Summary
An Arizona Court of Appeals recently released its first published decision applying the Prior Exclusive Jurisdiction doctrine to corporate receivership proceedings, affirming the preclusive effect of a Minnesota probate court’s trust instruction directing the trustee to reject the terms of a forbearance agreement proposed by the borrower.
The Upshot
- After a nonprofit charter school operator failed to make required debt service payments relating to a secured loan funded by bond proceeds, a Minnesota court ruled in favor of the trustee, rejecting the charter school operator’s motion to dismiss for lack of jurisdiction, and directed the parties not to enter into the forbearance agreement on behalf of the bondholders.
- The preclusive effect of the Minnesota proceedings was litigated in a subsequent appeal to an Arizona Superior Court decision appointing a receiver. For the first time in a published decision, the Arizona Court of Appeals applied the Prior Exclusive Jurisdiction doctrine to bar re-litigation of the Minnesota court’s directive, resulting in the appointment of a receiver.
The Bottom Line
Prior Exclusive Jurisdiction doctrine is a mandatory rule that applies when there are parallel state and federal in rem or quasi in rem proceedings regarding the same matter, where a court will not assume in rem jurisdiction over a matter that is already under the jurisdiction of a court of the other authority.
On January 5, 2023, in UMB Bank, N.A. v. Parkview School, Inc., the Court of Appeals of Arizona, Division 1, affirmed an order from the Superior Court in Maricopa County appointing a receiver for a school-charter holder that defaulted on its obligation to repay a secured loan funded by bond proceeds. The appellants, Parkview School, Inc. (Parkview), had appealed the order, contending that the Superior Court erred in relying on a Minnesota probate court ruling directing its trustee not to enter into a forbearance agreement on behalf of the bondholders.
The proceedings arose from a secured loan of bond proceeds made from the Industrial Development Authority of the County of Pima to Parkview in 2016. UMB Bank, N.A., a national banking corporation with a Minnesota corporate trust office (UMB), was the successor trustee for the loan. After Parkview failed to make required debt service payments, UMB and Parkview entered into two separate yearlong forbearance agreements in 2017 and 2018. However, the parties were unable to agree on forbearance terms for the 2019-2020 school year. Parkview then threatened to replace UMB as trustee if they did not accept the terms of their proposed forbearance agreement.
As a result, UMB commenced an action in Minnesota probate court seeking a directive not to enter the proposed forbearance agreement. In moving to dismiss the action, Parkview argued that the Minnesota court lacked jurisdiction over it. After holding a hearing in which Parkview participated as an “interested observer,” however, the Minnesota court denied Parkview’s motion and instructed UMB to reject the proposed agreement, authorizing UMB to initiate proceedings in the appropriate jurisdiction to appoint a receiver.
UMB then initiated an action for a receiver in the Superior Court in Maricopa County. The Superior Court received supplemental briefings regarding the preclusive effect of the Minnesota proceedings, ultimately ruling that the Minnesota directive precluded Parkview from imposing the terms of the proposed 2019-2020 forbearance agreement to bar the receivership. In making its determination, the Superior court relied on the Prior Exclusive Jurisdiction doctrine, stating that it lacked “the authority to under or override either the [Minnesota court’s] substantive ruling or its jurisdictional determination.” The Superior Court noted that Parkview had both notice and an opportunity to participate in the Minnesota proceedings.
Prior Exclusive Jurisdiction doctrine is a mandatory rule that applies when there are parallel state and federal in rem or quasi in rem proceedings regarding the same matter, where a court will not assume in rem jurisdiction over a matter that is already under the jurisdiction of a court of the other authority.
The rule recognizes “[t]he logical and practical difficulty of two courts simultaneously vying for possession or control of the same property” and “is not restricted to cases where property has been actually seized under judicial process before a second suit is instituted, but applies as well where suits are brought to … administer trusts.” The Arizona Court of Appeals noted that “to permit the Arizona court to ignore the Minnesota court’s disposition and proceed with its own determination would be illogical, impractical, and inequitable.”
The Parkview case is the first published decision in Arizona to adopt the Prior Exclusive Jurisdiction doctrine and is significant in establishing the preclusive effect of prior out-of-state trustee directives on subsequent in-state receivership proceedings in Arizona.
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