Lawsuits Over Student Loans Entangle UES : Auditor Wants Firm to Assume Any Liability

Times Staff Writer

United Education & Software, the embattled trade school operator that was behind a major foul-up in the processing of student loans last year, might have more troubles to deal with.

A complex web of lawsuits have been filed involving the student-loan processing fiasco, and although UES has sold its loan-servicing business, it has been dragged into the legal tangle.

Peat Marwick Main & Co., which was UES’ auditor, filed a third-party complaint against UES on Aug. 7 in federal district court in Los Angeles, seeking to hold UES responsible for any liability that Peat Marwick might face in connection with the loan-servicing problems.

Peat Marwick was named as a third-party defendant by Bank of America, which is being sued by a group of banks that had invested in the loans. Bank of America has said it and the other banks could lose up to $650 million because of the loan-servicing foul-up.


Surfaced Last Year

The matter surfaced last year when the U.S. Department of Education found a series of problems at UES’ loan-servicing business, including failure to properly contact delinquent borrowers. UES blamed computer errors, but government authorities said they found sloppy management conditions at the UES unit.

The Department of Education has indicated it might not pay for student loans that went into default, even though they were guaranteed by the government.

UES’s loan-servicing operation processed student loans that were purchased by the California Student Loan Finance Corp., a nonprofit organization, and guaranteed by the federal government. CSLFC issued bonds to buy the loans. Bank of America was the trustee for those bonds, which were backed by letters of credit from several banks.


Those banks filed suit in May against Bank of America in federal district court in Los Angeles for any losses they might face from loans serviced at UES. But if Bank of America is forced to pay damages, it would seek to have Peat Marwick share all or part of that burden.

In its Aug. 7 filing, Peat Marwick says UES failed to provide the accounting firm with accurate information regarding the student loans. Therefore, it claims, if Peat Marwick is held liable for damages, it would seek to recoup the cost from UES.

“If we’re in it, UES is the one who should be responsible for the problems,” said John Shutkin, Peat Marwick’s general counsel.

Financial Straits

UES, which has a net worth of about $16 million--based on the difference between the value of its assets and debt--could be in even worse financial straits if it must pay damages.

UES, which runs 25 trade and technical schools, lost $14.3 million in the fiscal year that ended Jan. 31 on $81 million in revenues.

UES’ only comment on the suit is that it believes any damages it might have to pay to Peat Marwick would be covered in an agreement it reached with Bank of America last November, when it sold the loan-servicing business to the bank.

Under that agreement, Bank of America conditionally agreed to cover UES for claims that Peat Marwick might bring against it in connection with the loan problems.


But Bank of America said that if UES is found to be liable for damages and seeks to have the bank pay for those damages, it won’t go along willingly. “We believe we have a good defense against indemnity,” or repaying UES for its losses, said Peter Magnani, Bank of America spokesman.

Insurance Policy

There is another wrinkle. Before the loan-servicing problems were uncovered, UES had hired the Los Angeles insurance brokers Jardine, Emett & Chandler to secure an insurance policy for it. That policy would have covered UES for losses of $5 million or more stemming from the loan fiasco, said Michael K. Maher, an attorney for UES.

But an insurance policy was never taken out for the firm. “We were sold a bogus insurance policy,” Maher said.

UES filed suit against Jardine in Los Angeles County Superior Court in March, asking for $5.5 million in compensatory damages and additional punitive damages. Jardine officials would not comment on the suit.

In the first quarter that ended April 30, UES earned $24,000 on revenues of $20.6 million. The company’s stock, which traded at a high of $16.375 in 1988 before the loan problems were revealed, now trades at about $2.