BURLINGTON, Vt. -- A proposed plea agreement in a $4.3 million fraud case involving a private school in Bennington, Vt., fell through Thursday afternoon when a federal judge ordered a psychiatric evaluation for one of the four defendants -- three of whom live in Berkshire County.

Matthew Merritt Jr., 81, of West Stockbridge, the former president and trustee of the Bennington School, was scheduled to plead guilty to a single count of health care fraud and one count of filing a false tax return.

But defense lawyer David V. Kirby started the U.S. District Court hearing in Burlington by explaining he had serious concerns for his client's mental health. Kirby said he was not prepared to go forward based on his interplay with Merritt on Thursday afternoon before the hearing.

"I'm concerned about his competency," said Kirby, a former U.S. Attorney for Vermont. "I'm not sure we could validly enter a plea today."

Kirby asked for a continuance of 45 to 60 days for an evaluation.

U.S. District Court Judge William K. Sessions III agreed to permit 30 days for the evaluation. He said he would not send Merritt to Devens, Mass., a federal mental institution, for the test. Instead it will be done as an outpatient.

Merritt operated the Ben nington School, a private institution for troubled boys and girls, and the former Valley head School, a similar facility for troubled young women in Lenox.

The four men are accused of an "egregious" case of tax and health care fraud through which they fraudulently overcharged Vermont and the federal government for compensation to the Bennington School -- none of which was reported on their individual tax returns.

The delay also caused the postponement in the subsequent scheduled arraignment of Raymond Crowley, 58, of Great Barrington, the former chief financial officer at the school.

Crowley, who is Merritt's son-in-law, was scheduled to plead guilty to a single count of subscribing to a false tax return, court records show.

Also linked to the case are Matthew Merritt III, 54, of Lenox, who planned to plead guilty also to tax fraud. He is expected to pay $120,000 to the federal government and $80,000 to the state of Vermont. He served as a plant manager for the school and worked for his father.

The fourth defendant, Jeffrey LaBonte, 59, also has agreed to plead to a single tax fraud case and will pay $1.3 million restitution as part of his plea deal.

Out of the $4.3 million restitution, the state of Vermont will receive $2,113,708 and the United States will receive $2,186,292, officials said.

The plea agreement is designed to settle both criminal and civil cases involving the four men.

Sessions, after learning that Merritt has paid the government about $2.6 million about two weeks ago, questioned whether that payment might be questioned during the competency issue.

Assistant U.S. Attorney Carol L. Shea, chief of the civil division, said the agreement was reached last fall. She said it was paid only recently because there was some tweaking of the plea agreement.

She said there was never an issue about his competency last fall.

Under the settlement, Mat thew Merritt Jr., had to pay $1,433,708 to the state of Vermont and $1,166,292 to the United States.

She said the money had been received by federal officials and the share for the state of Vermont had been wired in the last 24 to 48 hours.

Kirby noted that in all his months dealing with Merritt, there was never a question about his competency until about 15 minutes before Thursday's court hearing.

Sessions said he did not want to proceed because there was a "global" plea agreement with four defendants.

Assistant U.S. Attorney Tim Doherty agreed that he was not prepared to go forward after the delay in the first case.

During Merritt's hearing, Sessions questioned whether he was even able to order the evaluation because there was not an arraignment. Kirby said he was planning to seek one, even if the court didn't.

Doherty told the court that he was not making any representations of how prosecutors would proceed.

That was echoed by his boss, U.S. Attorney Tristram Coffin, as the office prepared to close for the day.

The defendants each had agreed to a plea agreement that did not require prosecutors to seek an indictment from a federal grand jury. It was unclear if prosecutors might seek an indictment to best protect the record.

Coffin's office outlined the history of the case in the following way:

Until 2013, BSI, a for-profit, closely-held corporation, operated a residential program in Bennington, Vermont that offered therapeutic and educational services for socially and emotionally challenged boys and girls, the U.S. Attorney office said.

It said over the course of the last two decades, the State of Vermont placed many students at BSI, and was responsible for their tuition and other expenses. The funding for these placements came from the Vermont Medicaid program (approximately 60 percent federal funding and 40 percent state funding) and from several Vermont state agencies, including the Agency of Education, the Department of Mental Health, and the Department for Children and Families.

The funding was based on a per diem rate for each student, determined on an annual basis by the Division of Rate Setting (DRS), within the Vermont Agency of Human Services. The annual rate set by DRS was determined upon a review of BSI's application materials, including various accounting reports and budgets. In particular, the formula for the rate calculated by DRS for Medicaid and Education payments to BSI was based upon the school's reported allowable expenses. The higher the allowed expenses, the higher the per diem rate for each student. However, not all of BSI's claimed allowable expenses were in fact allowable for the rate calculation.

Prosecutors noted that Matthew Merritt Jr. as president and LaBonte as executive director, with the assistance of Crowley, as CFO and Merritt III, as plant manager, implemented a system of compensating certain employees of BSI, in addition to their salary amounts, by providing personal benefits, such as cars, gasoline, oil for personal residences, payments of personal expenses on credit card accounts, salaries for family members who did not work at BSI, and reimbursements for various personal expenses.

Those compensations were never reported on the individuals' tax returns.

The investigation began in 2011 after a request by BSI for a rate change due to reduced enrollment.

A different company is now operating the Bennington School.