A number of recent federal district court decisions have both clarified and confused the analysis regarding the obligations of independent schools to comply with Title IX. The cases at issue concern what type of benefits available to independent schools qualify as federal financial assistance for the purposes of Title IX.
This article addresses the two types of benefits that have been litigated recently: the acceptance of Paycheck Protection Program (PPP) loans by independent schools during the COVID-19 pandemic, and the tax-exempt status that is claimed by many non-profit, independent schools.
Last month, in Karanik v. Cape Fear Academy, Inc., a federal district court judge in North Carolina concluded that an independent school’s acceptance of PPP loan issued by the Small Business Administration (SBA) during the COVID-19 pandemic, under the federal CARES Act, qualified as “federal financial assistance” under the federal statute known as Title IX. Therefore, the court held, the school was subject to Title IX during the life of the PPP loan.
Two other recent cases in federal district court, one in Maryland, the other in California, also involved the issue of Title IX compliance for independent schools. Those cases addressed whether a school’s tax-exempt status alone qualifies as federal financial assistance under Title IX.
The first, from the federal district court in Maryland, Buettner-Hartsoe v. Balt. Lutheran High Sch. Ass'n, not only reaffirmed the Karanik decision regarding PPP loans, but also took it a step further and found that the tax-exempt status of the school, Concordia Preparatory School, qualified as federal financial assistance and, therefore, the school had a duty to comply with Title IX regardless of the status of the PPP loans. The other decision, E.H. v. Valley Christian Acad., from a federal district court in California, also found that tax-exempt status qualified as federal financial assistance under Title IX. Although both cases could have a significant impact on independent schools, it is unclear if other courts will arrive at the same conclusion or if these decisions will even survive on appeal.
These three decisions carry important implications for nonprofit independent schools, many of which accepted PPP loans during the COVID-19 pandemic. These decisions suggest that courts will most likely find that schools that did accept PPP loans had an obligation to comply with Title IX during the life of the loan, even if the loan has since been forgiven or repaid. However, it is much less clear if other courts will follow the lead of the Buettner-Hartsoe and Valley Christian decisions and also conclude that an independent school’s tax-exempt status alone obligates the school to comply with Title IX.
PPP Loans: Karanik v. Cape Fear Academy, Inc.
In Karanik, the plaintiffs were three female students at an independent high school in North Carolina, Cape Fear Academy (CFA). The plaintiffs claimed that during the 2020-2021 school year, they were subjected to sustained sexual harassment by a number of male classmates and that despite repeatedly informing CFA of the harassment, the school refused to take action against the offending students, and instead retaliated against some of the plaintiffs. The plaintiffs eventually filed suit against the school for sex discrimination and retaliation under Title IX, among other claims. CFA moved to dismiss the complaint, arguing, in part, that the school does not accept federal financial assistance and, accordingly, is not subject to Title IX.
The court found that “[a] PPP loan is ‘federal financial assistance’ subject to Title IX because it is ‘[a] grant or loan of Federal financial assistance.’” Although a private lender dispersed the PPP loan, the SBA, acting under the authority of the CARES Act, authorized and guaranteed the funds, thereby making them a “loan of Federal financial assistance.” The fact that CFA received the funds through an intermediary (a bank) did not change the analysis, because, according to the court, PPP borrowers like CFA “are Congress’s intended recipients… not merely economic beneficiaries of someone else’s receipt of federal financial assistance.”
The court rejected CFA’s argument that the PPP loan fell under an exclusion in the definition of “federal financial assistance” for contracts of guaranty. The court stated that “[t]he contract of guaranty under Congress’s arrangement in the PPP is the SBA’s promise to the lender to repay if the borrower defaults or the SBA forgives the loan… the loan itself was not the guaranty.” Thus, the PPP loan was not a guaranty, but rather “the instrument that creates the debt to be guaranteed.”
Accordingly, the court found that CFA was subject to Title IX from May 4, 2020, when CFA first received PPP loan proceeds, until June 15, 2021, when the SBA forgave the entire PPP loan and repaid the lender in full. Therefore, the plaintiffs’ Title IX claims for violations that allegedly occurred during the 2020-2021 school year could go forward.
Tax-Exempt Status: Buettner-Hartsoe and Valley Christian
Although both Buettner-Hartsoe and Valley Christian involved suits by female students against defendant private schools for sex discrimination in violation of Title IX, the fact patterns were quite different.
Much like in Karanick, the plaintiffs in Buettner-Hartsoe were female students who claimed that they were subjected to sexual assault and verbal sexual harassment by a number of male students. The Buettner-Hartsoe plaintiffs alleged that despite their making numerous complaints to their school, the administration refused to take any meaningful action to remedy the situation.
By contrast, the plaintiff in Valley Christian was a female athlete and football player from a different school who claimed that the defendant, Valley Christian Academy, discriminated against her when Valley Christian refused to allow her to participate in football games her school played against the Valley Christian team.
Both the Buettner-Hartsoe and Valley Christian decisions focused on the issue of whether the respective defendant schools’ tax-exempt status, in and of itself, qualified as federal financial assistance under Title IX. Although the question of what qualifies as federal financial assistance under Title IX in the independent school context has been heavily litigated, including in the Supreme Court, the specific issue of whether tax-exempt status itself is federal financial assistance has rarely been raised.
In both cases, the court found that the only case directly on point was Johnny’s Icehouse, Inc. v. Amateur Hockey Ass’n, a federal district court case from 2001. There, the court found that the defendant, Amateur Hockey Association, was not subject to suit under Title IX, despite the defendant’s 501(c)(3) status. In reaching this conclusion, the court in Johnny’s Icehouse noted that the Title IX regulations that define federal financial assistance noticeably do not include income tax exemptions.
However, both the Buettner-Hartsoe and the Valley Christian court rejected the decision in Johnny’s Icehouse, instead concluding the opposite: that tax-exempt status did qualify as federal financial assistance under Title IX. In doing so, each court leaned heavily on cases where courts found that tax benefits qualified as federal financial assistance under Title VI. Since Title IX was explicitly modeled on Title VI, both courts found that tax benefits should qualify as federal financial assistance under Title IX as well as Title VI. Further, the Buettner-Hartsoe court also noted that the Supreme Court has previously “recognized 501(c)(3) status as a form of Congressional subsidy and the equivalent of a cash grant.”
Takeaways for Independent Schools
The Karanik decision — that the acceptance of PPP loans constituted federal financial assistance for purposes of Title IX compliance — was perhaps anticipated but no doubt has significant implications for independent schools. The decision, while not formally binding on other federal courts, is well-reasoned, and it seems likely that other courts will reach the same conclusion in similar cases. If so, independent schools that usually do not receive federal funds but did accept PPP loans could face claims under Title IX stemming from the time period during which the loans were outstanding. Further, an independent school that has not yet repaid its PPP loan or had the loan forgiven may be subject to ongoing Title IX compliance requirements.
The holdings in Buettner-Hartsoe and Valley Christian could also have significant consequences for independent schools; however, it is important to keep the decisions in perspective. It is less clear if those courts’ conclusion that tax-exempt status alone creates Title IX obligations for independent schools will be upheld on appeal, or if other courts will follow suit.
Many anticipate that the Buettner-Hartsoe and Valley-Christian decisions will be appealed immediately, and there is a lack of direct precedent aside from the Johnny’s Icehouse decision, which notably came to the opposite conclusion as the courts in Buettner-Hartsoe and Valley Christian. An appeals court could find that Congress did not specify that tax-exempt status qualifies as federal financial assistance under Title IX because Congress’s intention was that tax benefits not be considered as such.
It is also important to remember that none of these three federal district court decisions are binding on other courts. Further, although Title IX does prescribe a number of specific requirements regarding the investigation and resolution of sexual harassment and discrimination complaints, it is important to keep in mind that these types of lawsuits usually are brought because a school has not adequately followed its own procedures in resolving those types of complaints.