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Long before federal bank regulators acted against Crown Bank last week, Doug Kelley had the Edina lender in his sights.
The trustee in the Tom Petters bankruptcy has long maintained that the convicted Ponzi schemer enjoyed a special, and suspicious, relationship with the bank.
Kelley argued in a 2010 lawsuit that Petters owned 3,333 shares of nonvoting stock in the bank, which regulators recently ordered to deal with troubled loans and to beef up reserves for covering them.
Kelley asserted that Petters had a "close friendship" with bank President Kevin Howk, and that $100 million was transferred in and out of Petters Co. Inc. accounts between 2004 and 2008, when authorities shut Petters down.
"Crown was an integral part of Petters' Ponzi scheme," Kelley wrote in court papers filed as part of the case.
Petters is now serving a 50-year sentence for his crimes, and the Crown-Petters connection has largely faded from view. But Kelley said recently that he was still working to get the bank to return $6.1 million in loan and overdraft payments from Petters' illicit operations, revising the $7.8 million amount he had previously told the Star Tribune he was seeking.
That ongoing clawback case is just one of Crown's legal headaches. Nevada-based Beal Bank has accused Crown in a lawsuit of fraud related to a loan it made to Twin Cities real estate investor and developer Steve Hoyt, who has since filed for Chapter 11 bankruptcy.
The state Commerce Department and Federal Deposit Insurance Corp. hit Crown with an enforcement action in January, giving it 30 days to hire a third-party consultant to devise a management plan.
Crown's CEO Peter Dahl said he doesn't think the Petters and Hoyt cases raise any questions about Crown's overall operations and said the bank has no significant exposure in either matter.
Crown has been examined and subject to loan reviews and outside audits several times since the Petters scandal broke in 2008, he said.
"There is nobody that has said that our accounting is incorrect, and nobody felt there was any necessary write-downs in either of these matters," Dahl said. "If you look at any bank right now you'd see a tremendous amount of litigation."
"We're not running fast and loose; we never really have," he said.
Both Petters and his Petters Co. Inc. (PCI) banked at Crown, a two-branch bank that opened in 2000 and made a name for itself catering to wealthy Twin Cities residents and their businesses. After the Petters scandal broke, Crown's Howk told the Star Tribune that its relationship with Petters was routine and that the activity in Petters' bank accounts raised no red flags.
Kelley asserts the bank's relationship with Petters' organization went well beyond the norm. In an unusually detailed lawsuit filed in 2010, Kelly said Petters and Howk had a "close friendship" that dated back to the previous bank where Howk was employed, where he also worked on Petters accounts.
The lawsuit alleges that Howk did "special favors" for Petters, including writing up reference letters saying Petters was a good customer despite the fact that he overdrew his account 133 times from 2004 to 2008 for more than $17 million. It also alleges that Howk authorized Crown to cut Petters a certified check for $1 million at a time when there wasn't sufficient money in Petters' personal bank account to cover it.
Dahl said Howk and Petters were not close personal friends, and Howk did nothing wrong.
“Over a career of more than 20 years, Kevin Howk has built an impeccable reputation at Crown Bank and within the Twin Cities banking community,” Dahl said. “We categorically deny that Kevin ever engaged in any of the behavior alleged in this litigation."
Meanwhile, Kelley describes in the lawsuit other alleged details about Petters’ business with Crown Bank. The suit alleges that in 2006 Petters used $1.75 million of money in PCI's business account at Crown to make a payment on one of his personal loans from the bank. Crown accepted the transfer.
"Their president would call Petters at the end of the month and ask them to deposit money into those accounts so that the regulators would think there were positive large balances at month's end. Immediately after they appeared on the month-end balances, they would withdraw the money," Kelley said in an interview.
"The nature and the pattern of activity at Crown Bank tipped them off that there was suspicious activity at their bank, and they should have inquired into the suspicious activity and they should have reported those to the Fed," Kelley said.
Crown has moved to dismiss the case, saying it wasn't close enough to PCI to be considered an "insider." Dahl dismissed the lawsuit as one of scores of clawback lawsuits and insisted the bank was not a central player in Petters operations. Howk and Petters were not close personal friends, he said.
"It was categorically nothing but business," Dahl said.
Of the use of PCI funds to make payments on his personal loans from Crown Bank, Dahl said, "that's not illegal."
"It was within his rights and consistent with banking regulations and guidelines," Dahl said.
The motion to dismiss is awaiting a decision by U.S. Bankruptcy Judge Gregory Kishel, and the case remains on hold.
It's one of about 200 clawback lawsuits the trustee has filed against former Petters employees, associates and others who got payments from Petters -- including about six banks. Kelley is trying to recover $1.6 billion. So far, he's collected about $260 million.
Beal, the Nevada bank, sued Crown in November in U.S. District Court in Minnesota. Also named as defendants are StoneArch Fund IV LLC, the Citizens State Bank of Olivia, North American Banking Co. and Bruce K. Hoyt.
Beal accuses Crown of fraud, conspiracy and breach of fiduciary duty, among other things, related to a $3 million participation loan the banks made to Steve Hoyt in 2007. Hoyt filed for Chapter 11 bankruptcy protection last May.
The trouble started in 2010 after Hoyt defaulted. Beal accuses Crown of orchestrating a scheme to get the bad loan off the bank's books in which Hoyt, Hoyt's father and an associate created an entity called StoneArch IV to buy the banks' interests in the soured loan, except for Beal's 50 percent interest.
StoneArch IV financed the purchase with a $1.3 million loan from Crown. As part of the deal, Beal asserts, Crown consolidated several loans Hoyt had with the bank, including the $3 million participation loan, into a new loan with more security, and released Hoyt from any previous defaults.
Beal claims Crown didn't tell it about the sale until after it was completed, concealed Hoyt's involvement in StoneArch IV and concealed interest payments Crown received.
Crown denied any wrongdoing. Dahl called Beal's lawsuit "unfounded and premature" and said the proper venue for dealing with the complex issues it rases is in Hoyt's bankruptcy case.
"It's completely within our rights to sell our interests to anyone we want to," he said.
Jennifer Bjorhus • 612-673-4683