PORTLAND – The Massachusetts investors interested in purchasing bankrupt Eastern Pulp and Paper Corp. for $8.5 million walked away from negotiations Tuesday after they and Eastern’s major lender could not agree on what constitutes spare parts at paper mills.

By Tuesday evening, the investors – Satish Agrawal of Concord, Mass., and Robb Osinski of Salisbury, Mass. – were back at the bargaining table, but apparently it took some coaxing.

“They have some very specific issues and concerns that we find reasonable,” said Kurt Adams, legal counsel for Gov. John Baldacci.

A court hearing on whether to continue with the sale or proceed with abandoning the mills in Lincoln and Brewer starts at 10 a.m. today in U.S. Bankruptcy Court in Portland.

According to a source close to the negotiations, Agrawal and Osinski are frustrated that ever since last Friday, they have been assured at least three times that they have reached a deal with Eastern Pulp’s trustee and the company’s secured lenders. Each time, the source said, they have been approached for more money or have not been given assurances that the mills’ machinery and equipment will have all of the pieces that are needed to make them fully operational.

What appeared at the time Tuesday to be unresolvable talks on establishing a definition for “spare parts” nearly sabotaged any chance of Eastern Pulp being sold. Lenders want the spare parts to sell in order to recoup some money. The issue caused Tuesday’s court proceedings to teeter on proceeding with a hearing to abandon the properties altogether.

That didn’t happen, though, because of a misunderstanding between U.S. Bankruptcy Chief Judge James B. Haines and the state Department of Environmental Protection.

During Monday’s court hearing when a deal to sell Eastern Pulp’s properties was presented “in principle,” Haines told the courtroom, including 20-plus attorneys, that he would hear the formal terms of a deal Tuesday afternoon. He mentioned that an abandonment hearing remained a possibility if the deal fell apart overnight Monday.

But on Tuesday, with the state DEP still in Augusta and an abandonment hearing looming, Haines acknowledged that he should have been clearer the day before in instructing DEP to be in the courtroom on Tuesday in case the abandonment hearing became a reality.

DEP is objecting to the abandonment, saying the state has no money to clean up any environmental catastrophe that might result from the mills going cold and the chemicals inside being left unattended. Cleanup costs are estimated to be $18 million.

The misunderstanding gave sales negotiators a 19-hour reprieve to complete a deal, and Haines offered to help clarify some finer points regarding establishing a definition for spare parts by conducting a meeting with attorneys in his chambers.

Eastern Pulp’s mills – Lincoln Pulp and Paper Co. in Lincoln and Eastern Fine Paper Co. in Brewer – are older facilities, and the machine and equipment parts are hard to come by. Most of them have to be custom-built, according to loan negotiators.

On Tuesday, the investors and the lenders were trying to sort out whether parts vital to the operations or those sitting on warehouse shelves collecting dust should be classified as spare parts. The talks got to the point where the negotiators were trying to decide whether a part vital to the operations that just happens to be lying on the ground next to a paper machine should be classified as a spare part or not, according to a loan negotiator.

“It’s an argument that in my view gets down to a pretty silly level of detail,” Adams said.

Tuesday was to be the day that the investors’ offer was to be formally accepted by Haines as the stalking horse bid, and a date to actually sell the company during a court-sponsored auction was set, estimated to be in three weeks. A stalking horse bid is an offer that other interested buyers must top in order to unseat the stalking horse as the eventual buyer.

The hearing was to start at 1 p.m., and after two delays totaling an hour to try to complete terms of the deal, Bopp notified Haines that “we’re not where we wanted to be today in terms of a sale.”

Bopp, on behalf of the trustee, Bangor attorney Gary Growe, said negotiations between the Massachusetts investors and Eastern Pulp’s lenders were stalled on “not one issue but multiple issues” and that abandonment of the properties was becoming the only choice.

Besides defining “spare parts,” Congress Financial Corp. of New York City, one of Eastern Pulp’s major secured lenders, wants $750,000 added to the sales price to pay for the spare parts at the Lincoln mill. Bopp said Congress had already agreed to sell the spare parts in Brewer, as well as the rights to patented and patent-pending design processes and paper products to the Massachusetts investors for $500,000.

The investors, according to Bopp, believed they were getting the spare parts in Lincoln as well. That was before Tuesday’s hearing.

“For an additional $750,000, the buyer can have all the spare parts at Lincoln,” Bopp said.

Last week, Congress Financial received approval from Haines to sell the mills’ pulp and paper inventories along with other assets, including intellectual properties such as design processes. But Congress has not sold any of the materials yet in case a prospective buyer wants to purchase them, according to loan negotiators.

Attorneys for Congress Financial would not comment on the negotiations.

Because of the misunderstanding with DEP, Haines initially proposed beginning an abandonment hearing at 9 a.m. today. But he first asked Bopp whether that’s what the trustee wanted to do.

“It’s at the point where we tried to force the parties to the middle,” Bopp said, but with no luck.

Haines then asked Bopp whether he was certain that the deal with the investors could not be salvaged.

“Is it off the table and dead? Or is it still out there?” Haines asked. “I want to know if there’s a nail in the coffin or not.”

Before Bopp could answer, Haines asked the attorneys into his office to try to assist with defining “spare parts” and offering suggestions on working out other sales terms. The attorney for the prospective buyer, John Sigel of Boston, along with Osinski had already left the building.

According to Adams, it didn’t matter that the prospective buyer was not present to attend the judge’s conference.

“A lot of what the judge had to say didn’t have to deal with the buyers,” Adams said.

After his conference with attorneys, Haines went back to his bench and told an open courtroom that he believed that the deal could be salvaged.

“I’m convinced that this deal may have been in its final troughs, but that it is not dead, that there is not a nail in the coffin,” Haines said.

But the judge did give the attorneys a deadline. He said he wants an update on sales negotiations at 10 a.m. today or be told that the hearing to abandon the mills should commence. By 4 p.m. today, Haines said he wants to be handed just one of two things requiring his signature – either an order to start a sales proceeding or an order to abandon the properties.

“The record will be closed out at 4 o’clock tomorrow [Wednesday] afternoon,” Haines said.

On Tuesday evening, Bopp said negotiations with the buyers had been revived.

“We’re still working the deal and we hope to submit a revised term sheet [this morning],” he said.