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The College of New Rochelle: A Cautionary Tale

Article

The Business Advisor

Winter 2021

The COVID emergency has battered most industries, including higher education, although higher education had been in distress for some time before the emergency. The causes of that distress are well known and include: (i) a decline in the traditional college age population that is likely to continue through the decade; (ii) decreasing enrollments in the wake of an enrollment spike triggered by the 2008 Great Recession; (iii) declining investment in public higher education; (iv) inadequate capitalization (e.g., modest to slim endowments) leading to greater dependence on tuition for revenues; (v) fewer students able to pay increasing tuitions; and (vi) expanded discounting of tuition as a form of financial aid. Adding to this distress, the COVID emergency has reignited questions concerning the value of a college degree and its liberal arts core. It should come as no surprise that approximately four dozen colleges and universities have closed, announced closures, or consolidated with other institutions in the last five years, with the COVID emergency constituting the last straw in the most recent closures. At least four of the institutions that have closed have liquidated in bankruptcy. This article will address the prelude to the closure of one of those institutions, The College of New Rochelle (CNR).

Background

The Ursuline Nuns founded CNR, the first Roman Catholic college for women in New York, in 1904. CNR operated thereafter as a well-respected women’s liberal arts college. Operation as a single-sex institution was standard procedure for a Roman Catholic college. As late as 1965, the great majority of undergraduate programs at Roman Catholic colleges and universities either were single-sex or significantly limited enrollments by students of one sex. Starting in the mid-1960s, like most other single-sex colleges and universities, most Roman Catholic colleges and universities have become fully coeducational. [1] By 1972, in fact, all but three Roman Catholic men’s colleges had become fully coeducational. That factor negatively impacted enrollment at Roman Catholic women’s colleges. Women who previously might have considered attending those colleges, particularly students interested in programs not widely offered at women’s colleges, chose instead to attend formerly men’s colleges. Swimming against the tide of coeducation and the waning attractiveness of single-sex education, however, CNR remained a women’s college at the undergraduate level.

While remaining a women’s college, CNR diversified its student population by making inroads with students from underserved populations, notably African-American and Hispanic populations. Beginning in 1972, CNR reached out to other student populations. Programs in nursing and other health professions were developed. CNR also established the School of New Resources (SNR), coeducational from its inception, for adult learners. The development of healthcare programs and the growth of SNR fueled a steady and substantial increase in CNR’s enrollment for a number of years. However, a significant decline in SNR’s enrollment during the last years of CNR’s operations led to a significant decline in CNR’s overall enrollment. In response to the enrollment decline, CNR became fully coeducational in 2016.

Financial problems, even more than an enrollment decline, however, doomed CNR. Like many other colleges and universities, CNR never had a robust endowment. Moreover, many of CNR’s students from underserved populations needed extensive financial aid, much of which was provided through deep tuition discounts. [2] The extent of CNR’s financial problems came to light in September 2016 with the eruption of a financial scandal. At the center of the scandal was CNR’s former Controller (and, before that, Treasurer – Business Manager), Keith Borge, who had retired on June 30, 2016. Borge’s successor as Controller, Thomas Cunningham, discovered numerous financial irregularities and reported them to CNR’s then President, Judith Huntington, and CNR’s Board of Trustees. Huntington resigned shortly thereafter, and, on September 20, 2016, independent counsel was retained to investigate allegations that CNR’s finances had been mismanaged for several years, and subsequently issued a report of the results of its investigation (“Investigation Report”). The situation was so bad that it appeared that CNR would have to close at the end of 2016. However, a $5 million dollar gift by an anonymous donor prevented closure at that time. A new president was appointed in 2017 but was unable to right CNR’s ship. CNR closed at the end of the summer session in 2019.

On September 20, 2019, CNR filed a petition for relief under chapter 11 of the Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of New York, seeking an orderly liquidation of its assets. [3] An Official Committee of Unsecured Creditors (“Committee”) was appointed. A plan of liquidation (“Plan”) was confirmed by Order of the Bankruptcy Court dated March 12, 2020 [4] and became effective on May 1, 2020[5]. The Plan authorized the Committee to bring any causes of action belonging to CNR. On January 12, 2021, the Committee filed an adversary complaint (“Complaint”) against Borge, Huntington, and Betty Roberts (Borge’s successor as Treasurer – Business Manager), as well as the members of CNR’s Board during the years 2013 through 2016, asserting claims for breach of fiduciary duties of good faith and care under both statutory and common law. [6]

The Complaint

The Committee points out in the Complaint the conclusions of the Investigation Report that: (i) Borge’s misconduct was the cause of CNR’s financial distress; (ii) Huntington failed to properly supervise Borge; and (iii) Roberts failed to inform the Board of Borge’s misconduct and allowed Borge continued control over key financial matters even though she wanted Borge dismissed. The Complaint goes on to allege specific facts evidencing Borge’s misconduct and alleging the failure of Huntington and Roberts take sufficient action to address and remedy the damages resulting from that misconduct and to prevent further misconduct. Borge’s misconduct was further enabled, according to the Complaint, by the Board’s failure to exercise proper oversight over CNR’s affairs.

Borge’s misconduct that generated the most attention was his failure to pay approximately $20 million in federal and New York state payroll taxes or file the necessary returns for those taxes during a period beginning in the second quarter of 2013 and ending in the first quarter of 2016. Until September 2014, Borge served as CNR’s Treasurer – Business Manager. Borge’s duties included managing the filing of CNR’s tax returns and the payment of the taxes. [7] According to the Complaint, a CNR employee advised Huntington that CNR had not paid payroll taxes for the second quarter of 2013. Huntington contacted CNR’s secretary and counsel, who advised Borge to pay the taxes. Huntington also hired two consultants to investigate the matter and who, the Complaint alleges, concluded that CNR’s cash management system was inadequate and that Borge was not competent to act as Treasurer – Business Manager. Nonetheless, Borge remained CNR’s Treasurer – Business Manager for several months after Huntington became aware of the non-payment of payroll taxes. On September 24, 2014, however, after being advised that Borge had failed to pay payroll taxes in March 2014, Huntington removed him as Treasurer – Business Manager and appointed Roberts to the position. Borge was not dismissed but was appointed CNR’s Controller, a position he held until his retirement on June 30, 2016.

According to the Complaint, Roberts became aware of Borge’s failure to pay payroll taxes shortly after her appointment. Nevertheless, Borge remained in charge of managing the preparation of payroll tax returns and the payment of the taxes despite the issuance of delinquency notices by IRS and the State of New York and IRS’s issuance of a tax levy against CNR. The Complaint alleges that during the years 2013 through 2016, the Board ignored red flags like Huntington’s retention of consultants to investigate CNR’s finances. her removal of Borge from the position of Treasurer – Business Manager, and the issuance of the IRS tax levy that, if investigated, would have revealed the non-payment of taxes.

While failing to pay payroll taxes, Borge was also misusing CNR’s endowment funds. According to the Complaint, Borge accessed CNR’s endowment to pay operational expenses. Borge never had any authority to do so. Borge attempted to conceal his activities from the Board by submitting false and misleading information concerning the endowment to the Board. According to the Complaint, Huntington was aware that Borge used misleading terms to describe endowment assets. CNR’s outside auditors’ valuations of CNR’s endowment were significantly lower than Borge’s. In November 2013, the consultants hired by Huntington became aware that Borge had been withdrawing endowment funds. In February 2014, Borge provided the Board’s Finance/Investment Committee with a memorandum advising that $4.465 million had been “borrowed” from the endowment for operating expenses. The committee’s chair expressed concern over the use of such a large portion of the endowment fund for operating expenses and requested further information. In a follow-up memorandum, Borge disclosed the liquidation of an additional $4.5 million of endowment assets. Borge nevertheless retained access to the endowment funds until his retirement in 2016 and continued to make unauthorized withdrawals. By October 2016, CNR’s modest endowment (only $14.3 million as of October 2014) had declined in value to $4.2 million.

In addition to CNR’s endowment funds, Borge also improperly used the proceeds of two federal grants (collectively, “2014 Grants”) to pay CNR operating expenses. According to the Complaint, Roberts was tasked with reviewing and approving withdrawals from the 2014 Grants but lacked access to the portal by which withdrawals from the 2014 Grants funds and the funded expenses could be reconciled – despite her role as Grants Compliance Officer. Only Borge had access. By mid-2015, according to the Complaint, Huntington and Roberts were aware of Borge’s misuse of the 2014 Grants proceeds. Borge was advised that he was not permitted to withdraw any funds from the 2014 Grants, but retained access to the portal because he purportedly needed it for other aspects of his work. Borge continued to withdraw funds from the 2014 Grants at least through March 2016. In February 2016, the U.S. Department of Education began investigating CNR’s use of the 2014 Grant proceeds. According to the Complaint, Huntington and Roberts were thereby made aware of Borge’s continued misapplication of 2014 Grants proceeds and subsequently became aware of later unauthorized withdrawals by Borge, and Board members became aware of Borge’s misuse of 2014 Grants proceeds in February 2016.

Borge’s misconduct also included bouncing checks, which ultimately led to the disruption of CNR’s relationships with its banks. He failed to remit retirement plan contributions to CNR’s 403(b) plan. He also used for operating expenses student loan funds not claimed by the student-awardees. The Complaint alleges various levels of awareness of Borge’s misconduct in this regard on the part of Huntington, Roberts, and the Board. In the end, Borge’s misconduct resulted in his arrest, a guilty plea, and imprisonment.

Conclusion

With the obvious caveat that it is not proof of wrongdoing, the Complaint presents a disturbing and cautionary tale for officers and directors of nonprofits and the professionals retained for their liquidation or restructuring. The story presented in the Complaint is particularly disturbing, because it does not appear that Borge (or anyone else, for that matter) used CNR funds for personal gain. Borge appears to have been robbing Peter to pay Paul, to cover revenue gaps. The sad truth this that, like many other private nonprofit colleges and universities, CNR simply was not generating sufficient revenues to fund operations. There are a number of takeaways from CNR’s story, three of which will be addressed below.

Attendance to governance issues provides the first group of takeaways. Nonprofit organizations must have adequate and functioning governance structures, policies, and procedures. Competent and trustworthy personnel and Trustees must be in place to ensure proper governance. At the very least, Borge’s apparent control of CNR’s finances – even after his removal as Treasurer – Business Manager – indicates the inadequacy of governance controls over CNR’s financial affairs, as does a lack of adequate cash management controls at the college. Deficiencies in governance often facilitate financial distress in any industry, including higher education. Hence, once a college or university requires the assistance of restructuring or liquidating personnel, a review of the institution’s governance structures is crucial, even where evidence of governance deficiencies is not immediately apparent.

The second takeaway, closely related to governance, is that officers and directors must exercise their supervisory authority. Officers must enjoy and exercise the necessary powers to perform their duties, including supervisory authority over the relevant personnel. They may not, as appears to have happened at CNR, let subordinates call the shots. By way of example, a treasurer or vice-president for finance must be able to access an institution’s financial records, and that access cannot be dependent on the whims of a subordinate, particularly a subordinate whose conduct is being scrutinized. An officer must be willing and able to sanction a subordinate for misconduct. Similar to the obligations of officers, trustees may not shirk their duty of oversight. They must investigate red flags. Particularly if a college or university is struggling financially, the trustees must diligently monitor the institution’s finances, and the board must include trustees with sufficient training in finance to understand the institution’s financial condition. It goes without saying, moreover, that restructuring or liquidating personnel called in to advise a financially distressed institution must investigate whether officers have properly supervised their subordinates and directors have exercised their oversight authority.

The final takeaway from the CNR story is that facts must be faced – no matter how bad; no matter how inconvenient. CNR simply was not generating sufficient revenues to meet operating costs. Enrollment was declining; tuition was being discounted. CNR’s financial situation was deteriorating. Something had to be done. Options had to be fully explored. Decisions, however painful, had to be made. CNR could not continue to fund operations by not paying taxes and other obligations, raiding the endowment (down to only $4.2 million by October, 2016), or misusing grant funds. At the end of the day, however, CNR was forced by its past responses to its financial condition into the very painful choice of closure.


[1] By 1984, two of those institutions had become fully coeducational, and only St. John’s University (MN) remained “all-male” at the undergraduate level. Even so, St. John’s operations have been consolidated with a nearby Roman Catholic college for women, the College of St. Benedict. Indeed, the operations of the two institutions are so thoroughly consolidated that they were jointly awarded a Phi Beta Kappa chapter.

[2] CNR’s former Controller, Keith Borge, contends that CNR’s financial problems and ultimate closure were the result of enrolling too few students who could pay the tuition. See Convicted College of New Rochelle controller Keith Borge blames other officials for school’s demise (westfaironline.com). Notwithstanding his misconduct while he served as CNR’s Treasurer – Business Manager and later as CNR’s Controller, Mr. Borge appears to be correct on this point.

[3] See In re The College of New Rochelle, U.S.B.C. S.D.N.Y. Case No. 19-23694-rdd (“Bankruptcy Docket”), ECF No. 1.

[4] Bankruptcy Docket, ECF No. 312.

[5] Bankruptcy Docket, ECF No. 350.

[6] See Official Committee of Unsecured Creditors v. Gwen Adolph, et al., U.S.B.C. S.D.N.Y., Adv. Proc. No. 21-07002-rdd, ECF No. 1.

[7] ADP had handled these matters before 2013, but refused to do so thereafter because Borge allegedly failed to fund the payroll tax account.