[September 24, 2008]

Law school corporation filing for bankruptcy

(Paducah Sun, The (KY) Via Acquire Media NewsEdge) Sep. 24--The American Justice School of Law filed for bankruptcy Tuesday, listing debts of at least $5.2 million and assets of $1.6 million.

The AJSL is the corporation that founded the law school four years ago after receiving incentives from the Greater Paducah Economic Development Corp., which included 30 acres in the Paducah Information Age Park plus an option to buy the Resource Center for $1 million less than the appraised value of $3.25 million.

A new corporation -- the Barkley School of Law -- formed earlier this year to operate the school after a lawsuit against the original stockholders claiming mismanagement was settled. Most of Barkley's stockholders and investors are new.

Barkley School of Law -- which is not part of the bankruptcy petition filed in U.S. District Court -- is operating on a limited schedule this year with fewer than 20 part-time students. It plans to recruit a new class for the 2009-10 school year and resume full operation.

The bankruptcy, however, could affect the Barkley School of Law because its real estate is still owned by the AJSL and represents $1.4 million of its assets, according to court and real estate records. Also, AJSL owns the library holdings Barkley uses. Those holdings are listed as an asset valued at $111,000.

The real estate helped secure $1.1 million in bank loans and will be sold to satisfy those loans. However, the bankruptcy petition says the land's market value is substantially less than its $1.4 million assessed value.

Attorney Alan Stout, whose lawfirm filed the AJSL petition, said the bankruptcy will result in the corporation's complete liquidation. The lawsuit lists 67 creditors who are owed from $5 to more than $800,000. Stout said creditors whose debts are backed by collateral will be paid first, after the assets are sold.

Unsecured debts include $194,000 owed to the Kentucky Department of Revenue and $37,300 to the Internal Revenue Service for withholding taxes. It also owes the city of Paducah an unspecified amount in taxes.

The largest unsecured debt is $818,391 to LexisNexis, which provided the school and its students legal research.

As he prepared the bankruptcy petition, Stout said one unanswered question was the status of the incentive of land the Greater Paducah Economic Development Corp. gave to AJSL. The incentive was contingent on the school reaching enrollment goals during its first five years of operation. Those goals won't be met. GPEDC has the right to rescind the incentives and take back the land.

The option on the resource center has not been exercised. Barkley law school officials recently renovated the building and say they could exercise the option next month.

In the bankruptcy petition, Stout listed GPEDC as a American Justice School of Law creditor, but says the amount owed is undetermined.

Wayne Sterling, GPEDC president, would not comment on the status of the incentive. "We can't discuss it in the press," he said. "Things have to be worked out between the parties and it is up to the attorneys to work those out."

He would not say if GPEDC has considered declaring the incentive in default so it could reclaim the land.

Todd Farmer, one of the bankruptcy attorneys, said the trustee appointed to oversee the bankruptcy will decide the status of the real estate. He said if those who hold mortgages on the land agree, and if GPEDC doesn't foreclose, it could be sold to the Barkley School of Law.

Meanwhile, Stout said that since he prepared the petition, he has learned of additional unpaid bills that will increase the debt to a minimum of $6 million. He said anyone who has a debt with the school will have four months to file a claim in federal court.

Bill Bartleman can be contacted at 575-8651.

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