Why I Just Bet a Professor Money That at Least One Law School Will Close

Thomas Jefferson School of Law in San Diego survived a brush with death, but that doesn’t mean others will.

Wikimedia Commons/Visitor7

In a more fair universe, the Thomas Jefferson School of Law in San Diego would be dead and buried by now. The small, private institution is one of legal academia’s more wretched citizens, known for its miserable employment results and embarrassing bar-passage rates, as well as for having the most highly indebted students of any law school in the country (the average graduate with debt finishes $180,665 in the hole, according to U.S. News & World Report). When the job market for young lawyers collapsed during the recession, it was the first law school to face a class action suit claiming it had used misleading job stats to trick students into attending.

This year, it briefly looked as if Thomas Jefferson might get its just deserts. Enrollment had tumbled, as law school applications evaporated in general. Meanwhile, the school was heavily in debt, due to the $127 million it borrowed to construct a nice new building, and interest payments were devouring its falling revenue. In June, it defaulted on its bonds. The end appeared nigh.

And yet, it wasn’t. As Steven Davidoff Solomon, a University of California–Berkeley law professor, wrote in the New York Times last month, Thomas Jefferson worked out a “sweetheart deal” with its creditors, which cut the school’s debt, took its building, and leased it back to the institution for a reasonable price so it could stay in operation. Why would they do such a thing? They “had no choice,” Solomon writes. Picking Thomas Jefferson apart in bankruptcy court would have been useless, because it only had one significant asset: That building, which creditors would have had to either convert into offices with an expensive renovation or lease to another law school (which, of course, would be hard to do). Better to simply keep Thomas Jefferson as a tenant.

Solomon’s lesson from this? “A troubled law school is like Dracula: hard to kill. Creditors will not do so because even keeping a struggling school alive means there is some possibility of repayment.”

This is why Solomon says I’m wrong that a few law schools are bound to close due to the enormous enrollment drops of the past few years. Other than their real estate, stand-alone law schools like Thomas Jefferson (which aren’t affiliated with any larger university) are worthless to creditors, so they won’t force them through bankruptcy. Bigger universities have no incentive to close their law schools, even if they’re losing a bit of money, because that would just leave empty facilities sitting around gathering dust on campus.

So he and I now have a $2 wager. Solomon says no ABA-accredited law schools will close or merge by the end of 2018. I say at least one will.* I know, high stakes. But at least we’re both on record.

Anyway, here’s why I don’t think Thomas Jefferson’s lessons are generalizable. First, we don’t really know what the lessons are. Yes, it’s possible the school will come back as Dracula, a vigorous undead monster. It’s cut back its expenses and its enrollment has already recovered a bit. But the school could also turn out to be more like zombie Khal Drogo, brought back from the edge of death through black magic as a catatonic shell of its former self. The stigma of the past few years could drive away future students. Given that schools are now handing out tuition discounts left and right to attract competent students, it’s not clear the school will be in a financial place to compete. (Law schools need to maintain a minimum bar passage rate to stay accredited, though I’ve been told by the ABA that no institution has yet lost accreditation over that issue.) So Thomas Jefferson has survived a brush with mortality. It may survive long term. It may not.

Even if Thomas Jefferson does hold on, its ordeal may be an exception rather than a rule. By Solomon’s logic, you would think that colleges almost never close. After all, a small bible or liberal arts college doesn’t have many valuable assets other than real estate, either. But in fact, at least a few institutions of higher ed go bust every year. Colleges don’t always get saved by creditors via lease-back agreements, and I wouldn’t expect every stand-alone law school to either.

What about law schools that are nestled in larger universities? Solomon writes: “If a closed law school is worth nothing and a nice big building without students is useless, then keeping it open remains the only option.” The odd assumption here is that a college can’t find a new use for a “nice big building” if it’s currently housing a legal program that’s hemorrhaging money and attracting lower caliber students than in the past. It’s not as if law schools have some special architectural quirks that would prevent an administration from inserting, say, an expanded business school into its old digs. I’m sure most administrations will do everything in their power to cut costs first by laying off professors and staff, but at some point, if the books won’t balance, or the quality of the program declines, killing it might well seem like a rational choice.

In any event, the bet’s on. Side wagers are welcome.

*Update, Dec. 3, 2014: This paragraph has been revised to clarify that the bet was over ABA-accredited law schools, as opposed to unaccredited schools.