East Grand Forks grapples with a $510,000 mistake with loan

After the great flood of 1997, East Grand Forks, Minn., issued a $510,000 development loan to a business helping rebuild downtown.

Then the city forgot all about it, only coming across the aged documents last spring. East Grand Forks has not been repaid even a dollar. And it may never be. After discovering a thicket of legal complications, the City Council voted last week not to sue for the money.

"It isn't a surrender; it's not saying we're not going to get any money out of this deal," said Council Member Marc DeMers. "It's just we have to wait for a better time." DeMers called the situation "an embarrassment to myself as well as the community."

The city says it hasn't found problems with other loans awarded during that period.

But the mistake has intensified criticism from residents because a leader in the business that received the loan, Dan Stauss of Boardwalk Enterprises, is the brother of Mayor Lynn Stauss.

Neither Stauss is talking to the press, but the mayor has said he didn't know about the loan and recused himself from discussions on the matter. His brother didn't join the business until several years after the agreement was signed.

The company owns Boardwalk Bar and Grill, which sits on the city's popular "restaurant row."

A good chunk of the money could never be recovered anyway because the state has a six-year statute of limitations on collecting debts. Boardwalk was supposed to pay $30,000 annually between 2003 and 2019, but the city has no claim on nearly one-third of that now.

"It's unfortunate that it's gone on as long as it has, and it doesn't look good," DeMers said.

Boardwalk, for its part, has insisted that the city owes it $742,000 for construction costs and real estate taxes as part of the 1999 agreement. The company countered that Jim Richter, the economic development chief who was supposed to oversee the loan, never responded to the company's letters about the charges. Richter has since resigned.

"This whole thing is such a fiasco," Dan Stauss told East Grand Forks officials last year in a closed meeting. The city released an audio recording of the discussion.

A lawyer advised the city that if it took civil action, Boardwalk could try to recoup the money it claims it's owed.

There are other complications: Boardwalk's building received another $1 million mortgage at the time from a private bank. Now the property is underwater, worth less than that mortgage. The city is second on the lien, and officials said it wouldn't be able to collect the money until the property value improves.

The city also forgot to record the mortgage when it issued the loan in 1999, preventing it from showing up in title searches.

Dan Stauss told officials that he wouldn't have taken over the property if he knew there was a $510,000 mortgage from the city, according to the recording. He accused the city of hurting his business by allowing the controversy to leak to the local press before they could resolve the problem.

"The destruction that's happened to the Boardwalk is unbelievable," he said.

A new director took over the city's economic development authority in February, and the city is working to improve its financial oversight.

"It's given the city a pretty good black eye," said city administrator David Murphy.

Maya Rao • 612-673-4210