Bremer Trust trustees on Monday fired back at a lawsuit from the company it owns, Bremer Financial Corp., saying that they hold the power to sell the firm and that the existence of the trust, one of Minnesota's largest charities, depends on a deal.
The trustees' 43-page response to the lawsuit — filed last month by the bank's other directors — is the latest step in the fight that threatens to unravel a 75-year relationship unique in American banking. St. Paul-based Bremer Financial, with assets of around $12 billion and about 80 branches in Minnesota and three other states, is the only U.S. bank owned by a foundation.
After the bank's executives talked with another bank earlier this year about a potential merger, the three trustees and seven other directors of the bank began fighting over the shape and control of such a deal. The squabbling spilled into the open in October when the three trustees publicly declared the bank was on the block.
The trustees also lined up other investors to buy shares in a complicated maneuver to remove directors who objected to their lead. Monday's filing included a counterclaim that the other directors don't recognize the trust's right to sell its stake in Bremer Financial and won't set a date for a broader meeting of shareholders.
"BFC's incumbent leadership has done everything it can to obstruct a sale," the trustees said in the filing.
In response, Bremer Financial said in a statement: "We remain confident in our legal position, our strong financial results and in our talented team's ability to compete for the long term."
Both sides cite the wishes of Otto Bremer, who started the bank and the trust, to support their arguments. Bremer Financial said Bremer, who died in 1951, intended to create a "permanent relationship" with the bank's profits fueling the trust's charitable work.
On Monday, the trustees said Bremer's 1944 directive creating the trust made clear that trustees could sell its banks under "unforeseen circumstances."
"He left no room for the BFC board to second-guess this decision," the trustees said in the filing.
"The recent, revolutionary changes in the banking industry and the threats they pose to BFC and similar banks are circumstances that were unforeseen to Otto Bremer in 1944," the trustees also said.
They noted it was the bank's executives who first initiated the sale process by holding talks with a prospective merger partner earlier this year. No formal offer came together.
But once begun, the trustees said, both the bank and the trust were on a collision course with federal laws. The trust has to comply with tax rules that say charities must annually distribute funds equal to at least 5% of their assets. Meanwhile, the bank has to meet minimum capital requirements, under U.S. and state laws.
"The events of 2019 have revealed that BFC shares are worth approximately double their previous valuation," the trustees said in the filing.
In concrete terms, such a doubling would raise the assets of Bremer Trust to about $2 billion from $1 billion, meaning it would have to lift its annual giving to $100 million from $50 million to comply with tax rules. Bremer Financial would have to increase the dividend it pays to the trust by $50 million as a result. Trustees said they don't think it is possible for Bremer Financial to do that and comply with capital rules.
"BFC cannot sustainably increase its dividend by that amount," the trustees said in Monday's filing. As a result, the trust "now faces an existential crisis. And its only path forward is to sell its shares in BFC."
In the original lawsuit, Bremer Financial disputed the trustees' view that discussion of a higher valuation for the bank immediately changes the trust's value or puts it at risk of violating tax laws. They said trustees have not even asked for more dividends from Bremer Financial.
"This confirms that trustees' tax arguments are a pretext for their real aim — selling Bremer at all costs," the original lawsuit said.
The executives and other directors say that the three trustees — Brian Lipschultz, Daniel Reardon and Charlotte Johnson, all of the Twin Cities — want to increase their personal prestige and compensation by selling the bank and doubling the size of the trust.
In Monday's response, the trustees said: "Plaintiffs know — or should know — that these assertions are false. The trustees have agreed to freeze their compensation for two years following a sale. And, as plaintiffs are well aware, any future changes to trustee pay would require this court's approval."
The trust's operation has been subject to annual review by a St. Paul district court since 1989, as part of compliance with federal law.