Rochester MSA Building Company v. UMB Bank, N.A., Trustee

Background

Rochester Math & Science Academy and Rochester Stem Academy Inc. are Minnesota nonprofit corporations operating public charter schools. Rochester MSA Building Company owns the facilities where the schools operate. The plaintiffs received more than $15 million in bond proceeds loaned by the City of Rochester, Minnesota, to finance facility improvements and expansion. UMB Bank, N.A., was the current trustee for the bondholders.

The bond documents required the plaintiffs to meet financial benchmarks, including minimum cash-on-hand levels and specified debt-service coverage ratios. After declaring defaults based on the 2019 financial results, the trustee arranged for Pathway Learning Center to act as an independent consultant. The plaintiffs disputed parts of Pathway’s reports and recommendations and said they had met their obligations except for the financial covenants.

In August 2021, the parties entered a Forbearance Agreement. The plaintiffs agreed to meet operating milestones, retain Frank Yanez as an interim business manager with exclusive authority over their financial operations, and pay certain trustee fees and expenses. The agreement identified events that could end UMB’s promise to refrain from exercising remedies, including events related to the plaintiffs’ alleged defaults. It also provided that, after such an event, the plaintiffs would not oppose, contest, or challenge the appointment of a receiver.

The plaintiffs paid a $290,265.75 invoice and later disputed additional invoices. They filed this lawsuit seeking declarations that UMB’s fees were excessive and unreasonable and that they were not in default, along with fee information and an injunction against actions such as seizing funds, appointing a receiver, or foreclosing on the mortgage. UMB asserted counterclaims alleging defaults under the bond documents and the Forbearance Agreement, and it sought monetary and declaratory relief and appointment of a general receiver.

Receivership standard

The court treated appointment of a receiver as a procedural matter governed by federal law and equitable principles. A receiver is an extraordinary equitable remedy justified only in extreme situations, and the party requesting one bears the burden of showing that it is necessary. The court considered factors including whether the moving party had a valid claim, whether fraud threatened the claim, whether property faced imminent danger of being concealed or losing value, whether legal remedies were inadequate, whether a less drastic remedy was available, and whether a receiver would do more good than harm.

UMB argued that the plaintiffs had contractually consented to receivership and that this consent should be decisive. The court disagreed. It found that the plaintiffs had not agreed to receivership outright; their agreement not to challenge a receiver applied only after a Forbearance Termination Event occurred. The parties also conditioned receivership under the relevant agreements on an event of default, and the plaintiffs disputed whether any such event had occurred.

Court’s analysis

The court identified legitimate disputes concerning each default theory UMB relied on. Whether the plaintiffs were required to pay the disputed fees depended on the meaning and scope of the fee provision and whether the fees fell within it. If the fees were not covered, disputing them or filing the lawsuit would not trigger the contractual receivership remedy.

The court also found uncertainty about UMB’s claims that the plaintiffs failed to cooperate with the interim business manager, failed to meet reporting obligations, and failed to implement Pathway’s recommendations. The parties offered competing evidence about cooperation. The court further noted that the agreement’s language concerning management of cash disbursements did not clearly require Yanez’s approval to file a lawsuit, and UMB had not provided specific evidence showing how the plaintiffs failed to implement Pathway’s recommendations.

Although UMB had valid claims under the bond agreements, the remaining equitable factors did not support receivership. UMB did not claim that fraudulent conduct had occurred or was likely. It also did not show an imminent danger that the plaintiffs’ property would be concealed, lost, or diminished in value. The schools remained under the supervision of an interim business manager, UMB had security interests in essentially all of the building company’s assets, and UMB did not dispute that the plaintiffs had never missed a bond payment. Evidence of RSTEM’s recent negative operating income and failure to meet its current debt-service coverage ratio was not enough to establish imminent loss of property.

The court also concluded that UMB had not shown that ordinary legal remedies were inadequate or that no less drastic equitable remedy was available. It identified possible alternatives, including a financial accounting or a limited receivership. Finally, the balance of harms weighed against appointing a receiver because a receiver would add expense, could reduce returns to the schools, and could harm enrollment and related state funding.

Disposition

The court denied UMB Bank, N.A.’s motion to appoint a general receiver. The opinion states that the denial was without prejudice to UMB filing a renewed motion on a more developed record or after a material change in the schools’ financial circumstances.