Rochester charter schools serving Somali children file for bankruptcy, leaving future in doubt

A Rochester charter school organization filed for bankruptcy earlier this month after years of litigation over its debt, raising concerns about its future.

Rochester STEM Academy and Rochester Math and Science Academy, which serve kindergarten through 12th grade in one building, filed for Chapter 11 reorganization on Dec. 6. The move was in response to pressure from Kansas City-based UMB Bank, which holds more than $15 million in debt the school took on in 2018.

Rochester Southwest Schools, started in 2005, serves about 560 students, all of whom are Somali.

UMB Bank’s legal team argued in court documents that the schools’ financial loss operations put it at risk of closing. Lawyers say that in the absence of an agreement with the bank, the organization “will soon fall into administrative bankruptcy and will have to be liquidated”.

School officials did not respond to multiple requests for comment. The school’s attorney, Paul Ratel, said Rochester STEM Academy and Rochester Math and Science Academy were not in danger of closing, but were forced to file for bankruptcy after UMB Bank took more than $5 million from the schools’ bank accounts.

“From my perspective, this is a dispute that involves an unreasonable creditor, to put it mildly,” Ratel said.

Both sides will begin mediation starting next week.

In 2018, the city of Rochester issued revenue bonds to finance the school’s renovation of an existing property — and to build an additional 25,000 square feet. UMB Bank is the current trustee representing the interests of the bondholders, taking over from US Bank several years ago.

A unit of Paris-based Amundi, one of the world’s biggest asset managers, owns most of the bonds. Court records show Amundi’s concerns are driving the bond trustee’s actions.

School bonds had several financial conditions that are common with commercial loans. The schools defaulted on two contracts that included certain money and income metrics. So the custodian — US Bank at the time — defaulted on the loans in 2020.

The schools continued to make the required bond payments, so this is known as a technical default.

In June 2021, UMB — which took over as trustee — called the bonds, demanding repayment. UMB claims the schools failed to file required financial reports and failed to fully implement the recommendations of a consultant it appointed.

Two months later, the schools, UMB and Amundi signed a “forbearance agreement”. It essentially stayed default proceedings if the schools agreed to certain financial requirements and paid the bond trustee for its costs.

The schools paid $290,266 to US Bank, the former trustee. UMB then sent the schools a bill for $329,516 for its own expenses. This led the schools to sue UMB in November 2021 for breach of contract. UMB countersued, alleging the schools breached the forbearance agreement.

U.S. District Court Judge Eric Tostrud, who is based in St. Paul, ruled in April that the schools had indeed violated the forbearance agreement. But he did not rule on the reasonableness of UMB’s fees and denied the bank’s request to foreclose on the school.

After Tostrud’s decision, the schools and UMB began working on an agreement. They were close to an agreement earlier this month, bankruptcy court filings show. But negotiations appear to have broken down after UMB transferred $5 million from the schools’ accounts — all they had, according to Ratelle.

Ratelle said state and federal payments over the next two months will provide the school with enough funds to operate — though without more payments to UMB because of the dispute over its money.

Charter school experts said it’s rare for schools to file for bankruptcy while still operating — most charters close first. These schools have faced the same kind of economic hardship as public schools during the pandemic, and charters rely on fewer revenue streams because they don’t have access to fee-based funding like public schools.

Officials with the Minnesota Association of Charter Schools said the Rochester STEM Academy/Math and Science Academy organization is currently the only charter school operator to file for bankruptcy in the state.

Rochester officials said the school’s bankruptcy proceedings will not affect the city’s finances — the bonds are structured so the city is not required to repay them.

“There are no implications for the city,” said Gene McGann, the city’s interim finance director.

Rochester Public Schools officials say they are monitoring bankruptcy filings in case the district needs to enroll some of its charter school students. The district recently announced a plan to streamline its operations and reduce its budget, but backed away from most of those changes after a $10 million donation from the Mayo Clinic.

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