Bankruptcy Leads to Felony Charges At UW-Oshkosh

When the UW-Oshkosh Foundation filed for bankruptcy last year, few could predict what a wide-ranging impact that case would have. Now, bankruptcy attorneys, college administrators, and policy makers are closely watching the case and debating what steps can be taken to keep other foundations, universities, and lenders from suffering a similar fate.

Last fall, the UW-Oshkosh Foundation, which is a separate, supposedly self-funded entity designed to support UW-Oshkosh, filed for Chapter 11 bankruptcy. Normally, these sorts of foundations fundraise on their namesake organization’s behalf in order to provide scholarships and other financial support, but the UW-Oshkosh Foundation went a bit out of the box and inked five development deals that it hoped would provide revenue to the school over time.

It backed two bio-digesters that turn farm animal waste in energy, an alumni welcome center, a sports complex, and a hotel in downtown Oshkosh. The hotel has proven financially solvent, but the other investments have put the Foundation $14.5 million in debt.

Former Chancellor Richard Wells and former Vice Chancellor Tom Sonnleitner are facing criminal charges over all of this because it appears they lied to the Foundation’s lenders, saying that UW-Oshkosh — so students and taxpayers — would back the loans if the Foundation couldn’t make its payments. Both men are charged with five counts of misconduct in office by acting beyond their authority as parties to a crime. The maximum penalty for each charge is 3.5 years in prison.

The UW System is suing Wells and Sonnleitner in civil court over all this as well. They do not want the System to be on the hook for the UW-Oshkosh Foundation’s debts. And they really don’t want any taxpayer dollars or student funds used to pay off creditors. There are, however, questions about how much the UW System knew about what was going on at Oshkosh. Did the Board of Regents really not know that the school itself had agreed to pay for an alumni welcome center if the Foundation couldn’t make its debt payments?

Lawmakers in Madison are poised to take action to ensure that the 90-some “affiliated organizations” in the state that are similar to the UW-Oshkosh Foundation — in that they are supposed to be non-taxpayer-supported organizations that promote or support some function of the University of Wisconsin System or a specific college or university — are acting appropriately, and that the Board of Regents is exercising proper oversight over them.

From a bankruptcy law perspective, this case highlights how quickly things can get complicated when someone or some organization that is closely related to other entities files for bankruptcy. Although all related parties should know what financial commitments they have, too often leaders sign agreements with a wink and a nudge that suggest other assets could be in play if needed.

Our firm wades into the thick of disagreements over who owes who what all the time, and we have years of experience settling and litigating such matters.