HotChalk Responds to Concordia University Closure with $302m Lawsuit

Author

Phil Hill
April 20, 2020

On March 1 I wrote a post about the Concordia University of Portland’s unexpected closure notice and media descriptions of the role of Online Program Management (OPM) company HotChalk in this debacle. The article in question from OregonLive painted a picture of nearly-decade-long financial mismanagement of the university along with increasingly burdensome contract terms from HotChalk. I questioned in that post if we were getting the full story, arguing that it was not in HotChalk’s interest to refuse to help Concordia stay open and that the enrollment of Concordia had stabilized and was even rising over the past two years. This was not as simple as cratering enrollment leads to closure.

We need to admit that the information is too recent to support true conclusions at this point, and the enrollment data above show that there are nuances to be considered. However, it certainly appears that several factors came into play. Concordia University Portland has a history of poor financial management; The school relied on online education, using an OPM contract, as its cash cow; The OPM contract terms were onerous (20 years, escalating revenue share for vendor); and When the overall online enrollment environment changed, the house of cards started to fall despite successful efforts to stabilize enrollments.

This weekend came news that HotChalk is suing Concordia and its parent operation, the Lutheran Church Missouri Synod, for $302 million, claiming that the company was defrauded. More on that news after some unfinished business.

Missing Email Interview

After that March 1 post I sent requests for further information to both Concordia University and HotChalk. While Concordia did not respond to my requests, HotChalk did respond by email on March 11 – not ideal for an interview, but better than not responding. Unfortunately this little virus got in the way of PhilOnEdTech coverage, and I never got around to posting the email response. Mea culpa. Before describing the new lawsuit, it is worth sharing HotChalk’s unedited responses to my questions.

Can you confirm and/or clarify the escalating payments issue raised by OregonLive? Was the revenue share percentage increasing over time?

To set the foundation, the President of Concordia, in an interview with The Chronicle, was very clear that the closure was unrelated to its contract with HotChalk. Other articles discuss external factors that may have led to the closure, but those articles seem to be getting less attention and in the end, only Concordia can provide insight into the factors that contributed to Concordia’s final decision. HotChalk would never impose economic conditions so burdensome that it would risk the economic viability of a client university. Most of these arrangements are structured so that the service provider assumes nearly all of the risk in the early stages, by making significant multi-million-dollar investments in the program, losing money in the initial term, and seeking to ensure both parties are appropriately compensated over the full term of the contract.

The Oregonian article implied that HotChalk received a fixed payment even as enrollments went down. That is not the case. HotChalk’s contract with Concordia was structured as a revenue-sharing agreement consistent with Department of Education guidance. That means that if revenue decreased, both parties received less than anticipated and it was up to both parties to adjust accordingly.

Did enrollments for the Masters of Education continue to continue to stabilize / slight increase in the past year, or did enrollments start dropping again?

The nature of this question would be better answered by the University for exact figures as they retain control over who gets admitted, but according to our records, enrollment numbers increased for both 2018 and 2019 for the online programs.

Did HotChalk offer to alter the contract terms or make other financial arrangements to help Concordia University Portland avoid closure?

HotChalk consistently attempted to work with Concordia to try to help the students. We performed all of our obligations under the contract, even after Concordia stopped paying us in November 2019. As a general principle, HotChalk does not succeed unless our clients and students succeed, so we tried to be as supportive as possible, and we offered multiple times to discuss how we could help. Concordia made the decision to close without discussing our offers of help.

Any public statement on the outlook for HotChalk as a viable business given the loss of your largest customer?

HotChalk remains confident in the quality of our work, the students we support, and the value of our services.

This response seems to confirm my reading about enrollment stabilization. It also helps to answer the question of why HotChalk did not help Concordia – the school did not discuss any of the offers that were made, and it had missed several payments. What the response does not address is providing details on the contractual terms – in particular whether the revenue share percentage going to HotChalk was escalating each year.

As for the question of HotChalk’s outlook as a viable business, I think that part of the answer comes from the news of the lawsuit – half of the company has been laid off.

Back to the Lawsuit

It is worth noting that HotChalk is suing the Lutheran Synod not just for being a parent organization to a closing school. From the OregonLive article:

Concordia transferred several valuable assets to its parent organization just days before announcing it would close its doors after the spring semester, HotChalk claims.

HotChalk also claims that the intolerance of the Lutheran Church Missouri Synod prompted the shutdown and amounted to intentional interference in HotChalk’s contract with Concordia. “When Concordia failed to close the Gender and Sexuality Resource Center, the Synod and the Synod Fund forced Concordia to close by starving Concordia of operating funds as a consequence,” the lawsuit claims.

Furthermore, HotChalk claims that Concordia did not have to close.

But with estimated 2020 revenue of about $100 million HotChalk claims Concordia could have survived. It just needed to cut costs. In its lawsuit, HotChalk claims it pleaded with Concordia to cut its athletic program and other extra-curricular programs.

As for the details of the financial claims, the article describes a transfer of property to the Synod, giving the parent organization “right to take possession,” at the expense of existing creditors. Based on missing payments and HotChalk’s agreement to back off on collection efforts, they considered this a loan and therefore to have creditor status.

I am not a lawyer and do not claim to have an opinion on the merits of this case, but I do note that the lawsuit language aligns with HotChalk’s email response to my questions more than a month ago. I cannot provide additional explanations from Concordia as they have not responded. I suspect the legal case will take a long time to get resolved. I doubt that HotChalk is without any culpability in this sad case, but it is more clear now that there was more to the story than originally reported.

And next time I’ll try to keep up to date with blog post follow-ups.