At heart of the Bremer dispute, a midcentury banker's wishes and the demands of the digital age

Otto Bremer died in 1951 possessing a bank in St. Paul, stakes in a couple dozen more around the state and a straightforward idea: that their profits should go to their communities.

With no wife or children to carry on the businesses, Bremer placed his stakes into a foundation and set forth expansive hopes for it.

The foundation, called the Otto Bremer Trust, over the decades grew into one of Minnesota's largest. It has assets of around $1 billion and gives away about $50 million a year.

The banks also grew, unified when laws allowed, took the name Bremer Bank in 1998 and today form a group surpassed in size in Minnesota only by Wells Fargo, U.S. Bank and TCF.

Now, the foundation's trustees, led by a grandson of one of Otto Bremer's closest associates, want to sell the bank. They say the company's rising value, inflated by a strong economy and a deal-making wave, has outpaced its ability to fund the level of donations the foundation is required to make under tax law.

But the leaders of the bank say that is not what Otto Bremer wanted. They launched a legal battle in a St. Paul court last week to stop the three trustees, all of whom also sit on the bank's 10-person board.

"Any purported sale would violate the express terms of the governing Trust Instrument," the lawsuit said, referring to the document Otto Bremer and his attorneys wrote in 1944 to create the foundation.

The outcome may turn on judges' opinions of two sentences in the 13-page document and present-day requirements for charities under U.S. tax law. There is no precedent for the dispute because no other U.S. banks are owned by a foundation.

"This is a unique situation for a $13 billion bank to have the ownership structure that it does, with the objective to support those communities," said Terry McEvoy, an analyst at the investment bank Stephens, citing Bremer's asset base.

From its headquarters in St. Paul, Bremer's approximately 80 branches stretch through the metro area to small towns throughout Minnesota, North Dakota and Wisconsin. It produces solid profits, has a healthy balance sheet and reputation enhanced by the foundation's outreach. The bank contributes about half of its profits each year to the foundation; last year, that contribution was about $80 million.

"We are proud of being the engine that has driven [the foundation's] giving," Jeanne Crain, Bremer Bank's chief executive, said in an interview last week.

Across seven decades, the relationship between the foundation and banks survived nine recessions, numerous regulatory changes and several waves of industry consolidation.

But another round of big deals in the banking industry is underway, spurred by the technology-driven shift in the way that people bank. As banking over computers and smartphones became safer and more convenient, people stopped visiting branches often.

Pressure from rising technology costs spurred executives at TCF Financial, the Plymouth-based bank that was about twice Bremer's size, to merge the firm earlier this year with a bank in Michigan. And it's one reason, the Bremer foundation trustees say, that this is the right moment to sell the bank.

"Because of the changes in the financial-services industry, it can be daunting for a stand-alone regional bank to succeed," trustee Brian Lipschultz said in late October when the conflict became public. His grandfather, Samuel Lipschultz, was an attorney who helped create the foundation and was one of its first trustees.

The bank's other directors, in the lawsuit, call that statement "disingenuous" and the implication that the bank would struggle in the future a "falsehood." Instead, they say the trustees — Lipschultz, Daniel Reardon and Charlotte Johnson, all of the Twin Cities — realized in recent years that they could raise their profiles and income "if the Trust exited its long-held stake in Bremer and invested in different assets."

The trustees are still preparing a formal response to the suit. But in a written response to questions from the Star Tribune, the trustees on Friday said their actions in recent months have been shaped by "new information" that the market value of its Bremer Bank stake is about double the approximately $1 billion it previously believed.

Since the foundation is required under federal tax law to give away money equivalent to 5% of its assets annually, that higher valuation would mean it would have to give away about $100 million a year. That is more than the bank has provided to the foundation from its annual profits.

"As good as [Bremer Bank] has been, it is unrealistic to believe that the bank will be able to deliver dividends adequate to meet our increased distribution requirements," the trustees wrote.

Banks as large as Bremer rarely come up for sale, particularly in the Midwest. In the last 10 years, only five Midwestern banks with an asset base exceeding $10 billion have been sold, analyst McEvoy said. TCF was one of them.

In April, executives from a bank similar to Bremer in size approached its executives to explore a stock-for-stock merger, a structure similar to TCF's deal with Michigan's Chemical Financial Corp. Neither side made a proposal, and the discussions ended in June.

But they led Bremer directors to hire an advisory firm to analyze the bank's value. The result was a valuation greater than anything the trustees had considered in the past, they said on Friday.

The trustees separately hired an investment bank to explore selling Bremer. That firm concluded that Bremer was worth even more in a cash deal and the trustees began to push for that. In August, another bank approached Bremer with another offer, also richer than previous valuations.

In the lawsuit, Bremer directors said the trustees' view of how those valuations affect its tax-law compliance is dubious.

The directors note that, in that 1944 document, Otto Bremer ordered the foundation to own shares of his banks even if they were "unproductive of income or be of a kind not usually suitable for trustees to select or hold." In the next sentence, however, Bremer said those shares can be sold "owing to unforeseen circumstances."

When he died, Bremer's personal fortune of about $1 million, about $10 million in today's money, also went to the foundation.