Minnesota AG submits closing arguments in Otto Bremer Trust dispute
St. Paul-based charitable foundation sits on at least $1B in assets
ST. PAUL -- Closing arguments in a lengthy probate hearing that could decide control over the Otto Bremer Trust — one of the state’s oldest philanthropies — as well as St. Paul-based Bremer Bank are scheduled before a Ramsey County District Court judge on Jan. 31.
Citing a lack of checks and balances and allegations of self-dealing, the Minnesota Attorney General’s office has sought to replace the three trustees of the trust, a St. Paul-based charitable foundation that sits on at least $1 billion in assets.
“Trustees have persistently failed in the administration of the Trust and removal of the Trustees best serves the interests of the beneficiaries,” reads the Minnesota Attorney General’s Jan. 11 legal filing.
Attorneys for Brian Lipschultz, Daniel Reardon and Charlotte Johnson have argued that their corporate approach toward seeding charitable causes still adheres to the intent of Otto Bremer. Otto Bremer was a German immigrant who founded the philanthropy in 1944 and had used his personal fortune before that to prop up banks and farming communities across the Midwest during the Great Depression.
A Jan. 10 filing by attorneys with the law firm of Ciresi Conlin representing the trustees highlights the powers granted to the trustees by the trust’s founding documents.
“The Trust instrument provides considerable discretion to its trustees, both in the choice of selecting the charitable purposes to fund and in the general administration of the Trust and its property,” reads the proposed order from Michael Ciresi, Jan Conlin, Katie Lehmann and Mathew Korte.
Decision could have far-reaching impact
Between the two sides, written findings of fact, conclusions of law and proposed judgment orders submitted to Ramsey County District Court Judge Robert Awsumb in mid-January span nearly 300 pages.
A decision in the probate case could have far-reaching implications for Bremer Bank, a major Midwest farm lender. The trustees have sought to sell voting rights in the bank — a $16 billion financial institution that ranks as at least the fourth-largest bank in the state — in order to position it for a sale.
The bank’s board of directors had explored the possibility of a sale or merger in 2019 and then pulled back. The move came over the objections of bank president Jeanne Crain and other board members.
The Bremer Trust trustees — led by Lipschultz — continued to unload controlling shares to 19 East Coast hedge funds in October 2019, under the stated premise that a bank sale could fund a huge expansion of the philanthropy’s charitable work.
Attorneys for the trustees have argued that the legal structures around the philanthropy require it to spend a certain percentage of its assets on charitable giving, and the bank’s growing value in 2019 left little choice but to sell the institution in order to comply.
The bank and its employees have filed separate lawsuits to stop the sale, the trustees have filed counter-claims, and several hedge funds have filed lawsuits of their own. The share transfers have been put on hold by the court until the legal disputes are resolved.
The legal fighting has proven costly. The trustees have spent $20 million on legal fees related to the sale of controlling interests in Bremer Bank, and an additional $7.5 million fighting the attorney general’s removal petition. Most of that money has come from the philanthropy’s charitable assets. As of late November, insurance had paid out $3 million related to the removal petition.
A ‘corporate mindset’
According to Minnesota Attorney General Keith Ellison’s office, Reardon and Johnson largely allowed Lipschulz to institute a “corporate mindset” at the philanthropy, which adopted the slogan that it “works at the intersection of finance and philanthropy.”
The trio fired the trust’s executive director in 2014 and named themselves as co-chief executive officers, effectively eliminating day-to-day financial oversight of their decisions. Their salaries grew substantially, and Lipschultz and Reardon also received sizable benefits from naming themselves as investment advisers for the Trust.
Rather than allowing Ellison’s office to unseat the trustees, their attorneys have argued for raises of up to $200,000.
The trustees’ salaries currently average $450,000 annually, equivalent to about 2 percent of the trust’s cash income. In addition, Reardon and Lipschultz share another $388,000 in “investment advisory fees” between them.
Their attorneys called that compensation low, given that the founding documents allow them to pocket up to 4 percent of the Trust’s cash income. They recommended setting annual salaries at $425,000 to $460,000 for Johnson, and at $650,000 to $720,000 for each of the two men.
“The Trustees have not been compensated at or near the 4 percent level and do not ask to be compensated at that level now,” reads their latest legal filing.
Grants to faith-based organizations
In addition to the philanthropy’s traditional grantmaking, the three trustees began issuing loans marketed as “program-related investments” to Midwest charities, which caused some confusion among the nonprofit recipients.
Program officers testified that the foundation did not historically funds arts organizations, religious institutions, animal causes, schools, one-off special events or nonprofits located outside of Minnesota, Wisconsin, North Dakota and Montana.
Nevertheless, often working outside of the traditional staff review process, the trustees steered grants and loans to faith-based organizations, a private school that offers enrichment programs for low-income youth from Minneapolis, the Como Park Zoo and Conservatory, the Ordway Center for the Performing Arts, WE Day student events organized by a Canadian organization, and a newsletter on philanthropy written by a public relations consultant, among other causes that seemed to depart from Bremer’s specified priorities.
“It didn’t feel like a place with a lot of integrity,” said a program officer, taking the witness stand in late September. “I felt there were grants that were inappropriate.”
Other office behavior irked key staff, some of whom approached Ellison’s office with concerns.
Lipschultz, who joined the philanthropy in 2012, led a name change from the Otto Bremer Foundation to the Otto Bremer Trust, in light of its more corporate approach toward charity.
He continued to oversee Eagle Street Partners, an investment firm he founded that backs wireless infrastructure businesses, while at times using his executive assistant at the Trust to fax, file and ship packages.
The assistant testified he asked her to use her personal credit card and seek reimbursement from the philanthropy. When she raised concern with the foundation’s financial controller about using trust resources for a private business, Lipschultz asked the assistant to use his own personal credit card instead.
After being informed he was in violation of the rules of the Internal Revenue Service, Lipschultz testified that he later paid the trust back roughly $2,000 for the use of staff time and philanthropy resources, which in legal filings his attorneys deemed “an innocent … misuse that was appropriately and promptly corrected.”
Otto Bremer Trust
- Based in St. Paul. 46 employees.
- Founded in 1944 by philanthropist Otto Bremer.
- Issues more than $50 million annually in charitable grants and loans across Minnesota, Wisconsin, North Dakota and Montana.
- Owns 92 percent of Bremer Bank.
- Overall assets of $1 billion to $2 billion.
- Led by Trustees S. Brian Lipschultz, Charlotte Johnson and Daniel Reardon.
- Based in St. Paul. 83 branch locations. 2,000 employees.
- Third-largest bank in Minnesota by assets ($15.7 billion).
- Earned net income of $155 million in 2020, and distributed $73.4 million to the Otto Bremer Trust that year.
- Major Midwest farm lender.
- Chief executive officer Jeanne Crain.