Highlands Community Charter and Technical Schools - Chapter 11 Case Summary

Business Description

Highlands Community Charter and Technical Schools ("HCCTS" or the "Debtor"), a California non-profit corporation and 501(c)(3) organization, operates two adult-serving charter schools in Sacramento County: Highlands Community Charter School ("HCCS") and California Innovative Career Academy ("CICA" and, together with HCCS, the "Schools"). HCCTS filed Chapter 11 on October 4, 2026 in the Eastern District of California.

The Schools serve approximately 2,000 students aged 22 and older, offering high school diploma programs, in-person English language instruction, and career and technology certification programs. As of the Petition Date, HCCS served 1,260 students through in-person instruction and CICA served 655 students through independent study coursework, across six campuses. HCCS operates at five of the campuses, one of which also houses home office staff, and CICA operates at four. HCCTS has 167 employees across both Schools and also maintains two administrative locations and one storage facility.

• Charter schools are tuition-free public schools established through a written charter, a contract between the school's founders and an authorizing entity setting out the educational program, governance structure, academic goals, financial plan, and accountability measures. They receive state and federal public funding primarily through the Local Control Funding Formula (the "LCFF") and must be free and open to students. They are generally exempt from many provisions of the Education Code, giving them flexibility in curriculum, staffing, scheduling, and school design, but remain subject to federal and state law on special education, civil rights, and health and safety, and to ongoing oversight by their authorizing entity.

• The Twin Rivers Unified School District ("Twin Rivers") is the authorizing entity and issued the current charters (the "Charters") for both HCCS and CICA.

The Debtor estimates gross annual revenue of approximately $24.6 million for fiscal year 2025-2026, including approximately $23.9 million earned by HCCS and $621,829 earned by CICA. Had CICA received its full funding for that year, it would have earned approximately $10.8 million, bringing total estimated gross revenue to approximately $34.7 million. Gross annual revenue was $152.7 million for fiscal year 2024-2025 and $165.0 million for fiscal year 2023-2024.

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Corporate History

Since opening in August 2014, HCCTS has served approximately 60,000 students. The Debtor previously operated at 50 locations; it now operates at six campuses.

Twin Rivers appointed a voting member to the Debtor's board of directors, who initially sat simultaneously on the Twin Rivers District Board of Trustees and the Debtor's board. According to the Debtor, the appointee's role included approving policies relating to attendance and all other aspects of school operations, supervising the staff who enforced attendance policies and were responsible for attendance claims, supervising the staff responsible for hiring appropriately credentialed employees, and approving all budgets. The Debtor also states that the Twin Rivers Board approved the use of adult education credentials in the charter it approved, following a review by its own legal counsel and staff, and that Twin Rivers staff provided guidance on the subject when consulted. Twin Rivers removed its representative from the Debtor's board only after the State Auditor's report criticizing its lack of oversight was released. The Debtor believes this active management has given rise to significant affirmative claims against Twin Rivers.

Jonathan Raymond became Executive Director on July 7, 2025, overseeing day-to-day operations and executing the vision of the board of directors. His prior roles include Superintendent of the Sacramento City Unified School District and of the City School District of New Rochelle, Executive Director of the Massachusetts COVID-19 Relief Fund, Chief Accountability Officer of Charlotte-Mecklenburg Schools, and President of the Stuart Foundation.

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Operations Overview

Funding Mechanics

The Debtor's primary source of funding is the California Department of Education (the "CDE"), which provides LCFF funding on terms the Declaration characterizes as mandatory rather than discretionary: under applicable law the state superintendent "shall calculate" each charter school's LCFF entitlement and "shall apportion funding . . . equal to the amount computed," and apportionment is not discretionary once average daily attendance ("ADA") is reported and certified. LCFF applies to school districts and charter schools on equivalent terms.

Funding is set annually on different metrics for each School. HCCS funding levels are calculated based on ADA rates. CICA, which operates as an independent study school, is funded through a funding determination by the California State Board of Education (the "State Board") based on student work product multiplied by the ADA rate. Because those rates and metrics fluctuate from year to year and enrollment fluctuates both within and between school years, reconciliations are regularly required, and the CDE may owe the Schools additional funding or the Schools may be obligated to return overpayments.

Authorizer Oversight Duties and Fees

When a California school district issues a charter, it takes on a broad, affirmative, and ongoing oversight obligation for the full term of the charter under the Education Code, extending beyond a gatekeeping role at the front end. A central component is fiscal oversight: the district must review the charter school's annual independent audit, ensure compliance with generally accepted accounting principles, identify any conditions of fiscal distress, and take corrective action where mismanagement is found. The district must also ensure the school meets all state and federal legal and regulatory requirements, and is required to issue notices to a charter school that is not in compliance with its charter or law or that is engaged in financial mismanagement. Twin Rivers collected a total of approximately $14 million to $17 million for its oversight of HCCS and CICA.

Student Population and the SETA Partnership

The Schools serve individuals who could not complete secondary education due to economic hardship, family obligations, or involvement with the criminal justice system, as well as immigrants and refugees resettled in California. Students come from dozens of countries, and the Debtor serves many students from the Afghan community in the Sacramento area, including refugees who received special permission from the United States government to relocate because their lives were determined to be at risk if they remained in Afghanistan. Many of those students are learning to read, write, and perform basic math for the first time alongside learning English. Many refugees and other students are required to be enrolled in an educational program as a condition of receiving public assistance for housing or other vital services.

Beyond instruction, the Schools provide access to a food pantry, clothing, counseling for students facing mental health or other crises, and assistance locating doctors, dentists, optometrists, and hair dressers who speak students' languages. Other providers of ESL services and adult education, including non-profit organizations, traditional school districts, and community colleges, have reduced or eliminated their programs due to ongoing budget reductions.

• The Schools have an exclusive partnership agreement with the Sacramento Employment and Training Agency ("SETA"), a joint powers agency of the City of Sacramento and County of Sacramento that administers federal Workforce Investment Opportunity Act funding in Sacramento County. All students enrolled at the Schools must also be enrolled in SETA's workforce development programs, and SETA provides additional services to them. SETA reports that 63% of students enrolled in its Workforce Investment Opportunity Act program were employed in the second quarter following exit from the program.

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Prepetition Obligations

The Debtor's only secured debt consists of three equipment leases with De Lage Landen Financial Services, Inc. and Canon Financial Services, Inc., with combined balances totaling approximately $31,265.

The Debtor's largest unsecured liability is a disputed claim of approximately $186.5 million arising from a negative audit finding by the State of California (the "Audit Liability"). Its other largest unsecured liabilities are approximately $796,893.90 of trade debt, amounts owing to vendors and service providers, and prepetition amounts owed under certain real property leases, and approximately $385,391 of litigation and workers' compensation claims.

CDE Overpayment Assertions and Withholding

• As of the Petition Date, the CDE has asserted that it is owed approximately $30.8 million from HCCS and $22.4 million from CICA. The Debtor believes that, following completion of the funding determination process for the 2025-26 and 2026-27 fiscal years, the amount actually owed on account of the CICA overpayment claim will be substantially reduced to approximately $13 million.

• The CDE has elected to withhold and recoup future funding disbursements against the amounts it asserts are owed. As of the Petition Date, the State had withheld approximately $1.8 million of 2026-27 funding disbursements owed to HCCS and approximately $1.7 million of 2026-27 funding disbursements owed to CICA, in each case accrued prior to the Petition Date.

• The Debtor's emergency cash use motion seeks authority to use cash in the ordinary course in accordance with an approved budget, authority for the State of California to recover prepetition overpayments from future apportionments, and a finding that holders of the equipment liens are adequately protected.

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Events Leading to Bankruptcy

The State Audit and the $186.5 Million Finding

In June 2025, notwithstanding previous clean audits from independent auditors on the State Controller's approved list of local education agency auditors, the California Office of the State Auditor issued Report 2024-106 (the "Audit Report"), finding that HCCTS received more than approximately $186,450,574 in funds for which it was not eligible, engaged in wasteful and unlawful spending, assigned teachers with inappropriate credentials, and operated with insufficient oversight from Twin Rivers and other supervising entities including the Sacramento County Office of Education and the CDE. The Audit Report does not allege fraud; it alleges unwise use of funds and various other compliance issues.

The central finding was that HCCS was ineligible for approximately $177 million in K-12 funding for years 2022-23 and 2023-24 because it failed to meet certain attendance requirements and lacked the required state funding determination for certain non-classroom-based funding. The Audit Report separately found that HCCTS received an estimated $5.5 million in overpayments due to certain noncompliance issues and unsupported documentation. Beyond funding eligibility, it identified wasteful spending and conflict-of-interest concerns involving the prior administration, as well as a failure to abide by HCCTS's internal policies; those conflict-of-interest concerns relate in part to a now-former Twin Rivers board member who was responsible, in that capacity, for providing oversight to HCCS and CICA.

The Debtor's Response and the Audit Appeal

By July 2025, HCCTS had overhauled its leadership team, replacing both management and its board of directors with an entirely new board (the "Board"). By October 2025, it had initiated an appeal of the Audit Report (the "Audit Appeal"), and in preparing that appeal says it discovered new evidence it believes was not reviewed by the State Auditor and that substantially undermines the State's case on the $186.5 million both legally and factually. The Schools also laid off more than 600 employees and replaced teachers with individuals holding the credentials the State Auditor considered more appropriate; because there were not enough single subject credentialed teachers in the marketplace to replace all of the adult education credentialed teachers, approximately 10,000 students were displaced from their educational program.

In the Audit Appeal, HCCTS argues that it substantially complied with applicable law in good faith; that any noncompliance was inadvertent; that it implemented all 18 of the State's recommendations and repaid a significant portion of funds, making further penalties unnecessary; that the State Audit is wrong as a matter of law about both the requirements for claiming attendance and the use of adult education credentials; and that other parties identified in the Audit Report are partially responsible and should share in the liability to the extent liability is still found. Subsequent to the Audit Report, the CDE sent a letter to each School claiming entitlement to repayment of the funds identified in the Audit Report, with a right of appeal to the Education Audit Appeals Panel; the Schools timely appealed, and the Audit Appeal is scheduled for hearing before that panel on October 19, 2026.

• The State Auditor has found that HCCTS, HCCS and CICA fully implemented all 18 of its recommendations, including those pertaining to credentialing and attendance accounting.

• The Western Association of Schools and Colleges determined to maintain the accreditation of HCCS following an extensive review of reform efforts led by the new Board and management, including the adoption of more than 100 new policies and procedures and the hiring of a senior management team.

• A new independent auditor hired by the Board from the State Controller's approved list has been reviewing the financials for the year following the State Audit period, and its draft report to HCCTS identifies no findings relating to attendance accounting or credentialing, the issues forming the basis of the State's claim. That period preceded the arrival of new management and the implementation of new attendance accounting and credentialing practices.

• A certified fraud examiner retained since Raymond's arrival found no evidence of attendance fraud during the school years at issue in the Audit Report and questioned the State Auditor's reporting methodology, indicating that in the examiner's view the Schools owed substantially less than the Audit Report's findings. The examiner's report assumes that funds are owed and does not account for the Debtor's legal arguments.

• HCCTS has retained Charter School Management Corporation and Charter Impact, LLC, two firms specializing in back office services for charter schools, which have conducted further reviews of the Schools' attendance accounting processes.

The Audit Report's Findings Against Twin Rivers

The Audit Report also found that Twin Rivers did not provide adequate oversight of the Schools. Among other findings, it concluded that Twin Rivers did not fully review key charter oversight items; that its annual oversight reviews for years 2020-21 through 2022-23 failed to cover key compliance areas; and that more comprehensive oversight would likely have surfaced issues such as questionable spending and improper attendance practices at an earlier stage. The Audit Report further found that Twin Rivers' heavy reliance on annual independent audits was problematic because those audits did not report all required compliance procedures and contained inaccurate statements.

On fees, the Audit Report found that Twin Rivers charged $12.9 million in oversight and facility fees from year 2019-20 through year 2023-24, calculated as a percentage of HCCTS's total statewide K-12 funding, while providing some facilities for a formula-based use fee. Because Twin Rivers did not track its actual staff time or overhead costs for oversight services, the Audit Report concluded that Twin Rivers could not justify the fees it charged. HCCTS states that the $12.9 million is not all it paid, as it also paid substantial fees in years before the audited period.

The Debtor believes Twin Rivers had a duty to provide oversight and neglected it, that adequate oversight could have prevented or reduced some of the damage identified in the Audit Report, and that this provides a basis for forfeiture of all or some of the $12.9 million in fees. On credentialing, the Debtor maintains that its use of adult education credentials complied with state law but contends that, should the court disagree, Twin Rivers bears responsibility for the noncompliance because it approved the use of adult education credentials in the charters, advised the Schools on compliance relating to their use, and is expressly charged as authorizer with oversight of teacher credential misassignments. The Debtor also invokes California Education Code § 47604, under which the general immunity of authorizing districts from the debts and obligations of a charter school, and from claims arising from the charter school's acts, errors, or omissions, applies only where "the chartering authority has complied with all oversight responsibilities required by law, including, but not limited to, those required by Section 47604.32 and subdivision (m) of Section 47605." The Debtor believes it holds significant affirmative claims against Twin Rivers for its lack of oversight and that the proceeds should be used to benefit creditors in the Chapter 11 Case.

The Revocation Dispute

In June 2025, at the same time the Audit Report was released, the Twin Rivers District Board (the "District Board") issued a Notice of Violation for both HCCS and CICA alleging various violations of their conditions, standards, and procedures under the Charters. HCCTS states that it refuted or cured all of the asserted violations with documentary evidence. The District Board members and staff initially set a remedy deadline of September 26, 2025, then extended it, and the Debtor states that it fully cured all alleged issues or violations before the extension date.

On January 27, 2026, the District Board met to consider a recommendation from Twin Rivers staff and counsel, who presented findings that the Schools had fully cured or refuted all issues in the Notice of Violation and that there was accordingly no basis to revoke the Charters. The District Board nonetheless voted to revoke the Charters of HCCS and CICA (the dispute created by this revocation, including the pending appeals, the "Revocation Dispute"). Two days later, the same Twin Rivers counsel who had said the issues were fully cured argued that the issues identified in the initial notice supported revocation.

HCCTS, on behalf of HCCS and CICA, appealed the revocation to the Sacramento County Board of Education on March 9, 2026, and on May 19, 2026, after a lengthy public hearing and a review of the administrative record, the county board voted to overturn the revocation. Twin Rivers appealed that decision to the State Board on June 18, 2026 (the "State Appeal"), and HCCTS filed an opposition. The CDE then released a state staff report recommending to the State Board and its Advisory Commission on Charter Schools (the "ACCS") that the revocations be upheld. A hearing before the ACCS was scheduled for October 6, 2026 (the "ACCS Hearing") to address whether to recommend that the State Board hear Twin Rivers' appeal and whether to recommend that the State Board find the revocation supported by substantial evidence. The State Board is scheduled to consider any ACCS recommendations at a meeting on November 12, 2026 (the "State Board Meeting") and to evaluate whether Twin Rivers had substantial evidence that HCCTS was not in compliance with the law or its Charters. Absent intervention by a court, if the ACCS Hearing and State Board Meeting go forward and the State Board agrees with a negative staff or ACCS recommendation, HCCTS would lose its funding immediately and the Schools would face closure on or shortly after November 12, 2026.

Twin Rivers retains the ability as issuing authority to seek revocation of the Charters on various grounds regardless of the outcome of the State Appeal. The Debtor's management team and Board have concluded that the working relationship with Twin Rivers is untenable and that advancing the Schools' mission through a new charter and new school is the most viable path forward.

Mounting Legal Costs

The Audit Report and the Revocation Dispute have each remained unresolved for well over a year, necessitating sustained legal engagement and generating substantial professional fees that continue to accumulate, which the Debtor has been forced to fund from available cash rather than directing those resources toward stabilizing and growing the Schools.

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Chapter 11 Filing

HCCTS retained Sheppard, Mullin, Richter & Hampton LLP as legal counsel and Arch + Beam Global, LLC as financial advisor to advise on a potential reorganization or sale process once it became clear that the Audit Appeal, the Revocation Dispute, and their potential outcomes could render the Schools unable to operate outside Chapter 11. After exploring strategic alternatives, including unsuccessful attempts to negotiate a settlement with the CDE, the Debtor filed with a dual-track approach: first, to reorganize in a manner that maintains the status quo of the Schools under the existing Twin Rivers charter long enough to transfer the schools and their students to a new school operated under a new charter with the Sutter County Office of Education, while addressing the liabilities associated with the audit findings; alternatively, to operate the Schools long enough to sell them as a going concern in a value-maximizing manner that is least disruptive to students.

The Chapter 11 Case is intended to supply the breathing spell the Debtor needs to reach a decision by a replacement authorizing entity, with which discussions have been underway for months and whose decision is expected no later than December 2026. The Debtor has applied for a new charter with the Yuba City Unified School District, combined with an appeal to the Sutter County Board of Education ("Sutter County"), to continue the Schools' mission through one integrated independent study charter school offering several in-person courses, including English, combined with remote education. If approved, all academic programs, employees and students would transfer to that new school.

To hold the revocation proceedings in abeyance, the Debtor will file an adversary proceeding seeking declaratory relief regarding the applicability of the automatic stay to the pending charter revocation proceedings or, in the alternative, the issuance of an affirmative stay in the form of an injunction under section 105. The Debtor anticipates consenting to the termination of its current charter with Twin Rivers concurrent with its emergence from the Chapter 11 Case.

The Debtor states that its Chapter 11 plan would provide treatment of the disputed Audit Liability that is materially better than the treatment the claim would receive if the case were converted to Chapter 7.

Anticipated Timeline

• October 4, 2026 – Petition Date.

• October 6, 2026 – ACCS Hearing scheduled on Twin Rivers' State Appeal.

• October 19, 2026 – Audit Appeal hearing before the Education Audit Appeals Panel.

• November 12, 2026 – State Board Meeting to consider any ACCS recommendations; absent court intervention, a negative outcome would cut off funding immediately.

• December 5, 2026 – Sutter County meeting to decide whether to issue HCCTS a new charter.

• Within 30 days of the Sutter County decision – anticipated filing of the Chapter 11 plan, with confirmation anticipated within 90 days of filing.

• July 1, 2027 – start of the 2027-2028 academic year, when the transfer of schools and students under a new charter would take effect.

First-Day Relief

The Debtor's first-day motions (the "First Day Motions") seek authority to, among other things, maintain the Debtor's existing bank accounts and business operations; pay employees; pay the Debtor's taxes; operate school programs; reject burdensome leases; and access the funds necessary for operations. The package also includes motions on cash management and a limited waiver of section 345(b) deposit requirements, adequate assurance for utility providers, maintenance and renewal of insurance policies, rejection of certain unexpired leases, an extension of time to file schedules and statements of financial affairs, a limit on the scope of notice, and the appointment of Kurtzman Carson Consultants, LLC dba Verita Global as notice, claims, and solicitation agent.

Community and Constituent Support

At public hearings held by Twin Rivers and the Sacramento County Board of Education, as well as at Board meetings, students, employees, other agencies, and public officials expressed the belief that the Debtor's programs are vital to the community and worth saving under the stewardship of the new Board and administrative team. Letters of support come from organizations ranging from religious organizations representing multiple faiths to chambers of commerce, organizations focused on anti-recidivism, and organizations serving immigrants and refugees.