Taxpayers could be on hook as UW-Oshkosh Foundation files for bankruptcy in wake of scandal

Karen Herzog
Milwaukee Journal Sentinel

The University of Wisconsin-Oshkosh's private fundraising foundation declared bankruptcy Thursday in the wake of a scandal involving a former chancellor, his chief business officer, and several ambitious real estate ventures they allegedly orchestrated.

The University of Wisconsin-Oshkosh Alumni Welcome and Conference Center is located on the UW-Oshkosh campus next to the Fox River.

State taxpayers could be on the hook for millions of dollars in the complex legal maneuverings if a judge finds the UW System liable for the actions of its former employees.       

The foundation's board chairman in a news release Thursday blamed the UW Board of Regents, saying its "policy flip flop and ill-advised political gamesmanship" forced the foundation to file the reorganization petition under Chapter 11 of federal bankruptcy laws.

“This is a petition that never should have happened and could have been avoided,” foundation chairman Tim Mulloy said, referring to a deal that was being worked out with the UW System and the foundation's creditors before a Republican state lawmaker got wind of it and pressured the regents to back out.  

Mulloy said Thursday's voluntary action would protect the university's endowment, allow restructuring and help the foundation resume its mission of supporting UW-Oshkosh. 

The endowment and other donations held for specific purposes as directed by donors are protected from creditors during the reorganization because the money is held in trust and must be used for its designated purpose, according to Paul Swanson, an Oshkosh attorney representing the foundation in the Chapter 11 proceeding.

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But several other foundation assets may be at risk in the bankruptcy, including a new campus welcome center involved in the questionable real estate transactions.

The bankruptcy also will force current Chancellor Andrew Leavitt and his wife to move to a new home because the foundation is selling the official chancellor’s residence on Congress St. to raise cash.

The foundation bought the house from the former chancellor embroiled in the controversy, Richard Wells, for hundreds of thousands of dollars above fair market value when Wells retired and moved to Florida.

"This situation hasn’t defined us nor has it slowed us down," Leavitt said in a statement Thursday. "As we prepare for a new academic year, UW-Oshkosh is thriving and will approach this year with enthusiasm."

Leavitt said his primary focus is "an invigorated commitment to ethical behavior throughout the institution. I am working to create a culture where we question processes and anyone can safely and confidently raise concerns and be heard."

As for the future of the real estate projects "we hold dear," Leavitt said, "we remain in limbo."

He said the campus built a national reputation for the innovative and academic use of biodigesters, creating a training program that brings students from across the country. And the campus has "enjoyed a new engagement tool for UW-Oshkosh with the Alumni Welcome and Conference Center, bringing thousands of visitors to our campus every year."

"Losing any one of these facilities would be a blow to our campus community," the chancellor said.

The Chapter 11 filing will allow the foundation to seek reimbursement for losses on building projects undertaken to benefit UW-Oshkosh, but which have since soured, Swanson added, alluding to where the UW System and state taxpayers potentially could be liable.

“This filing will provide a single forum for all involved parties, including the foundation, to be heard and have their disputes resolved," Swanson said. "Most important, it will allow the foundation to continue its charitable mission, which is to serve UW-Oshkosh and its students, free from the claims of its creditors."

In its filing, the foundation says it owes $15.8 million and has just $14.8 million in assets —  mostly in property. Creditors include: Madison-based First Business Bank, $6.6 million; BIOFerm Energy Systems of Madison, $678,000; First National Bank of Manitowoc, $5.6 million; and Wells Fargo Bank of Milwaukee, $1.6 million.

A settlement involving state taxpayer dollars was being discussed earlier this summer with the foundation's creditors because the foundation didn't have enough money to cover the debt on three of five real estate ventures in question: a campus welcome center and two biodigesters that convert waste into energy.

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When state Sen. Steve Nass (R-Whitewater) found out about the discussions, he warned such a bailout could have implications for the UW System's entire biennial budget, which still has not been decided by state lawmakers.

The regents backed out of the deal in June and announced no state tax dollars would be used to make debt payments on behalf of the UW-Oshkosh Foundation for "inappropriately made real estate related financial commitments" during a former chancellor's administration.

The UW System released a statement late Thursday from Board of Regents Audit Committee Chair Michael M. Grebe, saying foundations affiliated with UW campuses play a crucial role in fundraising, and expressing disappointment in the UW-Oshkosh Foundation bankruptcy filing.

"We had the shared goal of trying to reach an agreement that would help keep the foundation solvent, however, we could not support using state dollars to save a private entity," Grebe said. "That is understandably frustrating for the foundation, but we must act in a financially responsible manner on behalf of the UW System and our taxpayers.”

Foundation's mission

The private, nonprofit UW-Oshkosh Foundation was created to support university programs and initiatives, including raising and managing private money for scholarships and building projects.

The foundation was supposed to do significant fundraising on behalf of the university for five building projects at the center of its current legal problems: a $12.5 million Alumni Welcome and Conference Center, a sports complex, one-third interest in a private investor-led waterfront hotel renovation in town, and two biodigesters that turn waste into energy — one of them on the state's largest dairy farm.

Wells, the former chancellor, and former chief business officer Tom Sonnleitner were accused in a civil lawsuit filed earlier this year of illegally promising state money to back foundation bank loans on the projects if the foundation couldn't make its debt payments.

Former UW-Oshkosh Chancellor Richard Wells.

That lawsuit, which seeks unspecified damages, was filed by the state Department of Justice on behalf of the UW System.

Wells and Sonnleitner also are accused of illegally transferring more than $11 million in university funds to the foundation to help finance the projects in question between 2011 and 2014. Sonnleitner continued to make transfers until he was suspended in 2016; he retired three weeks later.

Funding should have flowed only from the foundation to the university. Both the state constitution and UW System policies prohibit a public entity from supporting a private entity, and campuses have strict rules to prevent university executives from being in decision-making roles on behalf of university foundations.

Tom Sonnleitner

An investigation was launched last year after Leavitt was approached on behalf of the foundation and told the foundation might need help it was promised with a debt payment on the conference center. Leavitt questioned the legality and took the matter to UW System President Ray Cross.

The arrangement was investigated first by UW System officials, then a retired Dane County judge and the state Department of Justice.

No criminal charges have been filed against Wells or Sonnleitner.

Mulloy said Thursday that when the projects at the core of the matter were first proposed several years ago, the Board of Regents "was a strong, public supporter and even participated in celebratory events marking the completion of them."

"Indeed, the UW System had a senior finance staff person as an ex officio member of our board who was fully aware of our plans and offered no objections," Mulloy said. "But last summer, the Board suddenly had a change of heart and reneged on its earlier commitments and previously approved lease agreements, reversing a policy that went back many years.”

The regents’ own special investigation, conducted by a former Dane County Circuit Court judge, found that the foundation board “acted in good faith” and that it “bears no fault of any kind” relating to the financing of the projects involved in the dispute, Mulloy said.

The regents' investigation also found that “the Foundation Board exercised due diligence” in addressing the financing issues and that the “Board cannot be faulted in any way” and “has no culpability whatsoever” relating to the financing of the projects, Mulloy said.

Mulloy noted that months ago, the foundation had reached "a fair and reasonable settlement" to the dispute with the UW Board of Regents — focused on the actions of two former state employees — but “the Board again flip flopped on its position and caved in because of political pressure.”

The foundation maintained that bankruptcy was a last resort as the scandal unraveled, but its lifelines evaporated after officials signaled that state support wasn’t an option, Mulloy said.

The private foundation was treading water in the months after a Justice Department lawsuit accused university leaders of funneling public money to it, paying bills with dividends from managing investments and revenue from electricity generated at the biodigesters.

But after surviving for months on that income alone, time ran out. The foundation defaulted on some $7 million in outstanding loans on the Rosendale Biodigester project, and was making minimum payments on the Alumni Welcome and Conference center ahead of filing for bankruptcy.

So the foundation’s board voted unanimously to file for bankruptcy, “with great sorrow, I might add,” Mulloy said.

Two key foundation projects tied up in the case — the alumni center and the Witzel Biodigester — will bustle back to life soon as students start their fall semester.

Though Mulloy said the foundation’s properties will remain open and operational for the time being, the bankruptcy court will ultimately decide their fate.