Bremer case lays bare a relationship that goes back decades — but may have reached its limit

Nearly two years after discord in the relationship between Bremer Financial Corp. and the Otto Bremer Trust burst into public view — and after battling each other in court over the past month — one giant question remains unanswered:

Why are these two still wrapped up with each other anyway?

Nowhere else in America does a charity like Bremer Trust own a bank like Bremer Financial. Meanwhile, at a time of fast, sweeping change in how people use banks, Bremer Financial's ability to adapt seems constrained by the trust's ownership.

But the bank's top executives don't mind. Aided by the Minnesota Attorney General's Office, the bank has spent $20 million over the last two years arguing to a state judge against the trust's attempt to sell it.

"I'd always heard that Bremer can never be sold," Jeanne Crain, the bank's chief executive, said in testimony at an evidentiary hearing that concluded Friday.

The relationship ties up Bremer Financial in another way. Because it's obligated to deliver profits to the trust, the bank has less capital on hand to make acquisitions of its own. And it can't raise capital in the stock market the way a publicly listed bank could.

The two entities were formed by the same entrepreneur, Otto Bremer, a German immigrant who used the fortune he made as a co-owner in the Schmidt Brewing Co. in St. Paul to buy stakes in rural banks in the 1920s and 1930s.

The childless Bremer decided in the late 1940s to create a foundation that would inherit his bank interests — which sprawled across Minnesota, Wisconsin, North Dakota and Montana — and give the profits to charities in those places.

"This relationship is an important part of Bremer's identity, it's one of our differentiators, and we are proud of it," Bremer Financial said in a statement.

"Bremer Bank is an asset to its communities and has been an important part of the work of the trust over the last 75 years," the trust said in a statement. "As was extensively documented in the hearing, we did not go looking for the circumstances we find ourselves in."

In the 1944 document establishing the foundation, Otto Bremer wrote that trustees could sell the bank holdings under "unforeseen circumstances" that they determined, but he gave no further guidance. He appointed three colleagues in his original bank to be trustees of the charitable foundation, and gave them the right to pick their successors.

Today, Otto Bremer Trust is led by three descendants of the original trustees — Charlotte Johnson, Brian Lipschultz and Daniel Reardon. Their attempt to split the trust from the bank is akin to what happens when second- and third-generation descendants of a family-run business gain control. Often less interested in the original business, children and grandchildren of company founders will sell it off, take the money and try something else.

The trust's own growth prospects are constrained by the connection to the bank. Bremer Financial is the trust's largest asset, accounting for more than 90% of its total. The trustees' attempt to monetize the bank by forcing a sale in 2019 resulted in the current court case.

With the evidentiary hearing now complete, Ramsey County District Judge Robert Awsumb is likely to take a few months to decide whether to remove the trustees from their jobs, as the Attorney General's Office is seeking.

No matter what he does, the fundamental tension and mutual constraints in the Bremer relationship are likely to continue.

In 2014, trustees renamed what had been known as the Otto Bremer Foundation to the Otto Bremer Trust. They sought a more direct connection to the Federal Reserve Bank of Minneapolis, which oversees banking in the Upper Midwest, and tried to assert a greater role in the affairs of the bank.

The newest trustee, Lipschultz, a grandson of one of the original trustees, took a particularly aggressive tack after joining the trust in 2012. Testimony and documents in the court hearing showed he worried that Bremer Financial, which has about 80 bank branches, wasn't large enough to absorb growing technology costs.

And when Crain notified the trustees in spring 2019 that Great Western Bancshares, a South Dakota bank nearly Bremer's size, expressed interest in discussing a merger of equals, Lipschultz quickly started talking to advisers about selling the bank outright.

"You can be absolutely sure they will never open the door to an outright sale. But we will," he texted an investment banker shortly before the Bremer Financial board first heard of the trustees' intention to do just that.

Congress tried to eliminate interference by the descendants of business founders and their associates with the Tax Reform Act of 1969. The law required foundations to sell controlling interests in companies, or lose their tax-exempt status.

For decades, business founders and their families used such foundations to prevent their investments from being taxed, and abuses grew. For instance, in the late 1940s, a New York University alumnus donated a pasta company to the school, which then tried to apply its tax-exempt status on the business.

"Ford, Rockefeller, Kellogg and a whole raft of others got caught with these single holdings in their foundations," said Paul Olson, former president of the Blandin Foundation, the Grand Rapids, Minn., charity started by paper mill owner Charles K. Blandin. "They wanted to maintain control of the company while they got the charitable deductions and could direct where the money went."

After the federal law passed, the Otto Bremer Foundation tried to sell its stake in Bremer Bank, but it found no buyers. As early as 1976, Bremer executives — the foundation and bank were so intertwined at the time that one person led both — reached out to about 30 different prospective buyers. They ranged from banks in Canada, Montana and Texas to investor groups in Taiwan and the Middle East, documents in the current hearing showed.

In 1989, when the government deadline for compliance with the 1969 tax law arrived, Bremer executives alighted on a different strategy. They created two classes of stock, a maneuver used by tech startups and other firms so founders can retain voting control through one class while using the other class to raise capital.

Bremer flipped that structure. Because the 1969 law forbade the trust from exerting control over the banking business, the trust got all of the non-voting shares and 20% of the voting ones. Together, the two classes left the trust with a 92% ownership stake in the bank. The attorney general and court monitor the trust under laws governing charities.

After that 1989 reorganization, the balance of power in the relationship swung to the bank's executives, responsible for its day-to-day operations and the profits that fueled the trust. In the three decades since, Bremer Financial has delivered nearly $1 billion of its profits to the trust. The trust, in turn, has distributed nearly all of that to hundreds of charities.

But there have been several years since 2000, and as recently as 2016, when the bank didn't deliver the minimum level of profits needed by the trust for it to both maintain its asset base and comply with tax laws that require it to give away 5% of its asset value annually.

In court, Crain and other executives showed forecasts that Bremer Financial would be able to meet those minimums through the 2020s.

Even so, funding uncertainty is one reason the trustees are eager to diversify the trust's assets.

When the Great Western opportunity arose in 2019, the three trustees quickly began looking at various sale options for Bremer Financial. Just two months into their exploration, they told Bremer Financial's board they would only accept an outright sale of the company because that would be most lucrative to the trust.

A sale, however, would likely mean the ouster of Crain, other executives and employees throughout Bremer Financial. Just days after that ultimatum, Bremer Financial hired takeover defense attorneys and battle lines quickly hardened.

In court, attorneys never directly asked Crain why she was so opposed to a sale. But when questioned about the prospect that even the merger-of-equals with Great Western might lead to layoffs at the bank, she replied that Bremer might not have done it for that reason.

Directors at family-owned and community banks often consider the effect on employees when looking at deals, said Mike Iannaccone, a Chicago-based investment banker who specializes in the banking industry.

"Most people would put investors first," he said. "But when this type of board is looking at it, they're typically looking at customers first, their employees second, their communities third and then shareholders."

The hearing revealed that Bremer Financial executives continued to receive interest from other prospective partners or buyers even while they were splitting with trustees in fall 2019.

One of them was TCF Financial, which had merged with a Michigan bank earlier in 2019 and has since been acquired by Huntington Bancshares of Ohio.

Great Western, the bank whose outreach led to the fracture of the Bremer entities, last month agreed to a merger of equals with Montana-based First Interstate Bank.