Manistique Papers creditors file complaint, allege customer poaching

By Caroline Salls

Pittsburgh, Dec. 27 - Manistique Papers Liquidation Co., Inc.'s official committee of unsecured creditors filed an adversary complaint on Dec. 26 against Remark Paper Co., Inc., DDFKD Investments, LP, Merit Capital Partners, Merit Mezzanine Fund IV, LP, Merit Mezzanine Parallel Fund IV, LP, Donald P. Kramer, Dennis Kramer, Thomas Campion, Evan Gallinson and Jon Johnson.

According to the complaint filed with the U.S. Bankruptcy Court for the District of Delaware, the committee filed the action "to address the improprieties committed by several classes of defendants," including Remark and DDFKD, lenders Merit Capital, Merit Mezzanine and Merit Mezzanine Parallel, board members the Kramers and board members and insiders Campion, Gallinson and Johnson.

The committee said Remark purchased a minority equity interest in Manistique Papers, and Remark's principals, the Kramers, assumed day-to-day control over the company's sales and operations and "started a chain of events that led initially to decreasing profitability, then to severe liquidity constraints, and ultimately to the debtor's bankruptcy filing."

Based on Manistique's corporate structure and corporate governance guidelines, the committee said Remark and the Kramers were able to run the business with virtually no day-to-day oversight by the board, for their sole benefit and to the detriment of the company's various creditor constituencies.

The committee said the most significant of those constituencies was the unsecured creditors, "who face millions of dollars of potential losses."

Board failings

According to the complaint, the board was charged with safeguarding Manistique "against the greed and self-interested behavior of Remark and the Kramers" and either knew and turned a blind eye or should have known that Remark was purchasing paper from the company at below market prices, re-selling that paper to Remark's end-user customers and earning an unreasonable and above market commission.

In addition, the committee alleged that the board should have known that Remark was thwarting Manistique's efforts to do business with any merchants/brokers besides Remark, misleading some customers to believe that Remark's employees were direct mill salesmen employed by Manistique, when, in fact, the customers were purchasing paper through Remark as an intermediary, and stealing or attempting to steal Manistique's customers.

The committee alleged that the board betrayed the company and allowed the Kramers and Remark to control the company's operations and "run the debtor into the ground," likely because the board was conflicted because of the Kramers' director roles.

Reimbursement sought

Through the complaint, the committee said it is asking the court to order Remark to reimburse Manistique's estate for excessive management fees, commissions and markups it received as a result of paper it purchased from the company at below-market prices and revenue lost because of the customers Remark allegedly poached from Manistique.

The committee is also asking the court to void any and all transfers to the defendants and award compensatory, consequential and punitive damages.

Manistique Papers, a Manistique, Mich., recycled-fiber specialty paper producer, filed for bankruptcy on Aug. 12, 2011. Its Chapter 11 case number is 11-12562.

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