … received in connection with a portfolio, compared to the purchase cost of that portfolio,” ASFG says in its complaint.
     ASFG claims Aequitas purchased a Corinthian loan portfolio in June 2012 for just over $25 million, and a second one for $27 million on Sept. 30.
     But ASFG claims Aequitas hasn’t paid it a dime in commissions.
     “There is now due, owing and unpaid a commission equal to 3 percent of the face value of the June 2012 portfolio, or $750,693.26, together with a commission equal to 3 percent of the face value of the September 2012 portfolio, or approximately $810,000.00. The total amount of commissions due and owing to plaintiffs from defendants is therefore at least $1,560,000.00. Plaintiffs are informed and believe, and thereon allege, that defendants have not applied the above-described fees paid by Corinthian to ASFG, LLC as ‘Gross Receipts’ of any portfolio. Defendants have advised plaintiffs that they do not intend to apply those fees to the Corinthian portfolios. Plaintiffs are informed and believe, and thereon allege, that defendants have paid themselves ‘Preference Payments’ from the Gross Receipts of the existing portfolio. The existing portfolio is a non-recourse portfolio. Under the terms of the agreement, plaintiffs are entitled to a portion of any Preference Payments made on non-recourse loan portfolios. Defendants, while paying themselves, have breached the agreement by failing to pay any part of any Preference Payment on the existing portfolio to plaintiffs,” according to the complaint.
     AFSG claims that Aequitas is using its proprietary trade name, ASFG, to solicit business from other educational institutions “and have actually capitalized on the goodwill and reputation of ASFG, Inc. in so doing. Defendants have, among other things, created a website using the name ‘American Student Financial Group, Inc.’ purporting to provide a history of American Student Financial Group, Inc. and its relationship with Aequitas, in the course of soliciting additional business. None of this conduct has been authorized by ASFG, Inc.,” according to the complaint.
     The website in question, actually a sub-page on Aequitas’s own website , credits Aequitas for ASFG, Inc.’s growth. “Aequitas was able to build off the know-how of its proprietary CarePayment model, by structuring an innovative business model, and providing the capital to see it through. This insight, combined with working capital, allowed ASFG to not only grow quickly, but provided scalability to sustain and leverage the growth. A testament to the relationship is the recent client addition of Corinthian Colleges, a large publicly traded for-profit institution with nationwide campuses. Aequitas continues to provide strategic insight and capital as ASFG continuously grows,” Aequitas says on its website.
     ASFG seeks $15. million in unpaid commissions and damages for breach of agreement, breach of the confidentiality agreement, trademark and service mark infringement, unfair competition, and misappropriation of trade secrets.
     ASFG is represented by John Ryan with Latham & Watkins of San Diego, and Michael Djavaherian of Encinitas.
     Corinthian Colleges has been sued more than 200 times, according to the Courthouse News database; it is one of many chain colleges that came under congressional scrutiny for, among other things, the recruitment practices, educational programs and use of college loans.

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