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Published July 03 2010

Bank bails itself out of bad debt

With time running out, the Olson brothers and their bank partners had hit a brick wall as hard as the diamonds sold at the family’s Royal Jewelers store in downtown Fargo.

Cornerstone Bank, which Brent, Richard and Greg Olson started with three other area investors, was stuck with $10.8 million in bad debt attached to Minnesota auto mogul Denny Hecker.

They needed the debt off the books before the next bank exam in roughly three weeks, or the bank would be “shut down immediately,” Brent Olson wrote in a desperate

e-mail to Hecker on Dec. 24, 2008.

The brothers simply didn’t have the money to cover the debt, he wrote.

But Hecker’s hands also were supposedly tied by an agreement with his biggest creditor, Chrysler Financial Services, not to pledge any more assets to secure his existing debts.

Cornerstone Bank’s other partners – prominent Fargo businessmen Dell Arneson, Jim Ingstad and Ole Rommesmo Jr. – were willing to inject the capital needed to wipe the debt from Cornerstone’s books.

In return, they wanted 80 percent of the Olsons’ stock in the bank, Brent wrote in the e-mail to Hecker.

“I am begging you to find a resolution to this,” he wrote, “as this will be over one way or another very soon and to lose our stock will be horrible.”

But lose it they did.

“Because of the Hecker loan, yes, the Olsons have been diluted,” Ingstad told The Forum this week.

He wouldn’t get specific about the ownership percentages, saying only that the Olsons own fewer shares. Some of the bank’s employees also own stock, he said.

Cornerstone Bank’s board chairman and CEO, Dennis White, confirmed that Ingstad, Arneson and Rommesmo are now the bank’s majority owners.

“As far as beyond that, I cannot comment,” he said.

A written statement issued this week by Richard Olson and Royal Jewelers responded to claims by the trustee handling Hecker’s bankruptcy but didn’t address ownership in Cornerstone Bank.

Customers react

Cornerstone Bank officials have been doing damage control since last week, when the St. Paul Pioneer Press first wrote about bankruptcy trustee Randall Seaver’s lawsuit against Royal Jewelers, Richard Olson, the bank and its owner, Cornerstone Holding Co. The Forum published the Pioneer Press article, with additional material from the Minneapolis Star Tribune.

“We certainly have seen response, reaction from our customers, and rightfully so,” White said, noting the bank sent a letter to customers explaining its position on the matter.

White wouldn’t comment on whether the bank has lost customers as a result of the publicity.

“The thing of it is, we are in total compliance with the regulatory authorities and the FDIC insurance,” he said, adding that the

$10.8 million was returned to the bank by its owners, “so that’s a non-event.”

Tim Karsky, commissioner of the North Dakota Department of Financial Institutions, said banks the size of Cornerstone undergo an examination by regulators from his department or the Federal Deposit Insurance Corp. every 12 to 18 months.

Individual exam results are confidential under state law, so Karsky couldn’t say whether regulators found any irregularities in recent exams of Cornerstone Bank.

“I would just say that if we did, we would have handled that,” he said.

Cornerstone Bank was created in 2006 with the acquisition of Citizens State Bank of Enderlin, N.D. In addition to Fargo and Enderlin, the bank has locations in Bismarck, Fort Ransom, Lisbon and Sheldon.

The bank’s customers needn’t worry about the safety of their deposits, which are insured up to $250,000 by the FDIC, and to unlimited amounts on certain deposits, Karsky said.

“I think the deposit insurance really eliminates a lot of the fears of people causing a run” on the bank, he said.

Ingstad said the bank has nothing to hide.

“We did exactly what the regulators wanted us to do,” he said.

Debt moved off books

The trustee’s complaint against the bank says that as Hecker’s automotive empire crumbled and he slid toward bankruptcy, his insolvency “threatened the very existence of Cornerstone Bank.”

Hecker was originally referred to the bank by Richard Olson, according to the complaint. It claims the two men met more than 25 years ago when Hecker was shopping at Royal Jewelers, and they maintained a close personal and business relationship.

Ingstad said he’s never met Hecker, and that he, Arneson and Rommesmo weren’t aware of Hecker borrowing from the bank.

“The first I knew we even loaned Denny Hecker any money is when I knew that loan was delinquent,” he said, adding, “I wasn’t all that happy about it.”

The bank’s official statement, posted on its website, claims it entered into loan transactions with Hecker based on false financial statements and “statements by Denny Hecker later discovered not to be true.”

Ingstad, who owns Radio Fargo-Moorhead and is a silent owner in the local Gateway auto dealerships, said Cornerstone wasn’t in jeopardy of going belly-up.

“As soon as we found out the loan was delinquent, the owners stepped up and wrote a check to cover it,” he said.

That happened through an “assignment of interest,” a copy of which was included in court papers. It’s dated Dec. 31, 2008, and shows that the bank transferred the

$10.86 million in outstanding debt on four Hecker loans to Cornerstone Holding Co.

On the same day, the holding company assigned the debt – and the rights to try to collect it through the bankruptcy proceedings – to Blackstone Financial, a limited liability company created by Brent Olson on Dec. 22, two days before his desperate e-mail to Hecker.

Later, in an examination by the trustee’s attorney, Brent Olson was asked why the loans were moved out of Cornerstone Bank.

“Well, we didn’t want the media attention,” he said, according to the transcript. “So we wanted to remove it from the bank. Disassociate ourselves from it.”

Transaction questioned

Blackstone’s 2009 annual report to the North Dakota secretary of state lists Brent Olson as president, Arneson as secretary and Rommesmo as treasurer.

Arneson owns U Motors Inc. and a grain elevator near Hillsboro, N.D., and also has developed property in Fargo. He did not return a message seeking comment, nor did Rommesmo, whose Rommesmo Companies include Fargo Tank & Steel, Dakota Steel & Supply, Minnkota Windows and FTC Transport, according to the company’s website.

The decision to transfer the debt to Blackstone, Brent Olson said while being questioned in the bankruptcy case, was made upon the advice of Eide Bailly, the bank’s regulatory adviser.

The trustee contends that the Blackstone transaction would never have happened if the bank hadn’t used its personal connections to Hecker to obtain additional collateral from his corporate entities and a blanket lien in his personal assets, allowing the bank “to recover more than it would have as a creditor in this bankruptcy case.”

The lawsuit also accuses Richard Olson of helping Hecker conceal expensive watches and a pair of cufflinks from the trustee.

The statement from Olson and Royal Jewelers says Hecker asked them to appraise the items after he filed for bankruptcy.

“When Royal Jewelers learned of the bankruptcy trustee’s claims to the watches and cufflinks, these items were turned over to the trustee by Royal Jewelers,” reads the statement, faxed to The Forum from Vogel Law Firm.

The statement also addresses the trustee’s argument that payments of $85,000 to Royal Jewelers and $10,980.86 to Richard Olson made by Hecker before he filed for Chapter 7 bankruptcy on June 4, 2009, should be returned to the bankruptcy estate.

“Both Royal Jewelers and Richard Olson dispute that the trustee has a right to the return of these payments,” it reads.

Investors won’t budge

The trustee’s lawsuit seeks to recover the value of what it claims were fraudulent transfers from Hecker to Cornerstone Bank, and to either not allow the defendants to collect anything from the bankruptcy estate or put them last in line behind all other creditors.

As The Forum reported last summer, the bank, Cornerstone Holding and Blackstone Financial filed suit against Hecker on Sept. 10, claiming they suffered a loss of $12.74 million that Hecker obtained through “materially false financial statements.”

At the time, Hecker reportedly owed $767 million to creditors, including Cornerstone and Fargo’s Vision Bank, which lent $7.12 million to Hecker and also filed suit against him, claiming he obtained the loan “under false pretenses, false representations, and/or actual fraud,” Forum archives show.

The bank’s official statement also accuses the trustee, Seaver, of making false allegations to get back at the bank for suing him to recover $425,000 in proceeds from the sale of one of Hecker’s auto dealerships in Brainerd, Minn. The bank contends it was first in line for the proceeds, which went into the bankruptcy estate.

“We won’t give up our first position on several things that we have,” Ingstad said.

Whether Blackstone will recover any of the money it claims Hecker owes remains to be seen. It could be years before the bankruptcy case is resolved, Ingstad said.

“Denny Hecker isn’t exactly my favorite guy,” he said.

Readers can reach Forum reporter Mike Nowatzki at (701) 241-5528