The trustee for bankrupt Great Northern Paper says he believes he has enough evidence to pursue claims against the company’s directors and officers for breaching their financial responsibility in running the East Millinocket mill, including the way they structured a complex deal to capitalize on a state tax credit program.

However, the trustee says he will not pursue those claims in exchange for an agreement he believes will return more money to creditors left holding the bag when Great Northern Paper filed for bankruptcy on Sept. 22.

According to court documents filed Friday, trustee Pasquale “Pat” Perrino Jr. is opting for a compromise because he has determined “that litigating such claims would be complex, expensive, inconvenient, and time-consuming.”

At the heart of the action is a proposal to remove liens from Great Northern Paper’s assets so a sale of the defunct paper mill can go ahead, with a “carve out” from the proceeds providing funds to the company’s dozens of unsecured creditors, including many businesses in the Katahdin region that were never paid for goods and services. Collectively, they are owed $22.6 million.

Jeremy Fischer, the attorney who filed the motion Friday on behalf of Perrino, said the strategy to seek a compromise could turn what likely would be a long and contentious legal battle into a quick, consensual settlement.

“That’s a net benefit for creditors because they’re not going to fund fighting between the entities,” Fischer said Friday.

The compromise is awaiting a judge’s approval. The company’s largest creditors, two Louisiana-based financing agencies, have agreed to a deal with the corporate entities that make up Great Northern Paper – GNP Maine Holdings, which owns the mill machinery and buildings, and GNP East, which owns the land.

SUSPECT MANAGEMENT

Great Northern Paper was managed by New Hampshire-based private equity firm Cate Street Capital. Cate Street acquired the East Millinocket mill in 2011 and operated it until late January, when it idled the paper machines, citing high wood and energy costs. A few weeks later, it laid off more than 200 employees.

Investigations started after Perrino was named trustee. Based on preliminary results, Perrino says he believes the directors and officers of the Cate Street-related entities breached their “fiduciary duties” in two ways.

The first was that the directors and officers of the corporate entities breached their “duty of care” by “operating at all times as insolvent or in the zone of insolvency and continuing to incur additional obligations.” In other words, the company’s managers knew the company was insolvent, but continued to accept goods and services on credit from suppliers and vendors.

The other breach referenced in the court filing is of the “duty of loyalty.” That claim is tied to how Cate Street-related entities used the Maine New Markets Capital Investment program, which was created in 2012 to provide cash refunds to backers who invest in businesses in designated, low-income areas of Maine. Great Northern was the beneficiary of $40 million in investment through the tax credit program, which flowed through two “community development entities” based in Louisiana: Stonehenge Community Development and Enhanced Capital.

Each Louisiana entity has an affiliate listed as a secured creditor in the bankruptcy case that is owed $20 million.

The New Markets tax credit deals are typically complicated, but these “were particularly complex transactions that had interesting permutations in terms of how they were structured,” according to Christopher Roney, general counsel at the Finance Authority of Maine, which administers the state tax credit program.

Fischer said their preliminary investigations determined that it was “insiders” – his term for people related to one or all of the Cate Street-related entities involved in the Great Northern business, such as GNP Maine Holdings and GNP East – that invested money in Stonehenge and Enhanced, which then turned around and loaned it back to GNP Maine Holdings.

“What’s clear to us is that insiders funded the loans,” Fischer said. “They put in the money that otherwise would have been put in as equity … and put it in as debt.”

Further, GNP Maine Holdings then used the funds for an internal acquisition: It paid $28.5 million to its affiliate GNP East to purchase the mill’s machinery.

“Upon information and belief, the true value of these assets as of the date of their acquisition by GNP Holdings was substantially less than $28.5 million,” Fischer writes in the brief.

For comparison, the current preliminary bid for the entire mill and all its machinery is $2.6 million.

In other words, GNP Maine Holdings overpaid its affiliated company for the machinery. Fischer wouldn’t comment on why the Cate Street-related entities would structure the transaction that way or whether structuring the tax credit deal that way raises legal questions. Bankruptcy cases are purely civil cases, and nothing in the brief should be misconstrued as alleging criminal acts, he said.

According to the filing, the Cate Street-related entities deny any breach of financial responsibility. Tanya Sambatakos, local counsel for GNP Maine Holdings, did not return a phone call seeking comment Friday afternoon.

“They are vehement in their assertion that all of their decisions and actions were well-informed, and were taken in the best interest of the debtors, their creditors, and their employees,” Fischer writes in the court filing. “They further believe that any trial would vindicate their actions.”

The Cate Street-related entities claim they invested more than $20 million in the business.

Fischer also makes clear that if a compromise had not been pursued, that GNP Maine Holdings, along with Stonehenge and Enhanced Capital, were ready to fight in court.

“That’s why settling now is more beneficial to the estate than litigating,” Fischer said.

The compromise Fischer has worked out with the “adversaries” includes what’s called a “carve out,” which is a way in bankruptcy cases to protect and reserve funds for unsecured creditors, who are otherwise on the bottom of the pecking order once funds are distributed.

In this compromise, 30 percent of the proceeds from the sale of the mill and its equipment will be carved out for the unsecured creditors. For example, if the minimum bid of $2.6 million is the final sale price, then the trustee would have $780,000 to distribute among the unsecured creditors.

That’s a drop in the bucket toward the $22.6 million owed the unsecured creditors.

However, “it’s infinitely higher than zero,” Fischer said.