Ketchikan borough sues veneer outfits

Suit claims companies guilty of fraud, breach of contract and conspiracy

Posted: Friday, December 20, 2002

KETCHIKAN - The Ketchikan Gateway Borough has filed a lawsuit against Gateway Forest Products and the Ketchikan Pulp Co., contending the two companies conspired to defraud the borough.

In a lawsuit filed last month, the borough accuses the companies of breach of contract, fraud and conspiracy.

Gateway President Jim Erickson told the Ketchikan Daily News that the borough's lawsuit was baseless, but otherwise declined comment.

In its legal response filed Nov. 27, KPC denied the allegations in the lawsuit.

Gateway opened a veneer plant on the site of the former KPC pulp mill in Ward Cove in January 2001. One month later, the company filed for bankruptcy.

The borough had issued three loans to Gateway and its creditors, totaling $15 million, in an effort to keep Gateway afloat.

In July, the borough purchased the veneer plant for about $2 million from Gateway creditor Foothill Capital Corp., moments before the mill was scheduled to be auctioned off.

Among other allegations, the borough claimed that KPC controlled Gateway. On June 2, 1999, KPC, Gateway and KPC's parent company, Louisiana-Pacific Corp., entered into a confidentiality agreement whereby they agreed to share information about the proposed veneer plant and KPC's real estate assets and to maintain secrecy among themselves, according to the borough lawsuit.

Through the confidentiality agreement, the officers and directors of Gateway and KPC maintained a relationship that placed KPC in control of Gateway during 1999, the lawsuit said.

The borough claims KPC used Gateway as a means through which the asbestos-laden power house and contaminated parcels of land could be abandoned to the public at large, thereby relieving KPC of much of the cost of cleanup.

The power house has been effectively abandoned by KPC through its sale to Gateway and by Gateway through its default on a loan from the borough, according to the lawsuit.

The lawsuit also contends that:

• The two companies knew that the veneer plant was grossly undercapitalized and not economically viable at the same time they conspired to attract borough investment.

• KPC and Gateway high-graded timber for initial operations of the veneer plant to achieve profitable results, for a very limited duration, to entice the borough into advancing more funds.

• The defendants artificially inflated the value of parcels used as collateral for loans from the borough.

• In November of 1999, KPC and Gateway represented to the borough that Gateway was capitalized by its shareholders with approximately $1 million in equity. The borough claims the equity contribution of Gateway's shareholders was illusory and that the borough relied upon that representation each time it loaned Gateway money.

• KPC by November 1999 had stockpiled more than 16 million board feet of red cedar logs, which were transferred to Gateway during the asset sale. Gateway immediately sold the timber, produced a profit of approximately $2 million and distributed 49 percent of that profit to shareholders in early 2000.

• Gateway falsely represented a due diligence report, required by the borough as part of its loan terms. On Nov. 10, 1999, the borough said it received a letter from Macadam Capital Partners, which said loan conditions were met and due diligence had been successfully completed. The author of the letter was, at the time he wrote the letter, a shareholder of Gateway. The conflict of interest was not disclosed to the borough, the lawsuit states.

The borough also contends it could not properly assess the feasibility of the proposed veneer plant because KPC only allowed the borough mayor, manager and attorney to examine a veneer plant feasibility study KPC conducted with the help of public funds.

The borough said a restrictive covenant prevented those borough officials from securing expert economic review of the feasibility study's findings and conclusions.

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