The trouble at Kake Tribal

Corp.'s leader optimistic despite many battles

Posted: Tuesday, January 11, 2000

Lawsuit looms over horizonat tribal corp.

Even when Kake Tribal Corp. emerges from bankruptcy, there could be contentious issues left to resolve in court.

Petersburg attorney Fred Triem is suing individual members of the corporation's board of directors and the board's professional advisers for what he contends were illegal dividend payments to shareholders in the mid-1990s.

On behalf of shareholder Cliff Tagaban Sr., Triem filed a lawsuit seeking an unspecified amount of money from Kake Tribal's board members and advisers to be paid toward the outstanding judgments in two past shareholder lawsuits and to the corporation.

The corporation's payout of nearly $37 million in shareholder dividends created the financial instability that led to the Chapter 11 case, Triem said. And state law prohibits dividends that create insolvency, even if shareholders want them, he said.

The dividends - including $62,250 for the average shareholder over one period of 3 years - ``created the false impression among the shareholders that the corporation was doing well,'' Triem said. He alleges that then-President/CEO Gordon Jackson ``was trying to entrench himself in office.''

But Jackson says the large dividend payments were in response to a shareholder petition for an even bigger payout.

Also, shareholders defeated management's plan for a $25 million settlement trust, which probably would have grown to about $60 million by now, he said.

A settlement trust is a provision in federal law for permanently insulating assets from the business risks of the corporation, and using those assets to promote the health, education and welfare of shareholders, and to preserve Native heritage and culture.

``I think a terrible mistake was made by not approving the settlement trust,'' Jackson said. ``I think about it and grieve about it on almost a weekly basis.''

Triem initially brought two lawsuits by dissident shareholders against the corporation, successfully arguing that there had been unlawful discrimination in the offering of life insurance benefits.

Now, Triem says that illegal dividends might have been intended to cause insolvency, to ``frustrate'' multi-million judgments from the shareholder litigation.

``It was not entrepreneurial profits'' being distributed, Triem said. ``It was core assets.''

Jackson noted that $20 million of the dividends were authorized by the two-thirds of the shareholders, the portion required by law for a liquidation of assets.

As for the balance of $16.9 million paid from 1993 to 1997, the lawyers and accountants helped the board develop a policy for distributing 70 percent of earnings, he said. ``We followed their advice, based on the law.''

Recently, Triem announced he would name the Juneau law firm of Dillon & Findley as co-defendants in the suit because partner Tom Findley and other members of the firm advised the Kake Tribal board during the period in which the large dividends were approved.

``There's no comment in the minutes that he objected,'' Triem said.

He noted that Kake Tribal has paid some hefty bills for professional services, such as $950,000 in 1997. It was an account Dillon & Findley didn't want to lose by challenging management's judgment, Triem said.

``They sure as hell didn't pay us a million dollars,'' Findley responded.

Dillon & Findley is owed money by Kake Tribal, so the law firm wasn't interested in seeing the corporation become insolvent, Findley said. ``There is a procedure for distributing funds in the law, and it was followed. . . . Obviously, we're not going to advise something that's illegal.''

Part of Triem's lawsuit has been officially frozen by Kake Tribal's bankruptcy proceedings.

The ``derivative'' portion of the suit - so-called because shareholder Tagaban is also seeking to recover funds for Kake Tribal itself, rather than just for himself and other shareholders - is not scheduled to go forward until after the bankruptcy is concluded, unless the judge decides otherwise.

But Kake Tribal bankruptcy counsel David Bundy said he will seek to have it incorporated into the Chapter 11 action, ``to consolidate the debtor's problems in front of one judge.''

If Kake Tribal was damaged by bad professional advice, there might be money the corporation could recover toward getting out of bankruptcy, Bundy said from Anchorage. ``We need to investigate it. I don't believe in suing people just because you think they may have made some mistake.''

While Kake Tribal Corp.'s bankruptcy action involves a tangle of lawsuits, debts and conflicting business ventures, one thing is clear: It's not going to get sorted out any time soon.

After filing under Chapter 11 bankruptcy laws to reorganize its finances, Kake Tribal is probably on a long road to recovery.

Some creditors of the Kupreanof Island village corporation are likely to go several years without getting all of their money. And for Kake Tribal's 600 shareholders, there are no dividends on the horizon.

The complicated case involves five corporate divisions or wholly owned subsidiaries in three cities, Kake, Pelican and Juneau; longstanding battles within the corporation; and a potentially landmark issue involving land conveyed under the Alaska Native Claims Settlement Act.

But Kake Tribal President and CEO Sam Jackson said the future looks reasonably bright.

So far, creditors ``are being patient and understanding of our situation,'' Jackson said. ``I feel we'll be able to turn the companies around that aren't profitable.''

For now, he's leaning against a second Chapter 11 filing for the subsidiary Kake Tribal Logging and Timber, something under consideration last month.

Kake Tribal's bankruptcy filing on Oct. 9 was the culmination of a turbulent decade that included shareholder lawsuits against the corporation, a lawsuit and countersuit with Arctic King Trading Co., downturns in timber and fishing, and, depending on who's talking, bad management decisions.

It was just the sixth time a corporation created under the 1971 Alaska Native Claims Settlement Act has filed for Chapter 11 reorganization.

The filing is intended to give Kake Tribal some court protection from creditors while preparing a plan for operating and for paying debt.

But creditors aren't yet expressing much confidence about getting their money.

Spencer Sneed of Anchorage, attorney for a committee of major unsecured creditors, said it's premature to comment.

Pelican Mayor Kathie Wasserman said she had no clue when the Native corporation would pay off its debts to the city. As of November, a Kake Tribal division owed the city almost $42,000 in sales and property taxes - about a quarter of the municipal budget, Wasserman said.

What's unusual in the Kake Tribal case is that much of the outstanding debt is owed to the corporation's own shareholders.

Internal political conflicts led to multi-million dollar debts from two lawsuits. Together, the lawsuits - alleging discrimination in insurance benefits - account for $6.5 million in still-unpaid judgments, which is more than half of the total debt of the parent corporation.

Kake Tribal shareholder Cliff Tagaban Sr. of Juneau, lead plaintiff on one lawsuit, said he couldn't speculate on whether the bankruptcy proceeding means he'll be paid some day.

``Boy, I don't know,'' Tagaban said. ``Hopefully, the corporation will survive.''

According to former Kake Tribal President and CEO Gordon Jackson, Fred Triem, the shareholders' attorney who brought both cases to court, is largely responsible for the financial troubles that led to the Chapter 11 filing.

But Triem counters that it was the corporation's dividend payments of $36.9 million in the mid-1990s that led to the loss of operating capital and finally to insolvency.

And Tom Findley, an attorney for Kake Tribal, says that the shareholder lawsuits didn't actually trigger the Chapter 11 filing because the judgments were to be paid out of corporate profits, only as they were realized. Rather, the bankruptcy was caused by badly timed investments in the fishing industry that led to losses of more than half a million dollars annually for five consecutive years, Findley said.

Kake Tribal listed $17.15 million in assets and $11.94 million in debts in a Nov. 5 statement with U.S. Bankruptcy Court. Those amounts are only for the parent corporation. Documents filed in the Chapter 11 case show the book value of the ANCSA land at $11.16 million at the end of 1997.

Although its assets exceed its debts, the corporation has to retain as many as possible to improve its bottom line. And Kake Tribal is contending that its undeveloped ANCSA land can't be used to satisfy debt, anyway.

As for how Kake Tribal will get out of Chapter 11, there are many variables.

The corporation does not project that its required reorganization plan will be ready for presentation to the court before April or May. But President Sam Jackson says he has identified potential breakthroughs this year:

A land exchange pending in Congress, involving 1,280 acres, would open up the possibility for a timber harvest. In a Dec. 3 filing with the bankruptcy court, Bundy termed this ``the most likely solution to Kake's financial problems.''

The corporation is negotiating a timber sale to Sealaska Corp. for about $800,000.

Kake Tribal is also negotiating with federal officials for compensation for halting Dungeness crab fishing in parts of Glacier Bay National Park, an action which hurt Kake Tribal's processing division, Pelican Seafoods. The government has offered $275,000, but the corporation is appealing for more than $2 million.

The corporation could win a multi-year custom seafood processing contract with Wards Cove Packing.

Kake Tribal is negotiating a potential timber project with Sealaska and Whitestone Logging of Hoonah.

Other custom processing contracts are being negotiated, as well.

During a recent court hearing in Juneau, Jackson said Kake Tribal is working on collecting from its debtors. Historically, the corporation has been too generous in granting credit, and it will be working on payment plans with debtors, said Jackson, who is cousin to Gordon Jackson.

The corporation closed its Juneau office earlier this year and has cut staff in Kake, as well.

Overhead has been reduced by at least 25 percent and more belt-tightening is on the way, according to Chief Financial Officer Duff Mitchell.

``It's definitely not business as usual,'' he told creditors' attorneys at the Dec. 7 hearing.

Stipends and per diems for the board of directors have been reduced, although Gordon Jackson received $6,000 a month in severance pay from July 15, the effective date of his resignation, through the bankruptcy filing.

Jackson, who lives in Juneau, said the board's decision to grant him a $36,000 severance package in six monthly installments was a ``thank you'' and a common corporate gesture for an outgoing CEO.

With the bankruptcy, ``I'm one of the creditors, too,'' he added.

Jackson disagrees with dissident shareholders' claim that bad management decisions led to the Chapter 11 filing.

The selective life insurance benefits that triggered the two shareholder lawsuits were an ``admirable'' attempt by the board to honor the elders who had fought for passage of ANCSA, he said. ``They wanted to provide those benefits while they were alive.''

Lawsuit plaintiff Tagaban views past management decisions as less than laudable.

``I think what happened is, they tried to take care of their own people back home,'' he said.

However, Tagaban has praise for Kake Tribal's new president and believes the corporation is on the mend. ``I think all of the ill feelings are slowly going by.''

That would be best for getting Kake Tribal out of Chapter 11 as soon as possible, said David Bundy, the corporation's bankruptcy counsel.

The corporation can't develop its land and make a profit without cash, so creditors will have to be flexible about when they'll get their money, Bundy said. ``People will have to work out deals, I guess. There's no (other) way out.''

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