The National Organization for Children, Inc. Bankruptcy Case, 2006

On March 2, 2006, The National Organization for Children, Inc., formerly doing business as The Einstein Academy Charter School (the “Debtor” or “Einstein”) filed a voluntary petitio n for reorganization under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”). 

The Debtor is maintaining in a segregated bank account at Sovereign Bank approximately $1,420,000.00 of funds which were originally made available by the Pennsylvania Department of Education (“PDE”) for the purpose of funding the Debtor’s operations as a cyber charter school and meeting the needs of compensatory education students and their families.

On or about June 30, 2003, the Debtor’s charter was revoked. 

On October 6, 2006, an Official Parents Compensatory Education Funds Committee (the “Parents Committee”) was appointed by the Office of the United States Trustee in the Chapter 11 case.  The Parents Committee consisted originally of three members, Amy Stewart, its chairperson, Doreen Burritt-Carl and Debbie Freed.  In January, 2007, Ms. Freed resigned from the Parents Committee.  A third member, Edward Phillips, has been appointed to replace Ms. Freed. 

The responsibility of the Parents Committee is to monitor the Debtor’s Chapter 11 bankruptcy proceedings and to ensure, to the greatest extent possible, that the interests of the Debtor’s former students and/or their families (collectively, the “Comp-Ed Claimants”) in and to the funds maintained in the Sovereign Bank account are protected. 

The Parents Committee has retained the law firm of  Klehr, Harrison, Harvey, Branzburg & Ellers, LLP (“Klehr Harrison”) as its counsel in the bankruptcy proceeding.  The attorney at Klehr Harrison having primary responsibility in the representation of the Parents Committee is Jeffrey Kurtzman, Esquire, whose biographical and contact information is available on the Klehr Harrison website.  

In addition, the Klehr Harrison website is a source for information, documents and pleadings relevant to Comp-Ed Claimants and their families.  Those persons may obtain copies of such documents which are available in PDF format on the website. 

On February 15, 2007, the Parents Committee filed a motion with the Bankruptcy Court seeking to impose a constructive trust on the entire amount of the funds on deposit at Sovereign Bank in order to make those funds available to Comp-Ed Claimants, net of certain administrative expenses.  Various parties in the bankruptcy case, including the Debtor, the official committee of unsecured creditors (the “Creditors’ Committee”), and the so-called “special committee” comprised of the Debtor’s former board of directors, filed pleadings in opposition to the constructive trust motion.  The PDE filed a response to the constructive trust motion in which it supported the Parents Committee’s position.  A hearing on the constructive trust motion was scheduled for April 13, 2007. 

On March 23, 2007, as a result of the consent of all principal parties in the Debtor’s bankruptcy case, a mediation was conducted by Judge Jean FitzSimon (who is not the bankruptcy judge presiding over the Einstein Chapter 11 case) in an effort to resolve the disputed issues arising from the constructive trust motion. 

While the mediation did not directly result in a resolution of those contested issues, on April 10, 2007, the Parents Committee, Einstein and the Creditors’ Committee entered into a settlement agreement to resolve the constructive trust motion.  A hearing to consider approval of the settlement motion was held on May 21, 2007.  On May 31, 2007, the Bankruptcy Court entered an order approving the settlement.  A copy of the memorandum opinion and order approving the settlement is available below.   

Copies of the settlement motion (which includes the full text of the settlement agreement) were served upon all compensatory education claimants at their last known address by regular mail. 

The settlement motion also includes a summary of the terms of the proposed settlement.  While compensatory education claimants are urged to review the settlement agreement in its entirety for a complete description of the settlement terms, the settlement is also summarized below as follows: 

A.        The funds on deposit in the Sovereign Bank account will be moved to a higher-yielding money market account or certificate of deposit in order to maximize the interest earned on those funds. 

B.         Of the total account balance existing on the effective date of a plan of reorganization (which has yet to be filed with or approved by the Bankruptcy Court), $500,000 will be allocated to Einstein for purposes other than the satisfaction of compensatory education claims.  The remaining balance (i.e. approximately $920,000 plus all interest accruing on the entire balance less certain expenses discussed below) will be allocated to the Parents Committee and held in trust for the benefit of the compensatory education claimants. 

C.        The Parents Committee will retain a consultant, in consultation with the Debtor and the Creditors’ Committee, to reconcile all remaining compensatory education claims.  The maximum fee payable to the consultant will be $30,000. 

D.        At the same time, the Debtor and the Creditors’ Committee have the right to retain their own consultant to review the compensatory education claim reconciliation process performed by the Parents Committee’s consultant. 

E.         Individual compensatory education claimants whose claims are greater than $4,000 shall have the option of accepting the sum of $4,000 in cash following the reconciliation of their claims by the Parents Committee consultant.  This option will operate to speed up the distribution to those claimants relative to the general distribution process described in the settlement agreement. 

F.         For those compensatory education claimants having claims greater than $10,000, either or both the Debtor or the Creditors’ Committee have the right to dispute the amount of those claims, in which case the Bankruptcy Court would resolve any dispute if it cannot otherwise be resolved by the two consultants. 

G.        The funds available for distribution to the holders of the compensatory education claims shall be used to satisfy the attorneys’ fees and costs of the Parents Committee’s lawyer.  Because those attorneys’ fees and costs have not yet been finalized and have not been approved by the Bankruptcy Court, it is impossible to state with certainty at this time how much money will be deducted from the funds available for distribution to compensatory education claimants for attorneys’ fees. 

H.        While the Parents Committee is hopeful that the funds available for distribution to the holders of compensatory education claims will be sufficient to pay those claims in full, there is presently no assurance that that will be the case, and it is possible that compensatory education claimants will only receive a percentage of the claim amount established by the Parents Committee’s consultant. 

I.          At the time that a compensatory education claimant receives his or her distribution, the claimant will be required to sign a release form.  However, the release form will not operate to release or discharge any claims which the claimant has, directly or indirectly, against the PDE. 

J.          In addition, each compensatory education claimant must sign a form which transfers his or her claims against the PDE, if any, to the Debtor and its bankruptcy estate. 

K.        If the Debtor or the Creditors’ Committee recovers any money against the  PDE on account of the assigned claims, compensatory education claimants could share in those recoveries in the event that they have not otherwise been paid in full from the funds which are administered by the Parents Committee consultant.  Therefore, under certain circumstances described in the settlement agreement, compensatory education claimants could receive additional money following the initial distribution on account of their compensatory education claims. 

L.         If the amount of funds available for distribution to compensatory education claims is greater than the total amount of those claims, the excess amount will be transferred to the Debtor for distribution as provided under its plan of reorganization. 

Copies of the settlement agreement and the settlement motion are available on the website. 

On August 1, 2007, the Debtor filed a Third Amended Joint Liquidating Plan (the “Plan”) and a Third Amended Disclosure Statement relating to the Plan.  Copies of both documents are available on the website.  The Parents Committee urges all Comp-Ed Claimants to return a ballot which reflects their acceptance of the Plan. 

A hearing to consider confirmation of the Plan is scheduled on October 5, 2007 at 10:00 a.m. in Philadelphia. 

The Parents Committee recognizes that it is of paramount importance to maintain in confidence the identities of the Comp-Ed Claimants and other information concerning them.   As a result, no information concerning the identity of Comp-Ed Claimants will be available on the website.  In addition, the Parents Committee has to date taken the position that no other party in the Debtor’s bankruptcy proceedings, including the Debtor, may make public or otherwise disclose information concerning the identity or condition of any Comp-Ed Claimant. 

While Klehr Harrison has been retained as counsel for the Parents Committee, it cannot provide legal advice to any individual Comp-Ed Claimant in connection with the Debtor’s bankruptcy proceeding or otherwise with respect to any rights or interests of an individual claimant.  To the extent that any Comp-Ed Claimant desires personal legal advice, the Parents Committee urges each such claimant to engage his or her own counsel for those purposes. 

The Parents Committee is committed to serving the needs and interests of each Comp-Ed Claimant as efficiently and aggressively as possible.  We look forward to providing responses to any questions or comments which you may have and invite you to contact us at any time.