Ohio’s closed Notre Dame College faces lawsuit after bond default

In one of them, filed in the U.S. District Court for the Northern District of Ohio, Bank of America, N.A. asks the court to appoint a receiver after the college of defaulted on bond payments and the settlement of an interest rate swap. 

Another lawsuit, filed in state court by Ohio Attorney General Dave Yost, alleges that the college’s trustees and officers used restricted endowment funds to pay off bond debt without his permission or a court order. One of the two is required to modify the restrictions on such funds.

Bank of America is named in the attorney general’s lawsuit because of its financial entanglements with the college. Yost did not accuse the bank of any wrongdoing.

A third lawsuit, from local residents in South Euclid, Ohio, aims to stop the sale of the college’s assets. It was dismissed, but they appealed, and that appeal is making its way through state court. Their lawsuit has put a cloud on the title of the college’s property.

The bond debt, $20 million of Series 2008 educational facilities revenue bonds, was issued through the Ohio Higher Educational Facility Commission. Bank America became the sole owner and holder of all the bonds, and remains so today.

The bonds were reissued in February 2017, and the college owed Bank of America $16 million on the debt by 2023, according to the attorney general’s lawsuit.

According to Bank of America’s lawsuit, Bank of America, N.A. v. Notre Dame College et al. (1:25-cv-01061), the college was in default under the bond documents by April 2017. For the next seven years, the lawsuit says, the bank worked with the college, making various amendments to the bond documents and waiving defaults.

The college had granted the bank a first-priority lien on and security interest in all unrestricted gross revenues; all interest, dividends, cash, instruments and other property payable or in exchange for the foregoing; and all proceeds, also known as the cash collateral.

The bank and the college also entered into an interest rate swap transaction that was terminated on Dec. 31, 2023. Bank of America says the college then failed to pay the amounts due under the swap documents.

The obligations of the college under the bond documents and the swap transaction are also secured by the first, second and third mortgage. Collectively, the mortgages grant the bank a first lien on and security interest in five buildings in South Euclid.

After the college announced its plans to shutter in February 2024, the bank gave the college a non-revolving line of credit in the amount of $2 million for the wind down and collateral liquidation process. 

“As of the date of this filing, there has been no sale of the real property or the personal property. As such, the college is in default under the liquidation and funding agreement,” the lawsuit says.

The bank’s lawsuit accuses the college of breach of contract; seeks foreclosure of mortgages and security interest, and assignment of rents; and the appointment of a receiver.

“The plaintiffs in the state court cases have been included in this action as nominal defendants to ensure the receiver can sell the collateral free and clear of any alleged interest of the state court litigants,” the bank notes. “The bank seeks no other relief against the state court litigants.”

Spokespeople for the attorney general did not respond to requests for comment.

John Smetanka — formerly the college’s president and one of the officers named in Yost’s suit, now assistant professor of physics at Westmoreland County Community College — did not answer phone calls requesting comment. 

The attorney general’s lawsuit notes that in October 2023, Smetanka told his colleagues the $2.8 million that had by then already been used to meet financial obligations would need to be returned to the restricted endowment funds. 

The executive committee later approved the further use of restricted funds beyond their charitable purposes without consulting the attorney general, according to Yost’s lawsuit.

The financial struggles and closure of the small college are one example of the fallout from the perfect storm of declining enrollment, rising costs and unsustainable debt practices that threatens some colleges as higher ed hits a demographic cliff.