Eastern Pulp's Mills to Be Liquidated

Bankrupt Eastern Pulp and Paper Corp.'s hopes of resuming operations were dashed in a matter of minutes Feb 4, when the company told a federal bankruptcy judge that a $3.8 million emergency loan had fallen through.

 

Immediately U.S. Bankruptcy Chief Judge James B. Haines converted Eastern Pulp's bankruptcy status to Chapter 7, or liquidation, from Chapter 11, protection from creditors under which the company had been operating for more than three years.

 

"I would say to the court, 'I'm out of tricks in my bag of tricks,'" said George Marcus, a Portland attorney representing Eastern Pulp.

 

Eastern Pulp, which owns Lincoln Pulp and Paper Co. in Lincoln and Eastern Fine Paper Co. in Brewer, shut down its mills on Jan. 17 in what was then called a temporary closure. About 750 workers were displaced - 500 in Lincoln, 250 in Brewer - but a skeleton crew maintained the equipment to prevent its exposure to freezing cold temperatures.

 

The conversion to Chapter 7 means that the mills will be mothballed and its owners will no longer have a say in what happens to the company, Marcus said.

 

An interim trustee will be appointed to analyze whether the mills can be sold as a package or in parts to a buyer or whether the mills should be abandoned and handed over to secured creditors to dismantle and sell. The trustee will be officially approved within a couple of weeks if there are no objections.

 

The mothball stage does not mean the mills will be shut down entirely, Marcus said. However, no pulp or paper-making operations can occur because technically the business no longer exists.

 

Congress Financial Corp. of New York City, which did not provide their share of the loan, will be expected to provide funds to keep the mills warm while the liquidation process occurs.

 

Any utilities whose services are essential to preserving the mills are supposed to be paid past-due balances that accrued during the bankruptcy, Marcus said. Congress' financial interest now is to protect its collateral, namely a good portion of the mill's assets.

 

Congress is owed more than $27 million by Eastern Pulp, and the paper company owes all of its secured creditors about $60 million. Unsecured creditors are owed about $46 million.

 

At least two unidentified companies were interested in purchasing Eastern Pulp before the court hearing, and the interim trustee is expected to talk with those companies about whether to proceed with a sale.

 

Eastern Pulp's two PACE unions are analyzing whether they should pursue an employee buyout of the mill, according to Peter Coppa, president of PACE Local No. 1-0403 in Brewer. Money is being spent to study whether the buyout is feasible, he said.

 

"The mills are not gone forever, but they're gone for now," said one bankruptcy attorney, who asked not to be identified. "We'll get them back sometime."

 

Robert Keach, a Portland attorney representing the official committee of unsecured creditors, said after the hearing that it's doubtful any of the unsecured creditors will receive any money from a sale of the mills.

 

"From the unsecured creditors' standpoint, it's not good," he said.

 

If the mills are sold, the buyer likely will get them at a liquidated value price and that might be less than what secured creditors are owed, Keach said.

 

"In all likelihood, there won't be enough [money] to pay the banks," Keach said about a sale price.

 

Any prospective buyer will pick up the assets and not Eastern's operations or debt, and any Eastern Pulp workers hired by a new company would lose seniority rights and other benefits. No severance pay is expected, according to one attorney.

 

The bankruptcy court hearing was supposed to be filled with optimism. After nearly a month of intense loan negotiations between Eastern Pulp and four of its secured lenders, Congress Financial agreed earlier in the week to loan Eastern Pulp $2.8 million after the Finance Authority of Maine decided to chip in another $1 million. Gov. John Baldacci announced the agreed-upon loan package at a press conference.

 

All that remained was the judge's approval.

 

The $3.8 million loan was to be used to restart Lincoln Pulp and return 500 people to work and keep Eastern Fine maintained with a skeleton crew. About 240 people would lose their jobs in Brewer.

 

Both operations would have been funded for 13 weeks while a buyer was sought, but no specific timetable to sell the mills was included in the loan.

 

Congress Financial had put conditions on the loan, including one that a chief reorganization officer be put into place to run the mills' day-to-day operations and another that an investment banker be hired to sell the mills. Eastern's owners and managers were to report to the chief reorganization officer.

 

Congress Financial already had been working with the new management team, Realization Services Inc. of New York, and the investment banker, Fisher International of Connecticut, during the last month to come up with a 13-week budget and to prepare financial reports to give prospective buyers.

 

If the loan had been approved, Realization and Fisher would have been paid by Eastern Pulp. Realization's rates were to be at least $50,000 per week plus expenses and a percentage of the net sale price of the mills, while Fisher's rates were to be $45,000 per month for three months plus expenses and a percentage of the net sale price.

 

The loan documents were submitted Tuesday, Feb. 3 to U.S. Bankruptcy Court  in Portland, but the 13-week budget was not included with them. On Feb., 4, the budget was passed around to almost 20 attorneys representing lenders and trade creditors, and questions arose in courtroom discussions on whether $3.8 million actually was enough.

 

Representatives from some of the utility companies said they didn't see any money in the budget to cover their costs.

 

When court was in session at 11 a.m., Haines questioned attorneys on whether the loan was in accordance with federal bankruptcy laws on the length of time a loan can cover and asked them to return to court after a two-hour break with documents that met the federal standards.

 

Keach said that after a "continued examination of the numbers, the amount that Congress was able to commit wasn't enough."

 

At 2 p.m., Marcus asked Haines to convert the company's bankruptcy status to Chapter 7. He commended the lenders, workers, elected officials and communities for sticking with Eastern Pulp and commented that depressed paper industry conditions were hard to overcome.

 

Haines also commended the effort and then dropped his gavel on Eastern Pulp.

 

The exchange between Marcus and Haines lasted about two minutes. About 16 attorneys sat stunned, and then Congress's attorneys entered the courtroom. They had missed the 2 p.m. hearing, believing that court was to resume at 2:15 p.m.

 

"It's all done, unless you want to undo it," one attorney told Congress's entourage.

 

Moments later, Congress would not comment on why it could not provide the loan.

 

"It's not a happy day," Keach said. "It's really unfortunate we weren't able to pull it out. Unfortunately, we ran out of time. This is not the outcome we all expected."

 

Throughout the state, mill workers, town officials and elected representatives remain optimistic the mills will be sold. They said the fact that the facilities will be kept warm still is an attractive selling point.

 

If the mills had not been maintained, Marcus said, "It could be expensive" to make them operable again.

 

"There's still hope, I guess, as long as they keep it warm," Coppa said. "We've just got to wait and see."

 

In Lincoln, where the mill was supposed to be restarted this week if the loan was approved, Town Manager Glenn Aho said he remains optimistic that both mills soon will be under new ownership.

 

"Today's decision just makes things a little more complicated," Aho said. "If you were to strip away all the legal and business complications, there are people still interested in buying the mills."

 

U.S. Sen. Olympia Snowe, who took part in negotiations with lenders, said she was shocked that the loan was withdrawn.

 

"This is devastating and surprising news at this juncture when an agreement had been reached to reopen the mills to help secure a potential buyer," Snowe said in a statement.

 

She said she will work to support the Brewer and Lincoln communities, the workers and their families and will help to find a way "to keep the mills warm to find the best possible buyer."

 

Baldacci, who was injured in a car accident Wednesday morning, was notified of the Chapter 7 conversion while hospitalized at Maine Medical Center in Portland.

 

"While the Chapter 7 designation will slow down the process, we are still confident the trustee will work hard to sell the facilities and get the mills up and running," said Lee Umphrey, Baldacci's spokesman. Bangor Daily News