Tuesday, February 14, 2012

Some law schools may face credit problems

From Thomson Reuters.

Fraud suits against law schools 'credit negative': Moody's

Class-action lawsuits recently filed against fifteen law schools for fraud are "credit negative" because they could cause reputational damage and a decline in tuition revenue, according to a report released this week by the ratings agency Moody's Investors Service.

The analysis of credit ratings for law-school bonds was released on Monday as part of the agency's weekly credit outlook.

Law-school graduates sued three schools in 2011, and twelve more on Feb. 1, alleging they committed fraud by publishing misleading job-placement statistics. The wave of litigation comes at a bad time for law schools -- especially those that are lower ranked, the report said.

"The outlook in general is that law schools are looking at fewer applications," said Emily Schwarz, who authored the report. "Students are starting to question the value of the degree because of high tuition rates and more limited job prospects. They're concerned they won't get their money's worth."

Moody's maintains credit ratings for eight of the fifteen schools sued, including: Southwestern Law School; California Western School of Law; Brooklyn Law School; New York Law School; Golden Gate University; DePaul University; Hofstra University; and the University of San Francisco.

None of the fifteen law schools facing lawsuits are among the top 50 in the latest US News & World Report rankings, and six are not ranked by the magazine at all.

Experts in legal education said they agreed with Moody's findings.

"In general, my sense is that credit agencies are not reliable, as their track record prior to the Great Recession amply confirms," Brian Leiter, a professor at the University of Chicago Law School who runs a popular blog on legal education, said in an email. "But in this case, the diagnosis seems to me exactly right."

STANDALONE SCHOOLS AT RISK

The report noted that standalone law schools -- including New York Law School and Southwestern Law School in Los Angeles -- are more likely to suffer the negative effects of the lawsuits than those that are part of a larger university. Standalone schools have less operating revenue and smaller balance sheets than those attached to universities, the report said.

Brian Tamanaha, a professor at Washington University School of Law in St. Louis, agreed on this point.

"Standalone law schools are especially vulnerable because there is no institutional support behind them to help out in difficult financial times," said Tamanaha. "At lower-ranked law schools ... the situation can quickly deteriorate if they experience year-after-year double digit declines in the numbers of applicants."

There are already troubling signs for some standalone law schools.

In January, Moody's revised its outlook on New York Law School from "stable" to "negative," reflecting "recent enrollment volatility" -- a 25-percent decrease in the size of the 2011 entering class -- and uncertainty about the outcome of the pending lawsuit. (The agency affirmed an underlying "A3" rating on New York Law School's bonds, the lowest grade of "A" bonds with above-average creditworthiness.)

Carol A. Buckler, interim dean of New York Law School, did not respond specifically to the Moody's reports, but said the lawsuit filed against the law school last year is without merit. "We are vigorously pursuing it in court and believe that we will prevail ," she wrote in an email.

Leslie Steinberg, associate dean for public affairs at Southwestern Law School, said that the lawsuit against the school is also without merit.

"Southwestern carries insurance to protect against financial instability and to preserve institutional resources," Steinberg said.

Hat tip Brian Leiter's Law School Reports.

(jbl).

http://lawprofessors.typepad.com/legal_skills/2012/02/some-law-schools-may-face-credit-problems.html

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