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Real estate investors have sued local executives of a failed bank over unexpected losses in the historic Olde Marco Island Inn.

Nearly a dozen investors, most of them from the Midwest, are involved in the suit, pending in state court in Long Prairie, Minn.

Together, they say they invested more than $1.1 million in partnerships created to purchase, operate and finance the inn. First, the plan was to improve the inn and build a modern resort around it that would turn a profit. When that didn’t work, the new two-bedroom suites and penthouses were converted to condos.

“My clients have lost all their money,” said John Ekman, the Minneapolis attorney representing the investors.

“Do I represent that there is anyone on the street because of this? No I don’t. But I know there are some people who were put into some pretty bad positions,” he said.

The lawsuit alleges breach of contract, fraud, self-dealing and misrepresentation. It targets First Integrity Bank and its former officers, shareholders and directors, including Marco Island resident K. Patrick Kruchten and Naples resident Bruce Carr, and their related partnerships.

Regulators recently shut down First Integrity, citing “unsafe and unsound” practices after losses had depleted most of its capital.

The lawsuit has nothing to do with the bank’s closing, Kruchten said.

Investors allege in the suit that Kruchten, Carr and other bank executives and shareholders lived well off other people’s money.

Many investors in the Marco Inn got loans from First Integrity to finance their stake in the project, which benefited the bank and its executives, who collected interest and other fees, said Ekman, with Lindquist & Vennum.

Some bank executives, including Kruchten, have owned penthouses at the inn.

The structure of the investment deal was complicated, and it changed several times, Ekman said, adding that he believes that was done purposely so investors didn’t understand what they were buying into.

In court documents, Kruchten, the bank’s former CEO, and Carr, a Naples real estate agent, deny all of the allegations.

Carr said he hasn’t been involved with the bank or its board of directors for 31⁄2 years. He said he couldn’t comment on any ongoing litigation involving the inn.

“I can’t say anything because I don’t know anything,” he said.

In a phone interview, Kruchten said “there is not the slightest bit of evidence to support the lawsuit.”

There are investors in the Marco partnerships that got some of their money back, and there are many investors who didn’t take out loans from the bank, Kruchten said.

Kruchten said he wasn’t involved in making loans to the investors, and that they were approved at arm’s length by bank loan officers.

The investors knew what they were getting into and the risks involved, Kruchten said. They were all accredited and they were told they could “lose every penny,” he said.

He too invested in the partnerships that purchased and improved the inn by adding two towers with 51 units and seven penthouses. He said he and the two other partners in Marco Cat, which bought the inn in 1999, have lost more than $3 million themselves.

“I expected to make money, too,” Kruchten said.

He called Carr, one of the partners in Marco Cat, the “hero of the project.”

“Every time something was needed, he was there to do it and he

did it without complaint. When the project needed more money, he would put in the money,” Kruchten said.

The inn originally opened in the 1890s with 20 sleeping rooms and one bathroom, which was recognized by Ripley’s ‘’Believe it or Not’’ as the only two-story outhouse in the world, according to its Web site. It was built by “Captain” Bill Collier on Calusa Indian grounds.

The Kruchtens and others saw a lot of promise in the property. He said the project failed not because it wasn’t a good investment but because of timing. The partnership reopened the inn three weeks after the Sept. 11, 2001, terrorist attacks, which crippled the tourism industry overnight.

Some investors haven’t joined the lawsuit because they accept their losses as “bad luck,” and some have received part of their money back, Kruchten said.

As for his penthouse at the inn, he said the money for it came out of his own pocket. After paying about $600,000 for it, it’s now on the market for $2 million.

“I bought it like I would have bought a house anywhere,” he said.

Investors also complain that Kruchten’s wife, Marcy, has benefited from the inn because she draws a paycheck as the manager.

Patrick Kruchten said she’s done the job because they’ve been unable to find anyone else who could get costs under control and fill the rooms.

Many of the disgruntled investors were once close friends, he said.

Kruchten said he hopes to sell the inn soon.

“We think some fresh money and some fresh ideas would be good for everybody,” he said.

First Integrity and its officers also face another lawsuit filed by investors in Spokane, Wash., over a failed hotel and retail project in Surprise, Ariz.

In that deal, investors who put $1.6 million into the venture allege that they were tricked into becoming the guarantor for the borrower, instead of a co-lender with the bank. So when the project failed, the bank got all their money, said their attorney, D. Roger Reed, with Reed & Giesa in Spokane.

Kruchten denies any wrongdoing.

The case is set for trial in September.

Now that regulators have shut down the bank, investors have little hope of collecting anything from it, Reed said.

“We are standing in line like other people, like all the other creditors that are owed money,” he said.

“It’s like a bankruptcy. That’s what it is.”