GNP suit: Illicit money transfer led to insolvency

loading...

BANGOR – Great Northern Paper Inc. became financially insolvent moments after it was sold to Inexcon Maine in 1999, when new owners Lambert Bedard and Joseph Kass transferred $9 million from GNP to Inexcon, according to a lawsuit filed this week.

It was not until Jan. 9 of this year that Bedard placed Great Northern under bankruptcy protection, and four months later sold Great Northern’s assets to Brascan Corp. of Toronto in a $103 million deal.

The lawsuit filed this week on behalf of the trustee for Great Northern’s bankrupt estate, Bangor attorney Gary Growe, is the second filed against Bedard, Kass and other Great Northern directors in less than a week.

In the newer lawsuit, Portland attorney Dan Amory, who represents Growe in his role as trustee, outlines allegations of questionable wire transfers between Great Northern and its owners’ holding companies, the backdating of a written agreement by the companies’ directors, neglecting promises made to creditors, and a waste of corporate assets.

The $9 million transfer from Great Northern to Inexcon Maine, which was incorporated in Delaware, allegedly was classified as a dividend that failed to meet its payment definitions under Delaware corporate law, according to the lawsuit.

“Immediately prior to the payment of the dividend by Great Northern to Inexcon Maine through the $9 million transfer, Great Northern had no surplus, as defined in the Delaware Corporate Code, and had no net profits for the fiscal year in which the dividend was paid,” Amory wrote in the lawsuit.

“GNP was rendered insolvent by the $9 million transfer and remained insolvent,” Amory continued.

The trustee seeks at least $7.7 million from the 10 defendants. The other directors named in the lawsuit include Eldon Doody of Millinocket, a former Great Northern president; Timothy Morgan of Wisconsin, former chief financial officer; and Martin Bedard of Quebec, Lambert Bedard’s son and former GNP director.

Also named are: Donald G. McNeil of Millinocket, former Great Northern president; Mendel Schwimmer of Brooklyn, N.Y., an investor and former GNP director; and Benoit Michel, Harold Gordon and Jonathan Kelsall, all of Quebec and all former GNP directors.

Attempts to reach some of the directors, or to secure their telephone numbers, were unsuccessful Tuesday.

According to the lawsuit, Bedard and Kass decided in 1996 that they would try to buy a paper mill. In the next three years, they made at least four offers on numerous companies and all of them were rejected.

“They had no material financial resources with which to fund such an acquisition, and, upon information and belief, planned to finance the acquisition through a leveraged buyout,” Amory wrote in the lawsuit.

Allegedly to protect himself financially, Bedard in 1996 “transferred substantially all his assets into various family trusts to render himself ‘bankruptcy proof’ if the acquisition failed,” Amory wrote.

“From in or about 1996 to date, Lambert Bedard has conducted his business ventures through entities which he actually controlled, but which were nominally owned by one or more trusts for his son, daughter and wife,” according to the lawsuit.

The entities included Inexcon Inc. and Cabadi Inc., both Canadian companies formed by Lambert Bedard and owned by a trust overseen by his son Martin. The trust listed Lambert Bedard’s son, wife and daughter as beneficiaries.

Kass, beginning in 1996, conducted business through Archer Consultants Inc., based in Canada, which he controlled or owned in whole or in part, according to the lawsuit. He also owned 158669 Canada Inc.

Inexcon Inc. and 158669 eventually formed Inexcon Paper Inc., which became the parent of Inexcon Maine, which in turn became the parent company of Great Northern.

In 1998, Great Northern’s previous owner, Bowater Inc. of South Carolina, informed Lambert Bedard that it was interested in selling all of its stock in GNP, and “invited him to make an offer,” according to the lawsuit. Later the next year, Bowater informed Bedard and McNeil that “it had decided to close one of the mills if Bedard and his associates did not acquire GNP,” Amory wrote in the lawsuit.

Bedard and Kass formed Inexcon Maine in April 1999, and in May, Inexcon Maine entered into a stock purchase agreement with Bowater. The net purchase price was $98 million, which Inexcon Maine paid through loans with the Bank of Montreal and GNE Holdings LLC, an affiliate of Duke Solutions. The loans were secured by “substantially all of GNP’s assets,” according to the lawsuit.

“Inexcon Maine’s acquisition of the outstanding stock of GNP and payment of all related fees and expenses were funded entirely through the Bank of Montreal and Duke loans to GNP, the proceeds of which were transferred by GNP to Inexcon Maine as dividends,” Amory wrote in the lawsuit. “Inexcon Maine put no equity into the transaction. The transaction was therefore a classic leveraged buyout.”

According to the lawsuit, at the closing of the sale, Great Northern wired $9 million to Inexcon Maine from the proceeds of the Bank of Montreal loan “with the knowledge and approval of Lambert Bedard, Martin Bedard, Kass and Morgan.”

Amory stated that more than $5.7 million of the $9 million wire transfer was used to pay acquisition fees and expenses incurred by Inexcon Maine or its parent company, Inexcon Paper Inc., a Canadian company owned by Bedard and Kass. But, Amory wrote in the lawsuit, “none of these fees and expenses were obligations of, or benefited GNP.”

Besides the $9 million transfer, in September 1999 Kass allegedly directed Morgan to have Great Northern make monthly payments of $175,000, or $2.1 million a year to Inexcon Maine under a services agreement signed by McNeil, Morgan and Kass, according to the lawsuit.

Amory wrote in the lawsuit that Bedard’s salary was to be $240,000 per year, and was increased to $300,000 per year in September 2000. He wrote that Inexcon Maine didn’t have any employees, and Inexcon Paper had a secretary who was paid $60,000 Canadian per year.

Amory wrote in the lawsuit that Inexcon Maine either gave the money to Inexcon Paper based in Canada to then pay the fees and salaries of Bedard, Inexcon Inc., and Archer Consultants, or Inexcon Maine paid them directly.

“The aggregate cost incurred by Inexcon Maine and Inexcon Paper for any limited services rendered to GNP in exchange for Inexcon Maine fees … was therefore approximately $300,000 per year, while Inexcon Maine charged Great Northern at an annual rate of $2.1 million for those services,” Amory wrote.

The services agreement allegedly wasn’t put to paper until August 2000, according to the lawsuit. In July 2000, Kass and Bedard tried to sell GNP’s stock or assets to HUFF Alternative Income Fund, and HUFF wanted to see all Inexcon Maine-Great Northern management contracts, Amory wrote.

Kass allegedly directed Martin Bedard to prepare a services agreement among GNP, Inexcon Maine and Inexcon Paper and backdate it to Sept. 1, 1999, according to the lawsuit. McNeil, Morgan and Kass allegedly signed the backdated agreement in mid-August 2000, Amory wrote.

The trustee’s lawsuit addresses $200,000 in total bonuses paid to Morgan between Oct. 31 and Dec. 31, 2002, before the bankruptcy. Amory called the bonuses “a waste of corporate assets,” and wants to get the money back.

The trustee’s lawsuit also questions a June 2001 decision by Great Northern’s board of directors to transfer property to Bedard and Inexcon Maine. The properties were used as collateral to secure a series of loans from Katahdin Federal Credit Union to Bedard and Inexcon Maine, and the money was to be used by Great Northern.

The board’s decision to conduct the land transfers is the focus of BCC Equipment Leasing’s lawsuit. That lawsuit, filed last week, claims that BCC was not made aware of the land transfers or the loans by Great Northern when it agreed to buy Great Northern’s assets for $50 million in 2002 and lease them back to the company.