You couldn’t pledge your neighbor’s house as collateral on a bank loan and get away with it when you defaulted. Nor would the bank get to keep the house.
But a now-closed Michigan college did something similar in a desperate bid to stay open, Jason Conti, a lawyer for the receiver guiding its dissolution, argued in a Michigan court recently. Finlandia University pledged restricted gifts to its endowment as collateral on a loan, and the state’s attorney general wants the bank to give that up because it wasn’t the college’s to pledge.
Conti’s argument held at least some sway with Judge Joyce Draganchuk, who denied a motion by lawyers representing former Finlandia board members, administrators, and the Miners State Bank to dismiss the lawsuit, which was filed by the receiver. The case is expected to grind on through discovery and eventually a trial.
The suit raises a host of issues for other colleges struggling to stay open, but it boils down to this: What can be done when a college is barely holding on, but has millions of dollars sitting in a restricted endowment fund?
Colleges can use that money, but only if they follow a carefully prescribed method, experts said. If a donor is alive, university officials can go to them and ask them to modify any restrictions. In the case of gifts from donors who are dead or unreachable, a court can approve the gift modifications.
Neither are unheard of.
At Lake Erie College, in Ohio, another struggling small institution, college officials recently went to donors to get modifications on gifts, which helped them pay bills and avoid a shutdown.
At Webster University, in Missouri, officials got approval from a judge to lift restrictions on more than $34 million in endowment funds. The university said it needed to do so in order to meet minimum liquidity-ratio requirements for various loans it had as well as to be used as collateral. Donors there originally filed a lawsuit to stop the move, but dropped it when officials said they will still use the money for scholarships as intended, but needed to list it as unrestricted on its financial ledgers.
But beyond those processes, there’s very little wiggle room for colleges to use restricted funds, said Larry Ladd, a senior consultant for AGB Consulting and a former director of Grant Thornton LLP’s higher education and nonprofit practice.
“The courts have held you can’t violate that restriction no matter how bad the finances are,” he said. “Even after a college closes, you have to use that money in the way it was intended.”
That didn’t happen at Finlandia, court records show.
The university was spiraling downward for years. In the summer of 2022, a new president arrived on campus and made a last-ditch attempt to start some new programs. But he needed money to do so and attempted to sell some land, only for a real-estate agent to discover a bunch of mortgages that made doing so impossible. That ended any hopes of a revival, and Finlandia closed at the end of the 2022-23 academic year.
Doomed by Debt
Loans were a lifeline for Finlandia University. Until they weren’t.
A court appointed a receiver to wind down the university, including selling off belongings and property and paying creditors. Among those creditors was the State of Michigan, which through the attorney general’s office, said in an April 2023 claim that it was entitled to the money — some $13,027,563 — from the restricted endowment that had been pledged as collateral to the bank. That money should be redistributed to similar nonprofits, as stipulated under the Michigan Uniform Prudent Management of Institutional Funds Act (UPMIFA), the attorney general argued. Every state has a nearly identical investment act, which codifies how institutions have to handle donations, including directing nonprofits on how to deal with leftover endowment funds. The claim by the Michigan attorney general prompted the lawsuit from the receiver.
There are generally two kinds of donations given to colleges — unrestricted and restricted. An unrestricted gift might be a donation to the college’s general scholarship fund. A restricted gift has specified conditions, and can only be spent on what the donor designated them for.
In March 2024, Finlandia’s receiver sued a parcel of former board members, a former chief financial officer, and Miners State Bank, alleging misconduct in “improperly pledging restricted gifts as collateral for loans” and other related issues.
At a late summer court hearing, Conti alleged the defendants, as late as December 2022, were still reporting in their tax and other filings that it had the money sitting in its endowment.
“These statements appear to be completely false and wrong because the money is gone,” Conti said in court. “What apparently happened to the money was that the officers … and the trustees, in complete violation of UPMIFA as well as their fiduciary obligations, as well as the plain language of these gifts, they apparently pledged them as loans. They knew that they weren’t allowed to use the money themselves directly for the school. So they came up with this scheme where they pledge these loans.”
There were ways Finlandia could have used that money to keep the lights on, Conti told the court. The university could have gone to a court and asked a judge to remove the restrictions on the funds. “There was a process by which they could have done it, but they didn’t do it here,” he said.
The bank argued it wasn’t liable because Finlandia’s board signed a note saying it owned the property and putting it up for collateral didn’t violate any other agreements or any laws, argued Jane Derse Quasarano, a lawyer for the bank.
Conti disputed that.
“With all due respect to Miners Bank, they should have done their due diligence,” he said. “The risk fell upon them to make sure that the collateral that they received were not restricted gifts that were barred from being used ... as collateral for a loan.”
Quasarano also maintained it was too late for any lawsuit to be filed, claiming the statute of limitations had run out because the pledges happened more than six years ago. Lawyers for the board members made the same point. They also argued the board was simply operating in a way to keep the college going.
Draganchuk, the judge overseeing the case, didn’t buy any of the arguments and ordered the case to continue.
