In June 2003, Dan Stauss sent a letter to former East Grand Forks Economic Development Director Jim Richter.

The note details costs his business had incurred constructing the Boardwalk building for which he argued the city was responsible. It included construction delays because of work on the adjacent city-owned Infill Building and real estate taxes the city agreed to pay.

“Boardwalk had a contract with the city and we performed,” he wrote. “Boardwalk wants to get reimbursed its costs for those items due.”

Six months later, nothing apparently had been done, and Stauss sent Richter another letter.

“Since nothing has happened to cure this situation, it is our position that we will take the monies owed Boardwalk by the city or EDA and offset our annual installment due until we recapture our proceeds,” he said. “This appears to be close to the first two (years’) installments of $30,000 each.”

Nearly 11 years later, in April 2014, controversy erupted when city staff members revealed a $510,000 loan -- with $30,000 to be repaid annually -- to Stauss’ group, Boardwalk Enterprises, had not been paid to the East Grand Forks Economic Development and Housing Authority. The loan was used to help construct the commercial building at 415 Second St. N.W., owned by Boardwalk Enterprises.

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Weeks later, Richter retired. And today, the disputed debt hasn’t been resolved after closed-door meetings and pleas from the public.

The issue has raised more ire because property records list Boardwalk partners as Dan and Scott Stauss, the longtime Mayor Lynn Stauss’ brother and son, respectively. The mayor consistently has said he wasn’t aware of the outstanding debt and said he isn’t involved with the business, and Boardwalk officials have said they didn’t know about it until it became public last year.

Dan Stauss, who has said he wasn’t part of Boardwalk Enterprises until 2002, has declined to comment to the Herald multiple times since the loan was revealed more than a year ago, including during a brief phone call earlier this month.

“I don’t want to talk to you. I’ve told you that before,” he told a Herald reporter this month.

Hundreds of public documents on file at East Grand Forks City Hall and reviewed by the Herald provide some context into the origins of the Boardwalk Enterprises loan and what happened in the aftermath of it becoming public. And recordings of closed-door meetings, made public after a challenge from the Herald, show tense discussions between Boardwalk and the city.

The dispute now has reached court. Last week, an owner of the bar and restaurant inside the Boardwalk building said the city is unfairly punishing her business by putting conditions on its liquor license in an effort to settle the loan dispute.

Reveal and aftermath

The city of East Grand Forks, under new City Administrator David Murphy, conducted an independent audit of what was then known as the Economic Development and Housing Authority last year. On April 1, 2014, Richter provided the Boardwalk file to City Attorney Ron Galstad, with then-City Council President Craig Buckalew present, and stated the “file is outstanding and needed to be resolved,” according to a timeline previously provided by Galstad.

The Boardwalk Enterprises loan was first revealed to the public on April 29, 2014, during an open EDHA Board meeting.

Richter did not participate in the meeting and declined to comment afterward. He did not return a message seeking comment for this article.

In a report later released to the public, the auditors noted that the mortgage on the Boardwalk Enterprises loan had never been filed with the county and no payments had been received.

“We recommend the mortgage now be filed and collection on the $510,000 be pursued,” the Abdo, Eick and Meyers report, dated May 28, 2014, states. It added that the “director claims he forgot about the file, but later stated he had had discussions with the individuals who own the building regarding when they would repay.” The report did not specify to whom Richter was referring.

The audit noted problems with EDHA loans to other businesses, including lack of documentation, no information on the risk analysis of borrowers, and one loan that was to be paid back as a tax deductible donation. The EDHA Board later wrote off three loans with balances totaling more than $200,000 that were deemed uncollectable.

Murphy wrote to Richter on May 9, 2014, informing the director that Murphy planned to recommend Richter be fired. Murphy cited the audit report, along with “other performance deficiencies.”

Richter asked for an early retirement that day.

“Thank you for the opportunity to be part of this organization for the last 27 years,” Richter wrote in a letter to the mayor, City Council and EDHA Board. “I will truly miss everything about what you do for our community.”

The city and Richter agreed to a separation agreement stipulating a $44,199 cash payment to Richter, $37,169 of which represented his accumulated sick leave. It also required he have no future employment with the EDA and he waive the right to contest his termination.

Late last year, the city filed an insurance claim to the League of Minnesota Cities in an effort to recoup some money over the apparent mishandling of the loan. In late May, the organization denied the claim by arguing the actions of EDHA or city employees “did not rise to the level of malfeasance, willful neglect of duty or bad faith.”

What got missed?

City officials consistently have questioned how such a large loan could go unnoticed for so long.

Dan Stauss told the East Grand Forks Exponent in a Dec. 3 article that it didn’t come up in multiple lien searches, and told city officials the money was listed in the city’s books under grants rather than loans, according to meeting minutes.

Galstad said in a closed June meeting that the money came from federal Community Development Block Grant funds and the city decided to make the $510,000 a loan in order to benefit the EDHA for future development. He added that the city’s finance department didn’t credit the EDHA with a $510,000 loan when it was first made.

“It was never on a loan report. … It was never a part of the EDA financial records,” Galstad said. Galstad added that he was on the EDHA at one point and was present at most of its meetings since 2002 and the loan never came up.

A memo from Brad Sinclair, the attorney hired by the city for the loan dispute, indicates Richter failed to bring Stauss’ claims to the attention of the EDHA Board.

“How did it get this far without anybody doing anything about it?” said former City Council member Dale Helms.

‘Blindsided’

In an East Grand Forks Exponent article published last December, Dan Stauss said he wasn’t aware of the loan until after Galstad stopped by the Boardwalk in the late afternoon of April 29, 2014, the day of the EDHA meeting. The story about the unpaid loan was on the front page of the Herald the next day.

Mayor Lynn Stauss said after the story ran he “knew nothing about that loan.” He was mayor at the time the loan was made and signed off on a development agreement that contained information about a $510,000 loan to be finalized later in 1999.

Mayor Stauss said in a June 2014 meeting that he signed a lot of documents that are prepared for him. He recused himself from discussions over the loan, and didn’t participate in two closed-door meetings on the issue.

Mayor Stauss said in a meeting last month the city “did a very poor job” in handling the loan issue, arguing that it was wrong for it to end up in the press first. He also said Boardwalk has “legitimate bills” against the city that need to be resolved.

Dan Stauss wasn’t part of the business until 2002, three years after the original development agreement was signed, according to the Exponent article. One council member said Boardwalk was “blindsided” by the news of the loan.

“We have no documents signed or unsigned on this matter nor have we ever seen any documents,” a May 21, 2014, letter from Dan Stauss to Galstad and Murphy reads.

Still, Sinclair said Stauss was “aware of the various agreements between the city of East Grand Forks/Economic Development Corp. and Boardwalk Enterprises.”

“From the limited information I have reviewed, it appears that Boardwalk Enterprises’ new owner, Dan Stauss, had knowledge of the EDC mortgage,” Sinclair wrote in a “document prepared in anticipation of litigation” to Murphy in June 2014.

When asked by a council member about his knowledge of the agreements between the city and Boardwalk, Dan Stauss said he was “represented those things were taken care of.”

Other economic development loans made to Boardwalk Bar and Grill and Boardwalk Entertainment Group, which have similar ownership as Boardwalk Enterprises, are current, according to the Abdo, Eick and Meyers report.

Boardwalk’s claims

Dan Stauss’ June 2003 letter to Richter details some unexpected costs the Boardwalk building had incurred during construction. Some stemmed from construction of the adjacent city-owned Infill Building, which started construction before Boardwalk.

“All of the materials, excess dirt and construction equipment for the Infill were on the Boardwalk site,” Stauss wrote. “This delay shifted the construction of the Boardwalk building into a winter construction condition.”

Suddenly, Stauss added, the Infill project manager Kraus-Anderson “realized they could not set their precast concrete unless they did it from the Boardwalk site. To do this, we would need to fill in our basement area for their access.”

“This delay in construction and the cost involved to accommodate Kraus-Anderson were expenses we were to be reimbursed for,” he wrote.

Other issues included a delay in completing the brick sidewalks around Boardwalk and “fill sand” that was needed to raise “the ground level to first floor height,” which was the city’s obligation under the contract, Stauss wrote.

Dan Stauss wrote another letter to Richter in 2008 and referred to letters he wrote in 2003 regarding construction and real estate costs.

“Since that time, further expenses have been incurred that relate to the contract Boardwalk Enterprises had with the city of East Grand Forks,” Stauss wrote, citing additional flood insurance premiums “we were assured we would not need” and real estate taxes that the city was responsible for.

“It is time for these items to get resolved and figure how to go forward without causing any (undue) publicity,” Stauss wrote.

Boardwalk officials said in an August closed meeting the city is responsible for $742,000 under the 1999 agreement. Dan Stauss told the Exponent that he had not received any reimbursements from the city.

Stauss indicated that he didn’t pursue the bills further because it would cause a similar controversy as the $510,000 loan.  

“It just so happens I have my brother as the mayor,” he said during the closed-door meeting in August.

Loan origins

The city of East Grand Forks was devastated by the 1997 Red River flood. Just six of its 2,301 single-family homes escaped extensive damage. The city lost 15 percent of its tax capacity and 10 percent of its residents.

But city officials remained optimistic that the future was bright. A 1997 financial report cited more than $75 million worth of federal and state grants that were available for community development and flood mitigation projects.

Two years later, in 1999, David Parker submitted a proposal to build a two-story commercial building between Whitey’s and the Blue Moose. He outlined some requests, including that the city provide $1 million for the project, $700,000 of which would be repaid interest-free over 25 years.

“I look forward to your assistance in developing this project and it becoming a taxable asset for the city of East Grand Forks,” Parker wrote in his initial proposal. He declined to comment to the Herald for this article.

The East Grand Forks City Council approved funding for the project in mid-April 1999, according to Herald archives.

Conflict of interest?

But just weeks later, officials warned about a potential conflict of interest over the deal, documents showed.

In May 1999, the firm Community Partners Research sent a letter to Richter describing what requirements the project needed to be eligible for federal Community Development Block Grant funds.

“We also have a concern with the potential city official conflict of interest in this project,” the letter added without referring to the specific official involved. “We have previously been consulted on this issue, and we have supplied the city with the relevant sections of the code of federal regulations that address conflict-of-interest in CDBG programs. We are not aware if these procedures have been followed.”

Yet Buckalew, who was then the City Council president, indicated there was some recognition of a potential conflict in the early days of building construction. Dan and Lynn Stauss are also leaders of Grand Forks-based Hampton Corp.

“It started out with Mr. Parker forming his own construction company to do the building,” Buckalew said during last August’s closed meeting, recalling information provided by Dan Stauss. “None of Hampton, none of Dan, Scott, any of those people were allowed to be a part of the structure itself because of the conflict of interest with brother Mayor Lynn.”

Buckalew said Parker had a business relationship with Dan Stauss and would turn to him for advice, but Stauss “was not included on this project,” according to meeting minutes.

Mayor Stauss told the Herald last week Hampton was not involved in the building’s construction. The building permit for the Boardwalk project lists the contractor as “general.”

“All I can say is I didn’t have a conflict of interest because I wasn’t involved,” Mayor Stauss said.

And, in a June 2014 meeting, Stauss said he “stayed out of” the business in order to avoid a conflict of interest.

“I told (Richter) and I told Dan, ‘Don’t tell me anything about it,’” the mayor said, because then he could “honestly say” that he didn’t “do anything with it.”

Helms said in a public meeting last year that he talked to Parker, who told him that the mayor had nothing to do with the Boardwalk building, according to meeting minutes.

Sinclair, in his memo to Murphy, said because the loan file does not indicate who the owners of Boardwalk Enterprises were at the time of the loan being made in 1999, “the issue of conflict appears to be unresolved.”

“The file does not contain any further information regarding the conflict of interest issue, whether one existed, the extent of the issue, and if the issue was even resolved,” Sinclair added.

Ultimately, the city and Parker reached a development agreement in June 1999. Community Partners Research, the firm that raised the conflict of interest question, reviewed the agreement and said it complied with the CDBG guidelines, according to a copy of the document.

Agreement

The development agreement states that the city would demolish and remove the building and its foundation that were located on the property, and “clear, level and granular fill the property to the grade of the boardwalk.” Parker would be responsible for a maximum of $5,000 per year in real estate taxes between 2001 and 2005, with the balance being paid by the city through its Border Cities Tax Credit fund pool.

The agreement also says the city would give Parker a $400,000 grant, a separate $90,000 land grant and $510,000 zero-interest loan out of its CDBG funds, with annual $30,000 payments beginning in 2003. Parker would pay the city $90,000 for the land.

Parker signed the agreement as the managing partner of Boardwalk Enterprises, and Mayor Stauss and Clerk-Treasurer D.E. Mack signed for the city. A loan agreement was finalized in October, with Parker signing on behalf of Boardwalk Enterprises and Richter and former EDHA Board President Rod Hagen signing for the city.

It wasn’t until nearly 15 years later that the city filed the mortgage with the Polk County Recorder’s Office.

Closed-door meetings

The city hired Sinclair in early June 2014. He reviewed the loan file and provided city officials with some options for pursuing the debt during a closed June 24 meeting.

Among the complications of the Boardwalk Enterprises loan was the first five years of scheduled payments were uncollectable due to statute of limitations, making the most they could pursue on the note $360,000. Sinclair said Boardwalk could also try to recoup funds against the city for its claimed costs.

Another problem was the lack of a personal guarantee on the loan, which Sinclair said would have made the issue much more clear-cut.

“I don’t have a hammer in this case,” he said.

Sinclair recommended sending out a notice of default, which notifies a borrower they have not made payments.

The City Council and EDHA board met with Boardwalk officials behind closed doors last Aug. 11.

A recording reveals the meeting was tense, with Dan Stauss blaming city officials for the issue ending up in the press before they were notified. He said the publicity has hurt his business, working relationships and family.

“This whole thing is such a fiasco,” Dan Stauss said.

While city officials suggested having Boardwalk pay $380,000 to settle the issue, Boardwalk Enterprises came to the August meeting with an offer to settle by having both sides walk away. They cited $742,000 that they argued the city was responsible for under the 1999 agreement.

“There’s no way I’m going to agree to a zero settlement,” City Council member Clarence Vetter said later in that meeting while Boardwalk officials were out of the room, citing public pressure to recoup payments.

At one point, Sinclair suggested issuing a press release if the negotiations failed to reach a settlement.

“Your press release can still say, ‘Hey, they’re bad guys. We’ve tried to settle, we’ve tried to do whatever we can,’” he said. “And then let the public decide, ‘Hey maybe I’m not going to do business there.’”

City officials didn’t seem warm to that idea.

“That’s not really not our mission … to run this business into the ground by forcing their hand,” former EDHA Board member Nan Larson responded.

Yet Jane Moss, a shareholder of the Boardwalk Bar and Grill, told city officials in that meeting the negative publicity had already resulted in a decrease in business.

The two sides ultimately agreed to do an appraisal of the building, which valued the property at $1.57 million. The City Council passed a resolution in March that said it was “not practical or cost effective to pursue foreclosure and civil action” to collect on the Boardwalk loan “at this time.”

Sinclair’s memo questioned whether there’s any financial benefit to foreclose on the mortgage when there was a first lien of more than $2 million.

“It appears it is in the city’s best interest to negotiate with Boardwalk as to resolving any setoff/recoupment against the debt outstanding and Boardwalk recommence payments pursuant to a new written agreement,” he wrote.

The Herald challenged the city’s ability to close the June 24 and Aug. 11 meetings to the public, and the Minnesota Department of Administration ruled that at least portions of those meetings were not properly closed according to the attorney-client privilege exception to the open meeting law. The city later released recordings and meeting minutes of those closed sessions.

Court case

More than a year after becoming public, the loan dispute hasn’t been resolved. And earlier this month the bar inside the Boardwalk building filed civil action against the city.

The City Council voted in June to put conditions on the liquor license renewal for the Boardwalk Bar and Grill, which is owned by Moss and Dan and Scott Stauss, according to the East Grand Forks Exponent. A resolution passed by the council states that the city would approve a liquor license for one year on the condition that the dispute over the loan be resolved within that time.

Boardwalk Bar and Grill then filed a petition in Minnesota Court of Appeals, questioning whether the city overstepped its authority in putting conditions on the license.

An attorney for Boardwalk argued that the city could not take that step because the bar and the building ownership group are separate entities. Jon Brakke of the Vogel Law Firm said in a June meeting that his side was willing to negotiate the debt, but not “at the point of the sword.”

In a response to Boardwalk’s appeal filed this month, the city pointed to the “commonality of ownership with” Boardwalk Enterprises. It argued that the bar and Boardwalk Enterprises “met the definition of applicant based upon a 50 percent beneficial interest of the ownership group in both entities.”

“This case is not ripe for review as there is no imminent harm to the Boardwalk Bar and Grill,” the city’s response, signed by Galstad, reads.

Moss disagreed, and told council members last month the publicity over the Boardwalk Enterprises loan and statements by council members have damaged her business. She said the dispute isn’t over money, but rather represents a “personal vendetta” against the Stauss family.

Moss added that the City Council is holding the Boardwalk Bar and Grill “hostage” in its efforts to recoup the loan.

City Council member Mike Pokrzywinski said in that meeting last month that East Grand Forks voters expect officials to recoup at least some of the loan.

“I don’t want to put anybody out of business,” he said. “I hope we can resolve this and put it to bed for the good of the city and for the good of all us on the council, and especially for the good of the business community, specifically the Boardwalk.”

Moss, who is not an owner of Boardwalk Enterprises, told the Herald last week that the council’s vote is hurting chances at bookings for future events, which she said they’re already scheduling for 2017. She said they lost about 33 percent of their bookings for 2015 compared to 2014 after the first news of the unpaid loan.  

“Of course we would like a resolution,” she said. “We would like the city to focus not on Boardwalk Bar and Grill but to focus on Boardwalk Enterprises.”