Motion to sell Adak plant

8/14/2019 Motion to sell Adak plant

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PAGE 1: DEBTOR’S APPLICATION TO SELL ADAK PLANT FREE AND CLEAR OF LIENS

H:\3023\ MAIN \ MOTION TO SELL - USE THIS.WPD

Cabot Christianson, Esq.CHRISTIANSON & SPRAKER911 W. 8th Avenue, Suite 201Anchorage, Alaska 99501(907) 258-6016

Attorneys for Debtor

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF ALASKA

In Re: ))

ADAK FISHERIES, LLC, )an Alaska limited liability company, ) Case No. 09-00623 DMD

)

Debtor. ) Chapter 11________________________________________________)

DEBTOR’S APPLICATION TO SELL ADAK PLANT

FREE AND CLEAR OF LIENS

Debtor Adak Fisheries, LLC, (Debtor) applies to this Court for authority

to sell to Adak Seafood, LLC, (Buyer) the plant facility at Adak, Alaska, and associated

equipment and assets, for $488,000 cash to the bankruptcy estate plus assumption of

approximately $6.7 million of debt owed to Independence Bank (the “Bank”), on the

terms and conditions set forth in the Asset Purchase Agreement (APA) attached hereto as

Exhibit A, and as modified herein. The proposed sale shall be free and clear of the liens

and interests of all entities other than the Bank, and those claims and interests (but not

those of the Bank) shall attach to the proceeds to the same extent and in the same order of

priority as existed in the underlying assets.




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1 In the mid-1900's the federal government began the process of transferringownership of the decommissioned Navy base on Adak to Aleut Corporation. In 1997,Aleut Corporation created a subsidiary, Aleut Enterprise Corporation, to manageconversion of the base to civilian use. The base’s dock became the site of the fishprocessing facility operated by the Debtor.



The Buyer is a newly created Delaware limited liability company

affiliated with Drevik International, a long time customer of Debtor’s operation. Kjetil

Solberg, former owner of the Debtor, also has a relationship to the Buyer.

Background

Adak Fisheries, LLC was created in 2001 by Kjetil Solberg, a Norwegian

national, to build and operate a fish processing facility in Adak, Alaska, on property

leased from Aleut Enterprises, LLC (Aleut), a subsidiary of the Aleut Corporation, the

ANCSA village corporation for Adak.1

Solberg partnered for a while with Seattle processor NorQuest Seafoods,

then with Icicle Seafoods, and then with Aleutian Spray Seafoods, Inc. (ASF). In late

2004, when Solberg and ASF were 50-50 owners of Debtor, ASF learned that Ben

Stevens, son of the then U. S. Senator, claimed a 25% stock option in the Debtor. This

revelation sparked litigation between Solberg and ASF, as well as commanding

considerable public attention at the time because Ben Stevens also sat on Aleut’s board of

directors.




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2 CFO William Matthew Tisher also acquired a 5% interest through an assignmentof a stock option, but because of a dispute concerning that assignment, Tisher voluntarilyrelinquished his membership interest in 2009.

3 Debtor’s unaudited financials for 2008 reflect $20.2 million of revenue, negative$2.3 million of net income, and EBITDA of negative $.4 million.

4 Debtor’s unaudited financial statement for 2009 YTD through June reflect $10.8

million of revenue, negative $1.7 million of net income, and negative $.7 million of EBITDA.

5 Cod sales are responsible for about 80% of Debtor’s revenues, and are thereforethe backbone of Debtor’s business. The cod season runs from mid-February throughMarch, so by June, the most profitable part of Debtor’s year is completed.



On October 17, 2005, Solberg purchased ASF’s 50% membership interest

in the Debtor for $5 million, payable over time. In 2007, officers Dave Fraser and Jim

Prince each exercised options and acquired 5% membership interests in the Debtor.2

2007 was a good year for Debtor: it enjoyed revenues of $32.3 million and

EBITDA of $2.0 million. 2008 was not a good year:3 although cod prices were good,

many fishermen sold their product that year to Trident Seafoods, which had installed a

floating processor in Adak that year. 2009 was also a bad year,4 largely because cod

prices were poor.

In June 2009,5

it became clear that Solberg would be unable to pay ASF

the balance due ASF for the purchase of ASF’s interest in Debtor, and so, effective

August 3, 2009, Solberg turned over his entire membership interest in Debtor to ASF.

Having by then conducted its due diligence, ASF determined that the membership

interest had no value, and on August 7, 2009, sold its interest for a nominal sum to

Pacific Pelagic Group, LLC, a Washington LLC owned by John Young. Young is a




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Seattle attorney who had represented ASF in the litigation involving the Stevens option,

and other matters. Thus, by August 2009, Debtor was owned 90% by Pacific Pelagic

Group, 5% by Dave Fraser, and 5% by Jim Prince.

Debtor’s major secured lender is Independence Bank, based in

Providence, Rhode Island, who is owed approximately $6.7 million, secured by broad-

form security documents. During 2009, Independence Bank has collected most of

Debtor’s fish revenues and has controlled the disposition of those funds. On September

1, 2009, the Bank commenced an action in federal district court in Anchorage to appoint

a receiver. The complaint alleged mismanagement and fraud by Kjetil Solberg

individually, and by the Debtor while Solberg was in control of the Debtor. By the time

that suit was filed, Debtor’s management had determined that the company was not

viable as an ongoing entity, and on September 11, 2009, this Chapter 11 petition was

filed.

The lease between Aleut Enterprise, LLC, and the Debtor, is central to the

proposed sale. The first lease between the parties was entered into in 2001. The current

lease is dated as of January 1, 2006, and by its terms expires December 31, 2009. The

lease provides for five additional options to extend, with each extension being for five

years. Notice of renewal must be given more than 120 days prior to the expiration of the

lease term, i.e. before September 2, 2009. Debtor did not give that notice: Debtor has no

intention of continuing operations, and perceives that the lease is burdensome to a new

buyer and needs to be renegotiated.




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Shortly after filing this Chapter 11 petition, Debtor moved to reject the

Aleut lease under Section 365. The hearing on that motion to reject has been continued

to November 9, 2009, at the same time as the hearing on this motion to sell.

Description of Buyer’s offer

The offer that is the subject of this motion came to the Debtor’s attention

in an unusual manner. Rather than the Buyer or the Bank approaching Debtor informally

to inquire if Debtor would sponsor the offer, the Bank filed a motion on shortened time

for approval to sell the plant, Docket No. 40. The Bank’s motion was the first that

Debtor heard of the offer. At Docket No. 54, this Court denied the shortened time

request on the ground that the Bank did not own the plant and therefore lacked standing

to sell it. Later, the Bank supplied the Debtor with the written APA.

The Buyer identified in the Bank’s motion is Adak Seafood, LLC, a

Delaware limited liability company. Until 2005, Debtor conducted its business under the

name Adak Seafoods, LLC, an Alaska limited liability company. The Alaska entity,

(Seafoods - plural) was controlled by Solberg, and was dissolved December 15, 2005.

See Exhibits B and C hereto. The Delaware entity (Seafood - singular) was created

September 4, 2009, see Exhibit D; however, no ownership or other information is readily

available on-line for that entity.

Undersigned sent Arne Willig, counsel for the Bank, an email on

September 18 concerning the proposed sale, see Exhibit D. Willig’s response, Exhibit F

hereto, contains the following questions and answers:




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1. Who is “Adak Seafood, LLC”? There is an Alaska LLC called“Adak Seafoods LLC that voluntarily dissolved in 2006 - see attached. Isthis the same entity?

Response: Independence Bank believes it is a group of Norwegian

investors. The Purchase and Sale Agreement states that it is a DelawareCorporation.

2. The dissolved Adak Seafoods, LLC was controlled by KjetilSolberg. What is Kjetil Solberg’s connection to “Adak Seafood, LLC,”the proposed buyer?

Response: Independence Bank does not know Mr. Solberg’s connection.That question should be directed to Mr. Celeste.

3. What past or present Adak Fisheries, LLC personnel are connected

with the proposed buyer?

Response: Independence Bank does no know. Again, this quiestionshould be directed to Mr. Celeste.

4. Are any employees of Independence Bank connected with theproposed buyer?

Response: Independence Bank in not connected with the proposed buyer.

Undersigned thereafter contacted Joshua Celeste, a Providence, Rhode

Island lawyer, the person identified in the APA as the contact person for the Buyer.

Celeste indicated that the Buyer was affiliated with the same Norwegian fish buyer,

Drevik International, who had been a major customer of the Debtor, and he also

acknowledged that Kjetil Solberg would be involved in the operation of the plant if the

purchase was successful. He declined to give any further information than this as to

ownership or management of the Buyer, and he also declined to give any information

concerning the financial ability of the Buyer to close. Mr. Celeste’s rationale was that




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6 Defined within APA as the Aleut lease, the Pollock Agreement, and the OffshorePollock Agreement.

7 $10,000 + $231,000 + $147,000 + $100,000 = $488,000. See Exhibit G., emailsdated October 9, 2009, to Mr. Celeste.



because this sale was all cash at closing to the estate net of secured debt, the Debtor need

not concern itself with the identity or financial capability of the Buyer.

The assets to be sold are detailed in Section 1.1 of the APA, and consist of

the inventory, equipment, permits, owned intellectual property, plans and diagrams,

insurance claims, cash on hand, and receivables; however, Section 1.3 states that assets

excluded from the sale are membership interests held by the Debtor (of which there are

none), avoidance and state law actions, instruments, etc., and defined Claims. Also

included in the sale is the Eskimo Princess, a fishing vessel titled to T&S Fisheries LLC.,

owned by Matt Tisher. See Exhibit F.

The sales price under the Asset Purchase Agreement is described in

Article II, Section 2.1 of the APA as

(a) $10,000 earnest money, plus

(b) assumption of the three Bank loans, plus

(c) assumption of the ADAK Agreements,6 plus

(d) Buyer paying $231,000 to the IRS and $147,000 to the State of Alaska,Employment Security Division, at Closing, plus

(e) $100,000 to the bankruptcy estate.

Ignoring item (c), assumption of the ADAK Agreements, this

consideration is equivalent to $488,000 to the bankruptcy estate, 7 plus assumption of the




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three Bank loans totaling approximately $6.7 million: i.e., total consideration of about

$7.2 million.

Perhaps the thorniest aspect of the APA is that by its terms it requires an

assumption and assignment of the Aleut lease. As set out in Aleut’s memorandum,

Docket No. 85, with respect to the Debtor’s motion to reject that lease, Aleut claims the

following defaults under the lease:

Minimum Annual Rent $ 138,108Utilities due City of Adak $ 428,729Sales taxes due City of Adak $ 546,191Repair costs for damage to housing units and plant (est.) $ 190,000

Environmental clean up costs (est) $ 1,000,000Security deposit ($50,000)Total monetary cure amount $2,253,028

Debtor is not prepared at this point to concede that the above amounts are

the proper cure figures, but it is apparent that the cure cost could be very substantial.

It is also apparent that there is no “room” in the Buyer’s offer to cure the

defaults in the Aleut lease, even if the cure figures are a fraction of what the Aleuts

claim. Further, even if the Aleut lease were to be assumed, the lease expires by its terms

December 31, 2009 - obviously a pointlessly short lease term from the Buyer’s

standpoint. The lease does contain a renewal option, but as indicated above, the renewal

deadline has passed. And, although Debtor cannot speak for the Buyer, in the Debtor’s

view, the lease terms need to be renegotiated anyway.

For these reasons, Debtor has urged Buyer to withdraw the assume and

assign requirement. For whatever reason, Buyer has declined to do so. The parties do




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recognize, however, that if new lease terms can be negotiated between the Buyer and

Aleut before the November 9, 2009 hearing on this motion, that renegotiation will moot

the issue of whether assumption and assignment is in the best interests of the estate, or

whether it can be accomplished at all, let alone whether assumption is in the best interests

of the estate.

The parties also agree that the proposed sale needs to close quickly.

Section 8.4 of the APA calls for a Closing up to ninety days after a sale order, but that is

impractical because the high fishing season starts in January 2010, so the plant needs to

be up and running before then. The parties have therefore agreed to a Closing date no

later than November 16, 2009. See Exhibit G.

Other liens against the property

There are recorded IRS liens against the Debtor as follows: $3,102.20

recorded June 23, 2009; $9,466.47 recorded July 6, 2009; and $21,642.97 recorded

August 24, 2009.

There are also recorded State of Alaska liens in the amount $6,864.52

recorded July 27, 2009, and $11,650.00 recorded April 14, 2009.

The $488,000 in sale proceeds will be more than sufficient to pay these

liens.

There are UCC-1's of record in favor of Pentech Financial Services and its

assignees, but Debtor is advised that these should have been released in the wake of

subsequent Independence Bank loans. There are also some individual equipment UCC-

1's in favor of several Toyota entities, and those secured claims will either be paid off or




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8 Debtor does not purport to understand all the nuances of this transaction,particularly given that when Debtor asked the Bank, “Who is Adak Seafood, LLC?”, Mr.Willig responded that “Independence Bank believes it is a group of Norwegian investors.The Purchase and Sale Agreement states that is a Delaware Corporation.” Exhibit F.



the equipment excluded from the sale. Aleut Enterprises, LLC has a UCC-1, but Debtor

assumes that any obligation secured by this UCC-1 will be eliminated as part of the

Buyer’s renegotiation of the lease.

All entities holding UCC-1's of record will be given notice of the sale.

Additional information

Until late August, 2009, Debtor had not three, but four, outstanding loans

with the Bank. In addition to the three loans descirbed in the Asset Purchase Agreement,

there was an “EXIM” loan, which was a $5 million line of credit established in March,

2009. In late August, 2009, the unpaid balance of that loan was approximately $324,000.

Unknown to Debtor, Drevik International paid off that loan, despite Drevik having no

legal obligation to do so, or any expectation or understanding with the Debtor that Drevik

might do so. Drevik was a substantial customer of the Debtor, but the payment was not

on account of any obligation to the Debtor. The Bank has informally advised that Drevik

made the payment in order to preserve its relationship with the Bank, whatever that

means, and apparently as a condition of the Bank supporting this offer.8 The Bank has

advised that Drevik made the payment to the Bank without any expectation of repayment

by Debtor, and from the Debtor’s standpoint the payment is a gift.

Debtor invites the Bank and the Buyer, before the November 9 hearing, to

provide complete details as to this transaction. Debtor also invites the Bank, the Buyer,




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9 Mr. Willig’s letter dated September 23, 2009, Exhibit F, states that“Independence Bank does not know Mr. Solberg’s connection [to the Buyer].” It nowappears to the Debtor that Mr.Solberg may be in complete charge of the Buyer’s newoperation.



and Mr. Solberg to describe Mr. Solberg’s relationship to the Buyer and to management

of the plant, if and when the Buyer is successful.9

Analysis of the offer

The Buyer’s offer is the only formal offer received to date by the Debtor.

Debtor believes that there may be another offer coming, from Trident Seafoods, and if

that offer is received, Debtor will file a supplemental motion to bring that offer for

consideration at the November 9 hearing. Debtor does not believe that the Buyer’s

proposed offer is viable if the assumption and assignment requirement is not waived, but

for the reasons discussed above, that requirement may well be waived.

Debtor also believes that the creditors and bankruptcy process would be

well served by the Buyer providing full details as to the ownership and proposed

management of the new operation, and by Buyer’s affiliates and the Bank disclosing

their relationships between each other, including the particulars of the $324,000

payment.

DATED this October 9, 2009

CHRISTIANSON & SPRAKERAttorneys for Debtor

By: /s/ Cabot Christianson




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Cabot Christianson

List of ExhibitsA - Asset Purchase AgreementB - Adak Seafoods, LLC Biennial Report

C - Adak Seafoods, LLC Articles of DissolutionD - Delaware Division of Corporations information re: Adak Seafood, LLCE - Christianson email dated 9/18/2009F - Willig letter dated 9/23/2009G - Christianson emails 10/9/2009

The undersigned hereby certifies that on October 9, 2009, a true and correct copy of this application wasserved on:

-- US Trustee

- Marc Wilhelm,Esq.- Micheal Mills, Esq.- Paul W. Paslay, Esq.- Christopher Mulhearn, Esq.- Diane Vallentine, Esq.- William D. DeVoe, Esq.- John Siemers, Esq.

by first class regular mail, to the address noted above, or by electronic means through the ECF system asindicated on the Notice of Electronic filing.

By: /s/ Margaret StrobleMargaret Stroble

Documents

Motion to sell Adak plant