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City of River Falls ordered to pay $260,000 on hotel loan that went bad

A judge has ordered River Falls to pay $263,337 to a bank as a result of a mistake involving a downtown developer who left behind a stack of unpaid bills.

Buffalo/ Pepin County Judge James Duvall signed a judgment ordering the city to pay the money to Timberwood Bank, Tomah, because checks sent to Martinsen Investment & Land Company Inc., Ashland, should have been made jointly payable to Martinsen and the bank. Martinsen eventually defaulted on its loan with the bank.

"The city attorney is handling the case and is reviewing the matter," said City Administrator Scot Simpson Monday. "He will advise the City Council on our options, which include an appeal."

Online court records show over 40 liens filed by various construction and building supply companies against the Martinsen project with over $1.75 million still owing on those. In other Pierce County civil court action earlier this year, Duvall ordered Martinsen Investment and Henry Martinsen Jr. to pay $8.5 million to Central Bank, Hudson. Also First American Bank, Hudson, foreclosed on and bought the complex's parking lot at 412 Spruce St.

In 2008 Martinsen proposed building a 67,722 sq. ft. mixed-use commercial facility with a minimum assessed value of $10,000,000.

Under a development agreement signed Feb. 25, 2008, River Falls gave the project site at South Main and Spring streets to Martinsen and agreed to pay the company $1.5 million to help cover costs related to the construction of a hotel-restaurant complex.

Most of those costs included bills for site excavation, grading, storm-water control, utilities and parking lot landscaping, said River Falls Finance Director Julie Bergstrom, who issued eight checks -- ranging in value from $50,000 to $250,000 -- from September 2008 through March 2009.

When Martinsen attempted to open a short-term line of credit with Timberwood, the bank required that the checks from the city be made jointly payable to it and Martinsen.

According to the judgment, Bernie Van Osdale, who was city administrator then, signed the financing agreement and gave a copy to Bergstrom but didn't tell her to make the checks out to Martinsen and the bank jointly.

The decision says Bergstrom was aware that Van Osdale signed the agreement, but no one told her it had been signed by all parties and was in effect.

No proof bank sent copy

Also, said Duvall, "No one ever questioned Ms. Bergstrom about the manner in which she was making out the checks."

He noted that Timberwood can't show that it sent a copy of the signed agreement to the city, the city didn't contact the bank regarding payments, and the bank didn't talk to anyone at the city about how to make out the checks.

Still Van Osdale signed the addendum agreement April 23, 2008; Martinsen signed it April 24; and Timberwood signed it April 25.

These are among the conclusions reached by Duvall:

--"The city accepted the (Timberwood) agreement by signing it and delivering it to Martinsen."

--"There was a meeting of the minds, since all parties (signed) the agreement within two days of each other."

--"The city breached the agreement by failing to make checks jointly payable to Timberwood and Martinsen."

Van Osdale said one of his jobs as city administrator was to work on economic development to increase the city's industrial and commercial tax base and to help create jobs in River Falls.

"I was also involved in revitalizing the city, to restore blighted properties or underutilized properties and to encourage redevelopment of existing properties," he said. One way to do that was to use Wisconsin's tax increment law, which allows a municipality to use tax money to pay for improvements -- such as infrastructure and other development-related costs -- in designated areas.

Van Osdale said at one point he focused on encouraging development of the block along South Main Street that had once held the River Falls Medical Clinic. The city had bought that property to make available for private use.

Van Osdale said he was approached by John Garden of Hudson, an agent of Martinsen Investment, who asked about the possibility of acquiring the property and using tax incremental financing to make the project financially feasible.

Van Osdale said the hotel complex was "a type of enterprise that the city was interested in attracting both for the tax revenue it would generate as well as because of the perceived need for such a type of facility in downtown, in the vicinity of the UW-River Falls campus."

'No direct recollection'

He said the city agreed to give the land to Martinsen in exchange for a commitment to build and operate the hotel complex. The city also agreed to contribute $1.5 million toward site improvements.

"I personally negotiated the terms of this (development) agreement with Martinsen and drafted it, using a form contract which I had in my possession and which I had used with respect to similar agreements in the past," said Van Osdale.

The draft was modified by City Attorney Bill Thiel and Martinsen's attorney with input from Bergstrom, City Engineer Reid Wronski and City Planner Buddy Lucero.

Van Osdale said he does recall that Garden stopped at city hall after the council approved the development agreement and asked him to sign another agreement.

"He explained that it had something to do with obtaining financing for the project for Martinsen, but I have no direct recollection of the nature of that discussion," said Van Osdale. "At his request, I signed the agreement for the city and gave a copy to Julie Bergstrom who placed it on file."

Van Osdale said he never again spoke to Garden about that agreement and was never told that Timberwood had approved it nor did he receive a "fully signed" copy of the agreement.

"Because no one every approached me or called me or sent me a copy of the fully executed agreement, I never advised the city finance director to make payments toward the city's $1,500,000 tax incremental financing obligation to Martinsen to Timberwood and Martinsen, jointly," said Van Osdale.

If he had received a completely signed copy of the agreement he would have told Bergstrom to write the checks to both parties, said the former city administrator.

He added, "It truly would have made no difference to the city whether the checks in question were made payable just to Martinsen or to Martinsen and Timberwood."

Judy Wiff

Judy Wiff has been regional editor for RiverTown’s Wisconsin newspapers since 1996. She holds a bachelor’s degree in journalism and sociology from UW-River Falls. She has worked as a reporter for several weekly newspapers in Wisconsin.

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