(ABC 6 News) — During a teleconference hearing Tuesday, Jan. 9, representatives from the Rochester Math and Science Academy, Rochester STEM Academy, U.S. Trustee, and UMB Bank discussed ongoing attempts to settle between the bank and charter schools.

According to attorney Paul Ratelle, representing Rochester’s charter schools, and Adrienne Walker, representing UMB Bank, the parties are ironing out the details of the settlement, to be publicly filed Jan. 9 or 10.

As part of the settlement, the charter schools will dismiss their bankruptcy filings, according to the hearing.

A final hearing on the agreement, which has not been finalized or publicly filed, was scheduled for late February, according to the representatives.

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(ABC 6 News) – The Rochester Math and Science Academy, Rochester STEM Academy, and Rochester MSA Building Company filed for bankruptcy Dec. 5, according to documents from the United States Bankruptcy Court.

Documents estimate that the Rochester Math and Science Academy has between $1 and 10 million in assets, but between $10 and 50 million in liabilities.

The Rochester STEM Academy filings estimate $1 to 10 million in assets, and $50-100,000 in liabilities.

Millions in debt

The two creditors with the largest RMSA unsecured claims, who are not “insiders” are UMB Bank in Minneapolis ($15,245,000) and Nile Restaurant and Cafe, Rochester, as a school lunch provider ($1,180,483.44), according to documents filed Dec. 5.

Rochester STEM academy filings list the same unsecured claim for UMB Bank in Minneapolis ($15,245,000), but $269,354 in unsecured claims for the Nile Restaurant and Cafe.

UMB Bank is listed as the only creditor in a third bankruptcy filing for the Rochester MSA Building Company.

The initial filings estimated that there were 100-199 creditors awaiting payments for the RMSA, and 50-99 for the Rochester STEM Academy.

Other creditors with unsecured claims in the hundreds of thousands of dollars include Blue Cross Blue Shield MN, the Teachers Retirement Association, and Munira Transportation Service, according to US Bankruptcy Court Documents.

The Rochester Math and Science Academy and Rochester STEM Academy are charter schools, serving kindergarten through grade 8 and grades 9-12, respectively.

There are 566 students, largely from the local Somali community, enrolled in the academies.

The Rochester MSA Building Company owns the school buildings and leases them to the charter schools, as charter schools may not own the buildings in which they teach and operate, per MN Statute 124E.13.

Years of monetary disputes

According to documents filed Dec. 8, the academies moved to use cash collateral from the UMB Bank loans to continue operating the schools Dec. 11-Jan. 9, 2024, while “pursuing the reorganization of their school operations.”

The documents claim that RMSA and Rochester STEM Academy, called “RSTEM” in legal documents, entered into financial agreements with UMB Bank in 2018.

During the fiscal year ending June 30, 2019, court documents allege that the STEM Academy’s building was under construction and could not make lease payments or meet “cash-on-hand” covenants until it was complete and approved in January of 2020.

By April of 2020, the documents claim that RMSA and “RSTEM” were in compliance with their financial agreements with UMB Bank.

However, UMB Bank notified the academies that they had breached the financial agreements, and as RMSA’s income was lower than agreed upon, it had triggered a default on the loan.

In June of 2021, UMB sent the academies a demand for payment, stating that they had not implemented a consultant’s recommendations.

The June 2021 noted that “all outstanding principal and interest was accelerated and deemed ‘immediately due and payable,'” according to court documents.

The bank later sent the academies’ leadership invoices for hundreds of thousands of dollars in attorney’s fees — the first of which installments was paid, according to court documents, and the second of which RMSA and RSTEM did not pay, citing charter schools’ obligation “not to allow the claim in the absence of sufficient itemization.”

UMB allegedly withdrew money for the additional hundreds of thousands in attorney’s fees from the funds accessible by the academies’ leadership.

Lawsuit between UMB Bank and STEM academies

According to court documents filed Dec. 8, the RMSA and RSTEM filed a lawsuit against UMB Bank following the bank’s withdrawal of funds to cover attorney’s fees in Nov. 2021.

A trial on that matter was scheduled to begin Dec. 4, 2023 — one day before the RMSA and RSTEM filed for bankruptcy.

According to court documents, the UMB Bank and the charter schools had reached an agreement to settle outside of court, and the schools’ board scheduled meetings Dec. 5 to approve the terms.

On the morning of Dec. 5, the schools’ leadership allegedly received a Choice Bank notice indicating that UMB had used its Account Control Agreements to transfer all available funds in the schools’ accounts to UMB.

RMSA and RSTEM claim that they called Choice Bank immediately, notified in-house counsel that they were going to file for bankruptcy, and asked for the transfer to be delayed until the afternoon.

“At the UMB’s direction, Choice Bank effectuated the transfer of all funds (over $5M in total) from the Schools’ bank accounts to the UMB,” court documents allege.

Court documents filed by RMSA leadership claim that Choice Bank confirmed that the wire from RMSA’s account occurred after RMSA filed for bankruptcy.

RSTEM’s account wire went through a little less than an hour before RSTEM filed for bankruptcy, court documents claim, but the charter schools petitioned for the return of the funds, as they were for public education.

“The Debtors need the interim use of cash collateral to pay the costs and expenses of its ongoing operations of the schools and to avoid immediate and irreparable harm,” court documents read. “If the Debtors cannot use cash collateral, it will not be able to fund the schools’ operation and lead to the shutdown of the schools.”

UMB requested, in turn, that the U.S. bankruptcy court enter a judgement against the charter schools, allowing the bank to immediately collect $15,595,517.70, “which UMB claims represents the outstanding principal and interest due,” foreclosing on the school property and mortgages to do so.

On Dec. 8, U.S. Bankruptcy Court judge William J. Fisher ordered UMB to return the funds taken from the charter schools’ accounts on Dec. 5, and authorized the schools to use cash collateral through Jan. 9 to operate the schools.

A final hearing on the charter schools’ motion to use cash collateral to keep the charter schools open is scheduled for 1:30 p.m. Tuesday, Jan. 9.