Central Falls Detention Facility Corporation - Chapter 11 Case Summary

Business Description

Headquartered in Central Falls, Rhode Island, Central Falls Detention Facility Corporation, d/b/a Donald W. Wyatt Detention Facility (the "Debtor"), is a public corporation authorized by the State of Rhode Island under the Act Creating Municipal Detention Facility Corporations, enacted under Chapter 421 of the 1991 Public Laws of Rhode Island (the "Act") and codified at R.I. Gen. Laws § 45-54-1 et seq. (1991).

The Debtor owns and operates the Donald W. Wyatt Detention Facility (the "Facility"), which is comprised of two components:

• A three-story building constructed in 1993 and located at 950 High Street, Central Falls, Rhode Island, owned in fee simple by the Debtor.
• The Wyatt Detention Facility Training Building at 935 High Street, Central Falls, Rhode Island ("935 High Street"), including adjacent employee and visitor parking lots, which the Debtor acquired on December 23, 2019 following its exercise of a purchase option under a prior lease.

Following an expansion of the Facility in December 2006 and other modifications (the "2006 Expansion"), the Facility's maximum occupancy increased from 300 male detainees to its current capacity of 782 detainees, including a 40-bed unit for female detainees.

Consistent with the purpose of its formation, the Facility provides significant economic development in Rhode Island. Upon information and belief, over the period of 2020 through 2024, the Facility made payments to Rhode Island-based employees and vendors totaling approximately $27 million annually, on average, and employed an average of over 200 Rhode Island residents annually, resulting in further economic benefit to the State.

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Corporate History

The General Assembly of the State of Rhode Island passed the Act in July 1991, seeking to promote economic development in Rhode Island and address the detention facility needs of the United States. Pursuant to the Act, a "municipal detention facility corporation" was authorized in each city and town in Rhode Island.

• As a condition to the continued existence of the corporations created by the Act, any city or town wishing to construct a detention facility was required, prior to December 31, 1991, to (a) pass appropriate resolutions, (b) enter into a contract for the operation of a detention facility with the United States Marshals Service ("USMS"), and (c) receive all necessary zoning approvals for the site of the detention facility.

Formation and Approvals

• On May 29, 1991, the City Council of the City of Central Falls (the "City Council") passed its Resolution in Support of Creating a Municipal Detention Facility Corporation (the "May 1991 Resolution"), supporting passage of the Act and declaring a need for the development of a detention facility as a catalyst for economic growth in the City.
• On August 5, 1991, the City Council passed its Resolution Regarding the Central Falls Detention Facility Corporation (the "August 1991 Resolution," and together with the May 1991 Resolution, the "1991 Resolutions"), declaring a need for the Debtor to function in the City.
• On August 9, 1991, the Debtor entered into Inter-Governmental Agreement 70-91-0033 with the USMS, as required by R.I. Gen. Laws § 45-54-1(c), and the Debtor was awarded all necessary zoning relief for the site of the detention facility effective December 19, 1991.

The Debtor was thus created for the purpose of acquiring land and constructing, managing, and operating a detention facility in the City pursuant to the Act.

Commencement of Operations and Transition of Management

• The Facility began operations in December 1993 under the management of Cornell Corrections ("Cornell") as a private operator under contract with the Debtor.
• In 2006, the Debtor ceased making full payments to Cornell, and in 2007, the Debtor terminated its management agreement with Cornell and transitioned the day-to-day management of the Facility in-house to an employee of the Facility, in a role first designated as its chief executive officer, and today, as the warden.

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Operations Overview

Governance and Management

Pursuant to the Act, the Debtor is managed by a board of directors (the "Board") appointed by the City's Mayor, with such appointments subject to the approval of the City Council. The current Board is comprised of Herman Yip, Anthony Goes, Anthony Manfredi, and Matthew Mulligan.

• The City's involvement with the Debtor is limited to the appointments to the Board made by the Mayor and approved by the City Council. Once appointed, each director's fiduciary duties run solely to the Debtor.
• The directors receive no compensation for the performance of their duties but are reimbursed for their reasonable expenses incurred in carrying out their duties.

The Board, in turn, appoints the Warden, who is responsible for overseeing the management and overall day-to-day operation of the Debtor and the Facility. Michael Nessinger (the "Warden") serves as the Facility's warden and manages its day-to-day operations.

Workforce

The Debtor employs approximately 251 employees, including approximately 240 employees who are employed on a full-time basis (the "Full-Time Employees") and 11 employees who are employed on a part-time basis (the "Part-Time Employees") or a per-diem basis (the "Per-Diem Employees," and together with the Full-Time Employees and the Part-Time Employees, collectively, the "Employees").

• Approximately 204 of the Debtor's Employees (the "Union Employees") are represented by two local unions with which the Debtor has collective bargaining agreements:
  • Fraternal Order of Police (FOP) Wyatt Lodge 50 (the "FOP"), as the bargaining representative for all correctional officers, including those holding the rank of Sergeant; and
  • Rhode Island Council 94 AFSCME, AFL-CIO ("Council 94," and together with the FOP, the "Unions"), as the bargaining representative for certain medical, maintenance, and administrative support staff.
• The Debtor's workforce is comprised of skilled professionals, including correctional officers, sergeants, physicians, nurses, other specialized medical personnel, and maintenance, administrative, and other support staff. The Debtor's ability to operate the Facility is entirely dependent on this workforce, which performs a wide variety of functions critical to the Debtor's operations.

Government Contracts

• USMS Intergovernmental Agreement: The Debtor currently accepts detainees from the USMS pursuant to the Office of Detention Services Intergovernmental Agreement, dated June 1, 2022 (the "2022 IGA," and together with its appendices and exhibits, the "USMS Contract"). Under the USMS Contract, the Debtor houses federal detainees awaiting trial or sentencing in Federal Court, and, on occasion, adult detainees from the Federal Bureau of Prisons.
• ICE Addendum: On March 1, 2019, the Debtor's agreement with the USMS was modified to add Immigration and Customs Enforcement ("ICE") as an additional party and to allow the housing of ICE detainees at the Facility in addition to the USMS detainees (the "ICE Addendum").
• Navy Contract: The Facility also houses United States Navy personnel who have been placed in the custody of the General Court-Martial Convening Authority (the "GCMC"). In 2016, the Debtor entered into a contract (the "Navy Contract") with the United States Naval Submarine Base New London in Groton, Connecticut, to provide detention services for military personnel placed in the custody of the GCMC for the United States Navy Mid-Atlantic Region Commander. The Navy Contract was recently extended through March 2027.

Operating Revenues

The Debtor's overall financial health depends on the average daily population of detainees housed at the Facility ("ADP"). Although the Facility has the capacity to house 782 detainees, it has historically operated well below its maximum capacity. The fixed per-diem rate currently received by the Facility for each detainee is $180.97.

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Prepetition Obligations

As of the Petition Date, the principal amount of the Debtor's outstanding bond debt is approximately $97.3 million, with outstanding interest of approximately $71.8 million. The Debtor's prepetition obligations are summarized below.

Existing Bonds and Bond Documents

• In order to fund the 2006 Expansion, on or about June 30, 2005, the Debtor issued the $106,380,000 Central Falls Detention Facility Revenue Refunding Bonds (The Donald W. Wyatt Detention Facility) Series 2005A (the "Existing Bonds") pursuant to the Indenture of Trust dated June 1, 2005 (the "Existing Indenture"), by and between UMB Bank, N.A., as successor trustee (the "Bond Trustee"), and the Debtor. Approximately 71.2% of the principal amount of the Existing Bonds is held by the Consenting Holders.
• The Existing Bonds are secured by and payable solely from Revenues and other funds generated by the Facility as set forth in the Existing Indenture (the "Existing Indenture Collateral").
• As further security, the Debtor entered into an Open-End Mortgage, Deed, Leasehold Mortgage and Security Agreement, dated as of June 30, 2005 (the "Mortgage," and together with the Existing Indenture and related documents, the "Existing Bond Documents"), with the Bond Trustee. Pursuant to the Mortgage, the Debtor granted the Bond Trustee a first-priority security interest in, and lien on: (a) the real property titled in the name of the Debtor, (b) all revenues of the Debtor, (c) all personal property of the Debtor, and (d) all leases and rents associated with the Facility (collectively, the "Mortgage Collateral," and together with the Existing Indenture Collateral, the "Collateral").
  • The Bond Trustee perfected its security interest in, and lien on, the Mortgage Collateral by recording the Mortgage on June 29, 2005, with the Office of the City Clerk.

Local Impact Fees Owed to the City

• Between 1994 and 2009, the Debtor paid the City approximately $5,386,130 in local impact fees. Under the Existing Indenture, the Debtor was authorized to make payment of local impact fees to the City only after satisfying the required principal and interest payments on the Existing Bonds and making provisions for certain reserve funds.
• In 2009, the Debtor ceased payment of local impact fees because it had insufficient funds to do so. Since 2015, the Debtor has made payments to the City totaling approximately $516,166.50, including the 2015 Forbearance City Payments the Debtor agreed to pay as part of forbearance and settlement discussions.
• In connection with the RSA, on April 10, 2026, the Debtor made a payment of $250,000 constituting annual local impact fees due to the City for the period of July 1, 2025 through June 30, 2026.

General Unsecured Claims and Equity

• As of the Petition Date, the Debtor owes a de minimis level of general unsecured claims. In the ordinary course, the Debtor pays its invoices as presented and has no unpaid accounts payable, though it expects to receive additional invoices for prepetition goods and services during the early post-petition period. Under the Plan, Allowed General Unsecured Claims will be Reinstated or paid in full on the Effective Date.
• The Debtor has no "equity security holders" as that term is defined under the Bankruptcy Code.

Material Prepetition Litigation

• Data Security Incident Class Action: On July 19, 2024, a putative class action complaint was filed in the United States District Court for the District of Rhode Island (the "District Court"), captioned Hellested v. Central Falls Detention Facility Corp., Case No. 1:24-cv-00284 (the "Data Security Incident Class Action"). The plaintiffs sought, inter alia, actual, compensatory, and statutory damages in connection with a ransomware attack on the Debtor's IT infrastructure.
  • As of the Petition Date, the Debtor has reached an agreement in principle with the proposed lead plaintiff and class representative as to the terms of a settlement. Since late 2025, the action has been stayed by the District Court pending final confirmation on certain terms and definitive documentation.
  • The Debtor intends to file a motion seeking preliminary approval of the Data Security Incident Class Settlement, including to establish notice and opt-out procedures and schedule a final approval hearing. Subject to Bankruptcy Court approval of the Plan, Holders of Data Security Incident Claims who do not timely opt out will receive the settlement terms described in Section 5.05 of the Plan, while those who timely opt out will have their claims treated as Class 5 Claims and Reinstated as of the Effective Date.
• UMB Federal Court Litigation: On or around April 10, 2019, the Bond Trustee filed a verified petition and complaint in the District Court, captioned UMB Bank N.A. v. City of Central Falls et al., Case No. 19-0182-WES-PAS, against the Debtor, the City, Mayor James A. Diossa, certain City Councilors, and the Debtor's Board of Directors, seeking appointment of a receiver and other causes of action for breach of the Existing Indenture, breach of fiduciary duty, and breach of the Act, among others (the "Federal Court Litigation").
  • The Federal Court Litigation was precipitated by a series of alleged actions taken by the Debtor and the City, including the State of Rhode Island's alleged attempt to dissolve the Debtor and close the Facility. On April 3, 2019, the City's Mayor at the time called a special meeting of the City Council to consider resolutions to effectuate the dissolution of the Debtor, and the City Council passed two resolutions rescinding and terminating the August 5, 1991 resolutions regarding the Debtor.
  • The Bond Trustee alleged that these actions constituted the City's tortious interference with the Mortgage, the Existing Indenture, and the USMS Contract by impairing the Debtor's revenue stream and ongoing viability, and that the City took steps to impermissibly extract money ahead of the Bond Trustee, including by attempting to collect property taxes from the Debtor on account of the Fink Property.
  • On April 5, 2019, the Board voted to "suspend" the ICE Addendum for a period of 90 days and directed the Warden to return all immigrant detainees to ICE custody within seven days (the "ICE Suspension"). The Bond Trustee alleged that the ICE Suspension constituted a breach of the USMS Contract, and also brought claims of tortious interference and breach of fiduciary duty against the Board and its members.
  • On April 23, 2019, the City filed crossclaims against the Debtor, including for breach of the 2015 Forbearance Agreement as a result of the Debtor's failure to make the 2015 Forbearance City Payments, and counterclaims against the Bond Trustee for breach of the 2015 Forbearance Agreement and anti-SLAPP claims.
  • On or around April 26, 2019, the District Court entered an Order Granting Preliminary Injunction and Appointment of Board Monitor (the "Preliminary Injunction"), ordering the Board to rescind several votes related to the suspension of the ICE Addendum and the removal of ICE detainees, and to ratify a new addendum related to the renewed detention of ICE detainees. A Board Monitor was appointed effective April 24, 2019, and a Special Master was appointed on April 26, 2019.
  • The District Court subsequently terminated the appointments of the Special Master and the Board Monitor on February 26, 2020 and February 28, 2023, respectively. The Federal Court Litigation is currently stayed until July 7, 2026 by the District Court's text order dated June 4, 2026.

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Events Leading to Bankruptcy

On July 10, 2026 (the "Petition Date"), the Debtor filed its petition for relief under chapter 11 of the Bankruptcy Code (the "Chapter 11 Case") in the United States Bankruptcy Court for the District of Rhode Island. Although the Debtor is on solid financial footing from a cashflow perspective as it relates to its current liabilities, its more than $167 million of bond debt is not sustainable, and the Debtor is unable to repay it according to its terms.

• The Debtor's main financial goal in this proceeding is to restructure that bond debt by eliminating approximately $101.6 million, or 60.1% of the aggregate outstanding bond interest and principal, while also resetting its relationship with the City.
• The three main stakeholders in this case—the Debtor, the Consenting Holders, and the City—are all in agreement with, and support, the Chapter 11 filing so that the Debtor can achieve these goals and "right-size" its balance sheet on a go-forward basis.

Operational Challenges

The Debtor's financial health is directly tied to its ADP. Over the life of the Facility, it has been consistently unable to sustain a population rate sufficient to fund both its operations and its obligations under the Existing Indenture.

• While the Facility has the capacity to house 782 detainees, due to practical limitations relating to the inflow and outflow of detainees, it cannot practically house 782 detainees at one time. Over the past five years, the Facility has continued to operate well below its maximum capacity, with ADP averaging approximately 675 detainees.
• In March 2020, as a result of the COVID-19 pandemic, the Governor of Rhode Island declared a state of emergency and ordered all non-essential business services to temporarily cease, leading to increased costs of operating the Facility while at the same time resulting in a substantial drop in ADP due to releases of detainees. To mitigate the negative effects of these increased expenses and decreased revenue, management took steps including availing itself of available government assistance:
  • In April 2020, the Debtor received a Paycheck Protection Program ("PPP") loan under the CARES Act in the amount of $2,903,400, the proceeds of which were used to cover eligible payroll, related benefits, worker expenses, and utilities. The loan was forgiven by the Small Business Administration in July 2021.
  • In February 2021, the Debtor received an additional PPP loan in the amount of $2,000,000, used for the same eligible purposes. The loan was forgiven by the Small Business Administration in October 2021.
• The Debtor suffered further financial difficulty due to a ransomware attack in November 2023. While the Facility's technological infrastructure was eventually reconstructed and brought back online, the Debtor later learned that, as a result of the attack, certain information regarding approximately 18,500 former and current detainees, employees, and vendors had been released on the dark web. The ransomware attack is the subject of the Data Security Incident Class Action.

Keepership and Forbearance Agreements

• In 2014, the Debtor filed a receivership petition in the Rhode Island Superior Court (the "2014 Keepership"), resulting in the appointment of a temporary receiver, Jonathan Savage, whose role was subsequently modified to a "keeper" (the "Keeper").
• To resolve the 2014 Keepership, the Debtor, City, Bond Trustee, and Keeper negotiated a forbearance agreement, dated March 30, 2015, among the Debtor, City, and Bond Trustee (the "2015 Forbearance Agreement"), pursuant to which the Bond Trustee agreed to forbear from exercising its rights and remedies under the Existing Indenture over a four-year period.
  • The parties agreed that the Debtor was authorized to transfer to the City a one-time payment of $100,000, plus $16,666.67 monthly in an aggregate amount of up to $800,000 from its revenues, to the extent funds were available after payment of operation and maintenance expenses (the "2015 Forbearance City Payments"). From March 2015 to August 2017, when payments ceased, the Debtor made the 2015 Forbearance City Payments of $16,666.67 per month. The Board resumed oversight of the Debtor in April 2015.
• The 2015 Forbearance Agreement was subsequently amended on three occasions:
  • On May 3, 2017, the Debtor and the Bond Trustee (but not the City) executed the First Amendment to 2015 Forbearance Agreement, pursuant to which the Bond Trustee advanced approximately $900,000 to fund security-based capital expenses and budgeted operational shortfalls. The amendment further provided that if the Debtor experienced future operational expense shortfalls requiring funding from the Bond Trustee to meet its most essential operating expenses, the Debtor would be prohibited from making any monthly 2015 Forbearance City Payments for a period of 60 days from such budget shortfall requests.
  • On March 12, 2018, the parties executed the Second Amendment to 2015 Forbearance Agreement, in which the Bond Trustee agreed to advance up to $388,000 from the Debt Service Reserve Fund to pay for half of the Debtor's financial needs to construct a portion of its perimeter fence requested by the USMS (the "Fence Project"), with the balance to be reimbursed by the USMS.
  • On January 16, 2019, the parties executed the Third Amendment to 2015 Forbearance Agreement, pursuant to which the Bond Trustee advanced funds as a bridge loan to meet essential budgeted expenses, including payroll. On February 19, 2019, the Debtor satisfied all of its obligations under the bridge loan and the parties terminated that emergency loan.
• On April 10, 2019, the Bond Trustee provided written notice that the 2015 Forbearance Agreement terminated pursuant to Section 4.2(ii) thereof, due in part to the unsuccessful attempt to dissolve the Debtor.
• On October 30, 2019, following the filing of the Federal Court Litigation, the Debtor and the Bond Trustee entered into a new forbearance agreement (the "2019 Forbearance Agreement"), pursuant to which the Bond Trustee agreed to forbear from the exercise of remedies under the Existing Indenture and to stay the Federal Court Litigation. The Bond Trustee advanced additional funds to meet essential budgeted expenses, including payroll, and the Debtor agreed that the Bond Trustee was entitled to debt service payments for remaining amounts in excess of $400,000 following payment of operating expenses. The 2019 Forbearance Agreement expired by its terms on December 3, 2021.

Federal Court Mediation and Restructuring Support Agreement

Throughout the course of the Federal Court Litigation, the Debtor, Bond Trustee, and the City engaged in mediated confidential settlement discussions before Magistrate Judge Patricia A. Sullivan in an attempt to negotiate a global resolution (the "Federal Court Mediation"). As part of the Federal Court Mediation, the parties agreed to a series of stays of the Federal Court Litigation, most recently through July 7, 2026. The Federal Court Mediation proved fruitful, resulting in the agreement that the Debtor would file this Chapter 11 Case and implement the restructuring embodied in the Plan.

• On June 19, 2026, following months of extensive, arm's-length negotiations, the Debtor entered into a Restructuring Support Agreement (the "RSA") with (a) holders representing approximately 71.2% of the aggregate outstanding principal amount of Class 3 Claims (Existing Bond Secured Claims) (collectively, the "Consenting Holders"), and (b) the City (together with the Consenting Holders, the "Consenting Parties").
• Under the RSA, the Consenting Parties have agreed to support the Restructuring as set forth in the Chapter 11 Plan of Central Falls Detention Facility Corporation (the "Plan").

The Plan and Go-Forward Strategy

The Plan will eliminate approximately $101.6 million, or 60.1%, of the Debtor's aggregate outstanding bond principal and accrued interest, leaving the Debtor better positioned to implement its long-term business plan and reset its relationship with the City. The face amount of the Debtor's secured bond obligations will be reduced from approximately $97.3 million to $67.5 million, a reduction of approximately $29.8 million, or 30.6%, in principal.

• Holders of Class 3 Claims (Existing Bond Secured Claims) will receive their pro rata share of Series 2026 Bonds in the face amount of $67.5 million, $27.5 million of which will amortize and the remainder of which will be payable solely from excess cash flow.
• All allowed claims, other than the Existing Bond Secured Claims and the City Claims (the treatment of which is set forth in the RSA), will be paid in full or reinstated on the Effective Date, thus preserving value for local suppliers, trade creditors, litigation claimants, and other stakeholders of the Debtor.
• The Plan also implements the terms of a settlement between the Debtor and the City in full and final satisfaction of the City's claims in the Federal Court Litigation, whereby the Debtor shall, among other things, make:
  • Go-forward payments of local impact fees to the City in the annual amount of $250,000;
  • An annual charitable donation of $25,000 to agreed-upon non-profits providing services in the City for public safety; and
  • Reimbursement to the City of $400,000 in the first 12 months following the Effective Date for community amenities to be provided by the City.
• Under the Plan, the Debtor intends and expects that its day-to-day operations post-petition will continue as normal, and that all post-petition debts, including wage payments to its employees, will be paid in the ordinary course.