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

A Rochester charter school organization filed for bankruptcy earlier this month after years of legal tussles over its debt, prompting concerns for its future.

The Rochester STEM Academy and Rochester Math and Science Academy, which serve kindergarten through 12th grades 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 borrowed in 2018.

The southwest Rochester schools, started in 2005, serve about 560 students, all of whom are Somali.

UMB Bank's legal team argued in court filings the schools' record of operating at a financial loss puts it at risk of closing. Lawyers say, absent an agreement with the bank, the organization "will soon be administratively insolvent and be required to liquidate."

School officials have not responded to multiple requests for comment. The school's attorney, Paul Ratelle, said Rochester STEM Academy and Rochester Math and Science Academy aren't 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 lender, to say the least," Ratelle said.

Both sides will head into 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 a 25,000-square-foot addition. UMB Bank is the current trustee representing the bondholders' interests, taking over from U.S. Bank a few years ago.

An arm of Paris-based Amundi, one of the world's largest asset managers, owns the majority of the bonds. Court records indicate Amundi's concerns are driving the bond trustee's actions.

The school bonds had several financial covenants, which are common in commercial loans. The schools did not meet two covenants involving certain cash and income benchmarks. So, the trustee — U.S. Bank at the time — declared the loans to be in default in 2020.

The schools continued making required payments on the bonds, so it is what's known as a technical default.

In June 2021, UMB — which had taken over as trustee — called the bonds, demanding repayment. UMB claimed the schools were not filing requisite financial reports and had not fully implemented recommendations by a consultant it had appointed.

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

The schools paid $290,266 to U.S. Bank, the former trustee. UMB then sent the schools a bill for $329,516 for its own expenses. That prompted the schools to sue UMB in November 2021 for breach of contract. UMB countersued, claiming the schools had 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 breached the forbearance agreement. But he did not rule on the reasonableness of UMB's fees, and he denied the bank's request to foreclose on the school.

After Tostrud's ruling, the schools and UMB began working on a settlement. They were close to an agreement earlier this month, bankruptcy court records show. But the talks appear to have fallen apart after UMB transferred the $5 million out of the schools' accounts — everything they had, according to Ratelle.

Ratelle said state and federal payments over the next two months would give the school sufficient funds to operate — albeit without any more payments to UMB because of the dispute over its cash.

Charter school experts said it's rare for schools to declare bankruptcy while still operating — most charters close first. Those schools faced the same kind of economic headwinds public schools did during the pandemic, and charters rely on fewer revenue streams since they don't access levy 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 that was looking to file bankruptcy in the state.

Rochester officials said the school's bankruptcy proceedings will not affect the city's financial situation — the bonds were structured so the city is not obligated to pay them off.

"There's no implications for the city," said Jean McGann, the city's interim finance director.

Rochester Public Schools officials say they are watching the bankruptcy filings in case the district needs to enroll some of the charter schools' students. The district recently announced a plan to streamline its operations and cut its budget but walked back most of those changes after a $10 million donation from Mayo Clinic.