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State Pulls the Covers on Charity

MINNEAPOLIS (CN) - The executive director of a nonprofit spent more than $222,000 of charitable assets on "personal expenditures" in less than six months, and another $65,000 in litigation costs for an option to purchase property owned by the nonprofit, Minnesota claims in court.

Attorney General Lori Swanson sued Eden Prairie A Brighter Day Foundation and its executive director, Gardner Gay, in Hennepin County Court.

ABDF was incorporated in 1995, and offered at-risk students the opportunity to attend public secondary schools in the City of Eden Prairie and to provide "stable and supportive home environment in Eden Prairie," according to the complaint.

Eden Prairie was ranked the best small city to live in in the country by in 2010.

Gay is executive director of ABDF and became a board member of the nonprofit in 2011.

Beginning in 2009, ABDF began to face financial difficulties and a decline in board oversight, the complaint states. In November 2010, the IRS revoked ABDF's tax-exempt status after it failed to file informational returns for three consecutive years, the complaint states.

During Gay's employment, ABDF paid him a salary and allowed him and his family to live in one of the properties owned and paid for by ABDF, the complaint states.

In 1997, ABDF acquired two adjoining properties in Eden Prairie, for $425,000.

From 1997 to 2012 ABDF housed five to 14 students, but by 2013, ABDF housed no students at its main location, except for one student who lived at Gay's residence until June 2013, the state says.

"At present, ABDF houses no students, and the only program service ABDF claims to provide is three to four hours per week of mentoring services with former students. Such mentoring services consists of periodic conversations between defendant Gay and former students," the complaint states.

In 2006, ABDF took out a $160,000 loan, and used both properties as collateral for it. When ABDF failed to repay the loan in 2011, the bank foreclosed on both properties, but allowed ABDF to occupy them after the expiration of the redemption period, the attorney general says.

A former ABDF board member obtained a commitment from a donor to provide financing to acquire the properties: "Mr. Stoebner arranged a deal with the MidCountry Bank in which a company owned by Mr. Stobner's daughter, TJS Communications LLC ('TJS') obtained title to the 8761 Property, on the condition that the bank would 'donate' the 8771 property to ABDF," Swanson says in the complaint.

In 2012, TJS entered into a lease contract with Gay's wife, Bridget Gay, allowing the Gays to rent the 8761 property with the option to purchase it for $200,000 at the end of the tenancy, in September 2013.

The lease stated that the option to purchase was assignable to ABDF, though Bridget Gay had never held any position with ABDF, the complaint states.

To fund the purchase after the lease expired, "Defendant Gay arranged for the sale of the 8771 Property and to use funds from that sale to exercise Bridget Gay's purchase option for the 8761 Property."

When the sale of the 8771 property did not close in time to exercise the purchase option, Gay arranged ABDF to take out second loan for $200,000 from Castle Rock Financial to fund Bridget Gay's purchase option, the complaint states.

"When Stoebner and TJS contested Ms. Gay's exercise of the purchase option, Ms. Gay filed a lawsuit against Stoebner and TJS in Hennepin County District Court and that litigation is currently pending. The Gays used ABDF funds to finance the costs of the litigation, apparently claiming that Bridget Gay's option to purchase the 8761 Property would be assigned to ABDF. To date, however, Bridget Gay has never assigned any rights to the 8761 Property to ABDF, and defendant Gay testified in his deposition that Bridget Gay may decide not to assign the option to purchase to ABDF. As a result, significant ABDF funds were used to pay for litigation to enforce Bridget Gay's option to purchase property under a lease agreement with no benefit to ABDF. Currently, the litigation over this option to purchase has cost ABDF over $65,000," the complaint states.

Nevertheless, ABDF sold the 8771 property. Of the $425,000 that ABDF received from the sale, approximately $224,700 was used to repay the Castle Rock loan that Bridget Gay received to exercise the option to purchase the 8761 property, the complains states. Proceeds from the sale were also used to pay a real estate attorney and a real estate agent.

"Defendant Gay placed the remaining funds of $158,082.48 in a business checking account at Associated Bank (the 'Associated Account'). When Ms. Gay's option to buy the 8761 Property fell through, a deposit of approximately $196,000 was also deposited into the Associated Account, representing the proceeds of the loan amount taken from Castle Rock that was never used due to the litigation over the purchase option," the complaint states. (par 26)

From the $425,000 purchase price of the 8771 property, ABDF received $354,000, which was deposited into the Associated account, of which Gay was the sole signatory, according to complaint.

To date, $131,687 remains in ABDF's bank account. "This means that in less than six months, defendant Gay made expenditures of more than $222,000," the complaint states.

Minnesota wants Gay enjoined Gay from overseeing ABDF's funds, donations and assets, and repayment of ABDF's charitable assets spent for Gay's personal use.

Minnesota is represented by Deputy Attorney General Nathan Breenaman.

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