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

Background

Rochester Math & Science Academy, Rochester Stem Academy Inc., and Rochester MSA Building Company are Minnesota nonprofit corporations. The first two operate public charter schools, and the Building Company owns and leases the school facilities. The plaintiffs borrowed more than $15 million in bond proceeds from the City of Rochester, Minnesota, to improve and expand those facilities. UMB Bank, N.A., served as trustee for the bond owners.

The bond documents required the schools to maintain specified levels of unrestricted cash and income available for debt service. After defaults were identified, the plaintiffs entered a Forbearance Agreement with UMB. The agreement required several operating steps, including retaining Frank Yanez as interim business manager, replacing the schools’ financial vendor, implementing certain recommendations, and paying reasonable fees and expenses connected with enforcement and the agreement.

The plaintiffs later sued over the reasonableness of UMB’s fees. UMB asserted counterclaims alleging breaches of the bond documents and Forbearance Agreement and seeking remedies including a receiver, foreclosure, and a declaration that UMB could exercise its contractual remedies. UMB moved for partial summary judgment, which asks the court to decide claims when there is no genuine dispute over a material fact and the moving party is entitled to judgment as a matter of law. UMB also requested immediate final judgment under Rule 54(b).

Financial-vendor breach

The Forbearance Agreement required the schools to meet benchmarks leading to appointment of a successor financial vendor by a specified deadline. The court held that the agreement unambiguously placed the ultimate responsibility for replacing the vendor on the schools, even though the process was to occur under the interim business manager’s direction. Because the plaintiffs did not replace their existing financial vendor, the court held that they breached the agreement as a matter of law.

The court rejected the plaintiffs’ argument that UMB waived this requirement. UMB had extended the replacement timeline rather than ignored the obligation, and the agreement required any waiver to be in a written instrument. The court concluded that no reasonable factfinder could find a waiver on the record.

Interim business manager’s authority

UMB argued that the plaintiffs also breached the agreement by failing to give Yanez sufficient authority over the schools’ financial operations. UMB specifically relied on the plaintiffs’ alleged failure to follow Yanez’s direction to replenish the debt-service reserve fund and their failure to consult him or obtain his approval before paying substantial legal fees in the case.

The court held that the agreement was ambiguous about the scope of Yanez’s authority. Although some provisions could support broad authority over cash management and disbursements, other provisions suggested that the schools’ boards retained some authority and that Yanez’s role was that of an executive-level business manager. Because the agreement could reasonably be interpreted in more than one way, summary judgment was not warranted on this theory.

Fees

The Forbearance Agreement required payment of UMB’s reasonable professional fees and expenses. The court held that the plaintiffs’ obligation to pay depended on the fees being reasonable, and that reasonableness was a disputed factual question. The court also found a factual issue about whether nonpayment caused a termination event because UMB withdrew the invoiced amount from the debt-service reserve fund within the agreement’s 30-day payment period. The fee-related claims therefore remain unresolved and may proceed to trial.

Effect of the vendor breach

The failure to replace the financial vendor constituted a Forbearance Termination Event. Under the agreement, that event ended UMB’s forbearance obligations and restored UMB’s rights and remedies under the bond documents. The court held that UMB was entitled to summary judgment on its breach theory concerning the vendor and to a declaration that events of default had occurred, that a Forbearance Termination Event had occurred, and that UMB could exercise remedies under the bond documents, subject to the unresolved issues addressed in the opinion.

The court also granted UMB summary judgment on the portion of the plaintiffs’ declaratory-judgment claim alleging that they were not currently in default and on the plaintiffs’ separate claim seeking an injunction to prevent UMB from exercising its remedies.

Rule 54(b) request

Rule 54(b) permits entry of final judgment on fewer than all claims only when the court expressly finds no just reason for delay. The court denied UMB’s request. The unresolved fee claims could result in a setoff against the judgment UMB sought, and the resolved and unresolved claims arose from the same Forbearance Agreement and overlapping facts. Entering judgment immediately also could create piecemeal appeals. The court therefore denied the request for immediate final judgment.

Disposition

The order states that UMB’s motion for partial summary judgment is GRANTED IN PART. The plaintiffs materially breached the bond documents and Forbearance Agreement by failing to replace their financial vendor; UMB may exercise its contractual remedies except as otherwise provided in the order; and UMB received summary judgment on the specified portions of the plaintiffs’ declaratory and injunction claims. UMB’s request for entry of judgment under Rule 54(b) is DENIED. The interim-business-manager and fee disputes remain unresolved.