BANGOR – An official committee of Great Northern Paper Inc.’s unsecured creditors is appealing a federal bankruptcy judge’s decision to allow Belgravia Paper Co. to be paid a $5 million breakup fee if it is not the eventual buyer of GNP.

The committee is petitioning a bankruptcy panel of the 1st Circuit Court of Appeals to overturn Judge Louis H. Kornreich’s decision to include the fee as part of Belgravia’s $91 million offer to buy the two mills in Millinocket and East Millinocket.

British Columbia-based Belgravia’s offer is positioned as the “stalking horse bid” in an auction of Great Northern slated for March 21. In auction bidding procedures approved by Kornreich on Feb. 18 in bankruptcy court in Bangor, other companies interested in buying Great Northern must top Belgravia’s offer by at least $2 million. In addition, the winning bidder must pay Belgravia $5 million for the breakup fee. Great Northern would write the $5 million check to Belgravia from proceeds of the sale.

In court testimony last month, Great Northern chief executive officer Jim Giffune said he accepted Belgravia’s offer even though he thought the breakup fee was too high. He said that without the offer, Great Northern would have faced foreclosure for not meeting terms of a loan from its primary creditor, Boeing Capital Corp.

Kornreich ruled that Giffune had used sound business judgement in accepting the offer.

In court documents filed late on Feb. 28, the creditors’ committee stated that Kornreich also should have reviewed what kind of detrimental effect, if any, the fee would have on Great Northern’s estate and the possible payment of money that is owed to creditors.

When Kornreich issued his ruling Feb. 18, he said that although he personally did not like the breakup fee, it was not his place to interfere with the negotiation of a contract between Great Northern and Belgravia unless an agreement was made without sound business judgment.

“I’m not going to surprise anyone by agreeing that $5 million is pretty high,” said Kornreich during his ruling. “But is there a law … that prohibits such a fee? No.”

According to the bankruptcy appellate panel’s Web site, 25 percent of the judges’ decisions sent to the board for review in the last five years have been reversed or sent back to the originating court for further review.

Jay Gellar, a Lewiston attorney representing the creditors, said in court documents that unless the breakup fee and other objectionable provisions of the bidding rules are not deleted, “the die for the sale process will be cast and the harm will be irreversible.”

He said the $5 million breakup fee, along with the $2 million overbid rule, sends a “chilling effect” through the sales process, and could cause “immediate and irreparable harm to the estate by dissuading other qualified purchasers from participating in the auction, thereby stifling competitive bidding.”

“The committee believes that the bid procedures are fatally flawed and that the burden of those flaws will be borne by discouraged potential purchasers and Great Northern’s creditors,” Gellar wrote in court documents.

According to the court documents, Gellar stated that any offer less than $98 million – but higher than Belgravia’s $91 million bid – “means that the bidder willing to pay the most for Great Northern’s assets may not prevail at the auction.”

“A bidder willing to pay $4 million more than Belgravia would not prevail at the auction [because] after the estate pays the $5 million breakup fee, the estate would be $1 million poorer. This outcome is unacceptable to creditors and should not be sanctioned by the court.”

Robert Keach, a Portland attorney representing Belgravia, said Monday that “it’s highly unlikely” the creditors’ committee will be successful in its appeal because “we think the judge used the proper legal standard.”

“We think the appeal is without real substance and it’s not going to change what we do,” Keach said.