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Students at the American Justice School of Law filed the lawsuit Nov. 17 in U.S. District Court.
The suit claims the school's top two administrators have engaged in criminal activity that includes racketeering, conspiracy and abuse of their offices "to enrich themselves at the expense of the students."
In addition to the $120 million in damages, the suit seeks a restraining order to prevent the school from filing for bankruptcy, a full accounting of financial records and other action to protect students.
Tom Osborne, a Paducah lawyer who resigned as chairman of the school's board this month, filed the suit on behalf of himself and the students.
Paul Hendrick, the school's founder, dean, president and majority stockholder, is listed among the defendants.
Also listed are Wayne Shelton, stockholder and chairman of the board of directors, and Jarrod Turner, assistant dean and minority stockholder.
The school, which opened in 2005, has about 200 students.
The suit claims Hendrick and Turner worked together to delay distribution of student loans for living expenses so they could invest the money and earn interest. It also claims they applied for student loans up to $20,000 without students' knowledge.
The suit says the students are being harmed because they've taken out large loans to cover the cost of the school, but that receiving a law degree from the school is remote because it has not been accredited by the American Bar Association.
The school applied for accreditation over the summer but was denied.
Joseph Ardery, an attorney for the school, said the school "will reply appropriately" to all allegations.
Hendrick declined comment on the lawsuit, but said he is confident the school will receive provisional accreditation next year and full accreditation no more than three years later.