By Peg Brickley

A bankruptcy judge on Wednesday temporarily barred regulators from continuing litigation against ITT Educational Services Inc., questioning whether there is any point in calling the defunct school operator to account for alleged fraud.

"If you want to punish and deter ITT, you ought to be bringing criminal actions," Judge James Carr said during a hearing in U.S. Bankruptcy Court in Indianapolis.

The operator of the ITT Technical Institute chain of schools closed in September after federal authorities yanked its authority to run on taxpayer-backed student loans.

At the time, the Securities and Exchange Commission, the Consumer Financial Protection Bureau and the state ofNew Mexico accused ITT Tech of defrauding students and investors in connection with its private-loan programs. Massachusetts also sued, accusing ITT Tech of misleading students with false graduation and job-placement statistics.

The bankruptcy filing that followed started a process in which a judge must balance competing demands to a finite pool of cash and manpower. On Wednesday, the judge said the regulatory crackdown has to take a back seat to other bankruptcy business, at least until Dec. 21, when he will take up the question again.

The SEC and CFPB wanted to steam ahead with the litigation as a demonstration to others in the for-profit education industry that bankruptcy won't immunize companies involved in the alleged mistreatment of investors and consumers.

"The liquidation of your claim is one of the least important things we can do," Judge Carr told a lawyer for the CFPB, which sued ITT Tech more than two years ago, accusing it of bilking students into loans.

Cash damages and fines from ITT Tech are out of the question for regulators, the judge said. However, he said he may be inclined to allow the SEC and CFPB to move ahead for nonmonetary sanctions against the failed company.

Judge Carr refused to shield ITT Tech's former leaders from continued lawsuits. Kevin Modany, who was chief executive, and Daniel Fitzpatrick, who was chief financial officer, have been sued in the SEC matter and deny wrongdoing. Their lawyers didn't respond to a request for comment Wednesday on whether they could claim shelter under ITT Tech's bankruptcy.

Bankruptcy trustee Deborah Caruso, who is running the company's liquidation, had pleaded for a reprieve from the onslaught of regulatory action as she begins the difficult task of sorting out the company's demise.

ITT Tech was operating out of some 130 locations and had a payroll of 8,000 people and an enrollment of nearly 40,000 when it shut its doors with little notice. Ms. Caruso has started selling real estate and on Wednesday won preliminary approval on financing of an orderly disposition of ITT Tech's affairs.

What happens to the regulatory cases could directly affect a central issue in the bankruptcy: whether the failed company can press students for payments on their loans.

While the CFPB's lawsuit and others call into question the validity of some student loans, allowing the regulators to walk over the dead company to a default judgment might complicate the issue, said Jeff Marwil and Timothy Karcher, lawyers for Ms. Caruso.

Department of Education regulations on the borrower defense against payment are complex, Mr. Marwil said. A default judgment might not be enough to allow students to get out from under the loans, and it could boomerang on ITT Tech if the company decides to pursue actions against its former leaders, the lawyers warned.

Ms. Caruso might not want to defend ITT Tech's past behavior in court, but she may have to in order to figure out whether the company can collect from students on certain loans, which would benefit other creditors, the trustee's lawyers said.

"We need to slow this down a bit," Judge Carr said.

Write to Peg Brickley at peg.brickley@wsj.com

(END) Dow Jones Newswires

November 02, 2016 18:25 ET (22:25 GMT)

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