The letter read “demand for payment” and Paul Westin felt like he was a bank teller being slipped a note to empty the cash drawer.

The vice president of A.W. Chaffee in Oakland was being asked to hand over $90,000 or the business risked being sued.

This wasn’t a typical “demand for payment” letter. A.W. Chaffee was being told to return money that it was paid for wood chips purchased by Great Northern Paper Inc. before the papermaker went bankrupt.

Westin viewed the letter as an insult because Great Northern still had owed A.W. Chaffee $20,000 when it filed for bankruptcy in January 2003.

“If I go into a store and pick something off the shelf and walk out the door with it, I’m going to get arrested,” Westin said. “If I take something that doesn’t belong to me, I’m in trouble. Except in bankruptcy. We sold them stuff and now we’re getting stiffed. This has been an excruciating experience.”

By the time the letter arrived last fall, the $90,000 Great Northern had paid already had been absorbed into the business. A.W. Chaffee officials were faced with a tough decision – hire an attorney and fight or find the money and send it.

An attorney was retained.

“We had to pay the people to deliver [wood chips] to Great Northern,” Westin said. “That is material we brokered to them. They made materials from the wood chips.”

The letter, commonly called a “preference payment letter,” is part of a standard operating procedure in the realm of bankruptcies, a process that dates back decades to a time when some suppliers were threatening companies to pay up or else.

Sent by the trustee appointed in a bankruptcy case, the letter states that in the three months before a company went bankrupt, the supplier may have been singled out and paid preferentially over others.

The correspondence implies that the vendor should have known it was working with a business on the brink of insolvency.

The preference-payment period for Great Northern was Oct. 9, 2002, to Jan. 9, 2003.

Theoretically, the returned money is put into a pool and distributed equally among the company’s creditors.

Suppliers can try to defend themselves, and bankruptcy law lists two acceptable defenses. The vendors can attempt to prove that the money was paid to them during what’s called the “normal course of business,” such as a check every two weeks like clockwork.

Or they can attempt to prove that they were paid when they delivered supplies that added “new value” to their customer’s business, such as providing much-needed materials to fill outstanding orders.

That is how the preference payment system is supposed to work.

Then there is Great Northern Paper.

‘It’s crazy’

The warning about forthcoming preference-payment letters came last summer, prompting suppliers to cry, “What’s next?”

Vendors already had been told during the bankruptcy case that they would never be paid even a small percentage of the amounts they still were owed by Great Northern. Claims from suppliers and former employees remain in excess of $85 million.

Then, with the preference alert, the vendors were notified that any money collected from them would not be put into a pool and divvied up equitably among all of the suppliers.

Instead, it would go to Boeing Capital Corp. of Long Beach, Calif., a secured creditor whose initial balance of $62 million was reduced to $12 million when Great Northern’s assets were sold a couple of months before the preference-payment warning.

“That’s just an accident of the facts in this case,” said Bangor attorney Gary Growe, the trustee of Great Northern’s bankrupt estate. “That’s not to say that’s the case in all bankruptcies. [Preference recalls] work in bankruptcies to pay all creditors under the rules.”

But some suppliers say they shouldn’t be forced to return money that they believe rightfully belongs to them just so one creditor can have it.

The suppliers are left trying to fight the demands – and spending money on attorneys to do that.

Most are losing.

“We never would have shipped [Great Northern] anything if they were talking $90,000,” Westin said. “It’s crazy.”

$1 million collected

Trustees of bankrupt estates have two years from their appointments to pursue preference payments.

In the Great Northern case, there’s nine months left.

So far, Growe has mailed hundreds of preference-payment demand letters, and he has reached compromises with some businesses for amounts that vary between pennies on the dollar of the demand to 90 percent.

At least 130 businesses have been sued for amounts between $4,000 and $1.5 million after unsuccessful attempts to settle beforehand. Some of those lawsuits were resolved without going to trial while some were dismissed after lively discussions between attorneys and the trustee.

Growe, who believes more than $4 million may have been paid preferentially by Great Northern, says that the $1 million collected to date has made it a successful venture.

Growe said the purpose of the preference-payment process is a valid one – to treat all creditors equally. He also said the mailing of preference-payment letters gives him a way to investigate which invoices actually fall into the category of preferential and which ones do not.

“Here’s the part that [critics of preferences] are missing,” Growe said. “As the trustee, I don’t know what all these payments mean. All I know is Great Northern made them. There have been a number of cases where things that appeared to be preferences weren’t preferences at all. That was the end of it. We didn’t initiate a suit. We didn’t send a follow-up letter.”

‘A train wreck’

But a number of the suppliers have called the preference-payment process a court-sanctioned form of blackmail. They believe they are forced to pay up or shell out money for a lawyer and gamble on whether they’re going to win.

“Blackmail is probably too strong a word,” said Jack Williams, a professor of bankruptcy law at Georgia State University. “Creditors will say it because it sticks in their craw. A preference has nothing to do with evil intent. It’s a policy for which all trade creditors in a class are to be treated equally.”

Williams has followed the Great Northern bankruptcy case and characterized it as “a train wreck.”

“It is a sympathetic story, there’s no question about it,” he said. “But here’s where a sympathetic story hits squarely with bankruptcy policy and bankruptcy policy usually prevails. It’s not unusual that the law requires a result that from an untrained legal eye makes no sense at all. It’s all legal, but I didn’t say it makes sense.”

Generally, Williams said, suppliers who are asked to return up to $10,000 are better off reaching a settlement with the trustee because the price tag to hire an attorney and retain expert witnesses could exceed $20,000.

Like A.W. Chaffee, Jeff Baker, owner of Universal Welding in East Millinocket, hired an attorney. Baker wants to win.

“I have to look at it as what’s my cost to fight this thing,” said Baker, whose company is being sued by the trustee. “They’re backing me into a corner and I’m looking for a way to recover this without a fight.”

Universal Welding, which was owed $17,700 when Great Northern went bankrupt, is being sued to return $35,000 in alleged preference payments.

Making a deal

Dana Hill, a controls and instrumentation specialist who owns Hill Control Systems in Bangor, sees nothing fair in a system that penalizes suppliers for the poor payment practices of a business.

A number of the suppliers fighting preference-payment recalls say they received checks that were written out before the 90-day period started and mailed after it began.

That’s what happened with Hill’s only check from Great Northern.

“I received one check dated the first of August, when [my invoice] was due, and I got it between December 1 and 4,” Hill said.

In April 2002, eight months before Great Northern’s bankruptcy, Hill received a $16,000 purchase order from the paper company to work on machine instrumentation. After seven straight weeks of work, he sent Great Northern a bill for $8,000.

For two months, he would call the company about his invoice and got little response.

“I felt like I had done my part, now send me the money,” Hill said.

In October, he began working again at Great Northern, even though the first invoice hadn’t been paid. When he eventually received the $8,000 check in December 2002, he cashed it.

Unbeknown to Hill, December was the last month in the preference-payment period. A year later, Hill was staring at a preference-payment lawsuit. He settled the suit five days before Christmas, agreeing to return $6,000.

“I never got the second $8,000,” Hill said. “That’s a lot of money for a line on a resume.”

Periodic payments

During the nearly four years before the bankruptcy filing, vendors were finding out the hard way that there was nothing normal or systematic about the way Great Northern paid them.

Baker of Universal Welding said that’s not his fault.

In court papers filed in July, Baker’s attorney, Michael Harman of Millinocket, argued that periodic payments were the “historic course of dealing” with Great Northern.

In other words, that was the papermaker’s normal, albeit aberrant, course of business.

Starting in mid-1999, Great Northern was under new ownership, having been purchased by Inexcon Maine. And starting in mid-1999, Baker struggled to get his invoices noticed and paid by the paper company.

He would call the company two or three times a week and “actually I got the answering machine nine times out of 10.”

Baker, who wanted to maintain a good vendor-customer relationship with Great Northern, said he didn’t press the issue by threatening collections.

Instead, he tried to work out a payment schedule, believing he was giving the company’s new owners time to get on solid financial footing.

“Our terms are normally net 30,” Baker said. “I allowed them to go beyond the net 30. I was being a nice guy and I thought that by being a nice guy they would consider me for more work. In other words, it doesn’t pay to be a nice guy.”

A.W. Chaffee wasn’t as patient waiting for payments. Great Northern owed thousands of dollars in May 2002, and the wood chips supplier decided to stop shipments until a good-faith effort was made to reduce the debt.

One hundred nineteen days later, A.W. Chaffee received a check.

“When they started to pay, at the end of August, we started shipping again,” Westin said. “The mind-set at our business was, ‘Hey, we’re not going to risk this. As soon as they pay us, we’ll ship again.’ Isn’t that what businesses do? If you want the product, you’ll have to pay us for it.”

Insolvent from the start?

Suppliers may have been frustrated that their bills weren’t being paid on time, but they didn’t know they were dealing with a company that probably could have been classified as insolvent on its first day of new ownership, Aug. 17, 1999.

The business community was made aware of Great Northern’s possible insolvency when two federal lawsuits alleging mismanagement were filed against the company’s owners and board of directors 11 months after the bankruptcy case had begun. The trustee filed one of the lawsuits.

Under bankruptcy law, businesses should have known about the alleged insolvency way before the preference period began – and stopped doing business with Great Northern.

Baker wishes someone had told him a lot sooner.

“If somebody had told me I was dealing with an insolvent company, I wouldn’t have sent them any products or services,” he said. “There’s no way.”

Century-old Great Northern, once the country’s top paper producer, was purchased by holding company Inexcon Maine in 1999 from Bowater Inc., a South Carolina-based company that planned to shut down Great Northern’s mills in Millinocket and East Millinocket unless it could find a buyer.

Inexcon Maine was owned by several Canadian holding companies set up by Quebec businessmen Lambert Bedard and Joseph Kass for the express purpose of buying a paper company.

Almost immediately the company began to experience a cash-flow problem, according to court documents. Part of the reason for the financial strain, the lawsuit stated, is that the owners transferred $9 million from the paper company to Inexcon Maine once the deal was completed, calling the payment a dividend.

“GNP was rendered insolvent by the $9 million transfer and remained insolvent,” wrote Portland attorney Dan Amory in the lawsuit, who disputed whether the transfer qualified as a dividend.

Amory represents Growe, the trustee of Great Northern’s bankrupt estate.

Bedard, Kass and the board members have denied they mismanaged the company, and a trial tentatively has been set for September 2005. Several board members are seeking removal from the lawsuits.

Paying for No. 11 rebuild

In 2000, the new managers began a nearly two-year rebuild of the No. 11 machine in Millinocket, coincidentally at a time when industrywide prices for pulp and paper were beginning to tank.

Baker of Universal Welding, like others in the community, viewed the rebuild as an investment in the Millinocket-East Millinocket area’s future. He wanted to be a part of that, too.

“[I thought] that they had sunk all this money into this new paper machine and once they got the new paper machine up and running, we’d get paid,” he said.

Short of cash to pay for the rebuild, Great Northern approached a couple of high-risk lenders for money and used the mills and everything in them as collateral, according to court testimony.

Great Northern also sold its timberlands and its power plant to help cover the cost of the rebuild.

In the meantime, three Great Northern executives were coming up with a plan to delay paying their suppliers, according to a memo presented as evidence in an Oct. 20, 2003, deposition of Bedard.

Timothy Morgan, Great Northern’s chief financial officer, allegedly outlined a plan to pay vendors at least 45 days after receiving their invoices.

Also, Morgan stated that Great Northern should consider asking vendors for an additional, immediate 30-day extension of payments “as a last resort, but we have to have a plan in case.”

The memo was given to Bedard and Don McNeil, Great Northern’s president, according to court documents.

Bedard, in the deposition, defended the payment schedule, stating that Great Northern’s previous owners were “too fast in paying their bills.”

He said Great Northern was having problems getting paid by buyers of its paper, on average every 45-50 days, and Great Northern’s suppliers should be paid in that same amount of time “plus a couple of days.”

Amory asked Bedard, “And that’s regardless of what the actual invoice terms were by the company’s vendors?”

“Generally speaking, yes,” Bedard answered, acknowledging that his vendors wanted payments sooner than 50 days from their invoice date.

But the memo couldn’t be used as a defense in a preference-payment case if Great Northern’s new payment schedule became its normal course of business, Growe said.

Plus, preference-payment law puts the onus on suppliers to show they did not change their payment requirements.

“If they in any way deviated from the ordinary course of business, they’ve got a problem,” professor Williams said.

Preference suits prevalent

The good thing that came out of the paper-machine rebuild was that it made Great Northern attractive to a buyer.

Six months after the bankruptcy filing, Great Northern’s assets were sold in a $103 million deal to Brascan Corp. of Toronto, a rock-bottom price for a company that owed so much money and invested so much into it.

Brascan, which owns Nexfor-Fraser Paper Co., set up its own operations in the mills, calling the new business Katahdin Paper Co. and employing more than 500 of the 1,130 people who were laid off when Great Northern went bankrupt.

Yet the paper company’s bankruptcy case continues, as it has for at least six major business bankruptcies in Maine since 2000. Even though most of the businesses have been shut down or their assets sold to new owners, trustees remain assigned to the case to settle up the estate finances.

The others include:

. Kent Inc. of Fort Kent, a children’s wear manufacturer, bankrupt Dec. 20, 2002, nine preference payment lawsuits filed in July.

. Keeley Construction Co. of Portland, bankrupt Oct. 28, 2002, 31 preference payment lawsuits filed in the last couple of months.

. Bangor and Aroostook Railway of Bangor, bankrupt Aug. 15, 2001, 35 preference-payment lawsuits filed this spring.

. EnvisioNet Computer Services Inc. of Biddeford, a technical support company, bankrupt June 14, 2001, 13 preference lawsuits filed last year.

. Crowe Rope Industries LLC of Winslow, bankrupt Nov. 6, 2000, 25 preference lawsuits filed last year.

Several Maine companies that sold products to the defunct Ames Department Stores chain of Connecticut received preference-payment lawsuits more than a year ago.

No preference-payment demands will be made in the 31/2-year bankruptcy of Eastern Pulp and Paper Corp., according to Growe, who is the estate’s trustee. Time has run out.

Growe said he would have needed to be appointed within the first two years of Eastern Pulp’s bankruptcy to initiate the preference-payment process. He wasn’t put on the case until last February.

Worth the fight

After more than eight months, A.W. Chaffee reached a settlement with the trustee earlier this week.

Instead of having to send back $90,000, the wood chips supplier has agreed to return $2,500.

“We just kept saying no and they kept coming down,” said Westin, A.W. Chaffee’s vice president.

The settlement awaits a federal bankruptcy judge’s signature.

John Rogers, a Waterville attorney who represents A.W. Chaffee, said he was able to show that there was no attempt by his client to take advantage of Great Northern, or to be treated differently from other suppliers.

A.W. Chaffee also was able to produce a payment history that showed the way Great Northern paid the supplier’s bills during the 90-day preference period was consistent with the way Great Northern always paid its bills.

If A.W. Chaffee had been forced to pay the $90,000, “it would have been a catastrophic event for them,” Rogers said.

Westin is relieved.

“The system is totally convoluted,” he said about the preference-payment process. “I can understand that it’s to keep people from enriching their brother-in-law. But, well … anyway, we’re done.”