Unsecured creditors are suing executives at the former Lincoln Paper and Tissue Co. LLC, alleging that the company officials fraudulently pocketed millions of dollars rather than using the money to repair a damaged boiler that was key to the mill’s profitability.
The complaint filed Tuesday at U.S. Bankruptcy Court in Portland names LPT Holding LLC, and paper mill CEO Keith Van Scotter, CFO John Wissman and managers Rodney Fisher, Douglas Meltzer and Dan Herring as defendants.
The lawsuit alleges that the men committed fraudulent transfers of funds or failed to provide due diligence to Lincoln Paper and Tissue LLC.
Attempts to contact the five men Wednesday were not successful.
Yet paperwork filed by company executives as part of the mill’s bankruptcy proceedings outlines their struggle to keep the mill operational despite the explosion in 2013 of a boiler crucial to pulping operations. The operations largely accounted for the mill’s profitability.
One of the plaintiffs’ attorneys, Fred W. Bopp III, declined in an email Wednesday to comment further on the lawsuit at this time.
“Please understand that the [plaintiffs’] position is that the allegations in the complaint filed with the bankruptcy court speak for themselves,” Bopp wrote.
According to the 20-page complaint, the defendants met on Dec. 9, 2013, about a month after the explosion, and agreed to negotiate a settlement with the mill’s insurer, FM Global, when they realized that if they “opted to repair and rebuild the boiler,” they “would not receive any distributions” — payment — “in 2013 or 2014.”
“Conversely, if [they] opted to pursue a cash settlement with FM Global in lieu of repair, then distributions in the range of $5-10 million would likely be made to LPT Holding and then to the members of LPT Holding” in 2014 and possibly in 2013, the complaint states.
According to the complaint, Van Scotter, Wissman and Fisher, members of LPT Holding, received $711,285, $652,620 and $475,389, respectively, in May 2014. Herring and Meltzer, nonmember managers of the mill and LPT Holding, did not receive any portion of these distributions.
In total, Van Scotter, in his capacity as the trustee of the Keith T. Van Scotter Revocable Trust, Wissmann and Fisher collectively received $3,211,811 as a result of the mill’s and LPT Holding’s distributions in 2013 and 2014, according to the complaint.
The defendants also accepted a $49.8 million insurance payout for the explosion, including a $10 million advance, without repairing the boiler, despite obtaining two estimates for repair costs being far less than the insurance settlement, the lawsuit states.
“Both estimates determined the cost of repair to be approximately $30-32 million, inclusive of commissioning, startup, infrastructure, site support, and engineering costs. The Board [of LPT Holding] also determined that the boiler could be repaired within 4-6 months,” according to the complaint.
According to the lawsuit, the plaintiffs determined that the mill’s earnings were $1.2 million per month before the payment of interest, taxes and/or expenses. Without the boiler, the mill lost $2.9 million per month, the document states.
The paper mill filed for Chapter 11 bankruptcy protection in September 2015, eventually laying off 128 workers employed there at the time. The explosion occurred in November 2013 and left the mill leaking cash.
Van Scotter wrote in bankruptcy court filings last year that “Lincoln did not believe that insurance proceeds were sufficient to rebuild the boiler and maintain its customer base.”
He also indicated that the executives’ struggles to keep the mill going included their decision to shut down some electricity generation equipment and two uncoated freesheet paper machines, which can produce office paper and other uncoated grades, to save money.
The company crafted a new strategy to capture a share of the tissue market, Van Scotter wrote, requiring it to compete on price through 2014 in an already crowded area.
The company also engaged in reinvestments to keep itself going after the explosion. The installation of new $6 million turbine and condenser system in early 2015 left it a nearly self-sufficient electricity generator, helping to end what Van Scotter termed years of exorbitant electricity costs.
The unsecured creditors seek a jury trial. The unsecured claims, which at one point totaled $9.1 million, are still being negotiated by the estate as part of a liquidation plan. The plan will take several months to negotiate.
Lincoln Paper and Tissue LLC attorney D. Sam Anderson declined to comment on Wednesday.
The plaintiffs seek a verdict that the distributions were avoidable and they could recover them, plus any further relief the jury would award.