Adak Fisheries Lease Motion

Case 09-00623

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Cabot Christianson, Esq. CHRISTIANSON & SPRAKER 911 W. 8th Avenue, Suite 201 Anchorage, 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. ) Debtor. ) Chapter 11 ________________________________________________) DEBTOR’S APPLICATION TO REJECT ALEUT LEASE

CHRISTIANSON & SPRAKER 911 WEST 8TH AVENUE, #201 C ANCHORAGE, ALASKA 99501 (907) 258-6016 C Fax (907) 258-2026

Debtor Adak Fisheries, LLC, applies to this Court for authority to reject, pursuant to Section 365, that certain Lease Agreement entered into between Aleut Enterprises, LLC, as lessor, and Debtor, as lessee. A copy of that lease is attached hereto. Background For several years, Debtor has operated a fish processing facility in Adak, Alaska. The facility is leased from Aleut Enterprises, LLC (Aleut), a subsidiary of the Aleut Corporation, the ANCSA village corporation for Adak.1 The first lease between

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In the mid-1900's the federal government began the process of transferring ownership of the decommissioned Navy base on Adak to Aleut Corporation. In 1997, Aleut Corporation created a subsidiary, Aleut Enterprise Corporation, to manage conversion of the base to civilian use. The base’s dock became the site of the fish processing facility operated by the Debtor. PAGE 1:

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the parties was entered into in 2001. The Lease Agreement currently in effect 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. Adak Fisheries, LLC was created in 2001 by Kjetil Solberg, a Norwegian national. Solberg partnered for a while with Seattle processors 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. On October 17, 2005, Solberg purchased ASF’s 50% membership interest

CHRISTIANSON & SPRAKER 911 WEST 8TH AVENUE, #201 C ANCHORAGE, ALASKA 99501 (907) 258-6016 C Fax (907) 258-2026

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

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CFO William Matthew Tisher also acquired a 5% interest through an assignment of a stock option, but because of a dispute concerning that assignment, Tisher voluntarily relinquished 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. PAGE 2:

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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 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.

CHRISTIANSON & SPRAKER 911 WEST 8TH AVENUE, #201 C ANCHORAGE, ALASKA 99501 (907) 258-6016 C Fax (907) 258-2026

Debtor’s major secured lender is Independence Bank, based in Rhode Island, which is owed approximately $7 million, secured by broad-form security documents. During 2009, Independence Bank has collected all of Debtor’s fish revenues and has controlled the disposition of those funds, including paying itself on its secured debt while trade creditors, employees and tax authorities go unpaid. On September 1, 2009, Independence Bank commenced an action in federal district court in Anchorage to appoint a receiver. By then, Debtor’s management had determined that the company 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 therefore the backbone of Debtor’s business. The cod season runs from mid-February through March, so by June, the most profitable part of Debtor’s year is completed. PAGE 3:

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was not viable as an ongoing entity, and on September 11, 2009, this Chapter 11 petition was filed. Debtor’s intention in this Chapter 11 is to sell the equipment at the plant to a high bidder, and then either file a liquidating plan of reorganization or convert to a Chapter 7. Regardless of whether the sale of equipment is successful, Debtor has determined that it cannot operate profitably at Adak, and therefore the lease should be rejected immediately. As of the petition date, the lease is in arrears to the extent of approximately $57,106 in rent.6 On September 14, 2009, without being aware that the Chapter 11 had been filed the previous Friday, Aleut sent notice of termination of the lease. Debtor believes that the stay nullifies the effect of that letter, but the issue may be moot given that Debtor

CHRISTIANSON & SPRAKER 911 WEST 8TH AVENUE, #201 C ANCHORAGE, ALASKA 99501 (907) 258-6016 C Fax (907) 258-2026

is seeking to terminate the lease anyway. Debtor and Aleut currently have an understanding that Debtor will remain in physical control of the property, and will keep it insured for fire and liability. Legal standard The decision to assume or reject an executory contract is within the sound business judgment of the debtor, In re Pomona Valley Medical Group, 476 F.3d 665 (9th

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In addition, Debtor owes Aleut $683,818 on a note for purchase of fuel, plus $178,174 for fuel purchased on open account, plus $398,173 on an obligation assigned from the City of Adak to Aleut. There are also covenant defaults on the lease (change of control and failure to provide financial statements) that Aleut may or may not waive. PAGE 4:

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Cir. 2007).7 In the case at bar, Debtor believes only that rejection is in the best interests of the estate, and that there is no reasonable basis to conclude otherwise. Conclusion For the foregoing reasons, Debtor requests that its application to reject the Aleut lease should be granted. DATED this 17th day of September 2009. CHRISTIANSON & SPRAKER Attorneys for Debtor

By: /s/ Cabot Christianson Cabot Christianson

CHRISTIANSON & SPRAKER 911 WEST 8TH AVENUE, #201 C ANCHORAGE, ALASKA 99501 (907) 258-6016 C Fax (907) 258-2026

The undersigned hereby certifies that on September 17, 2009, a true and correct copy of this application was served on: - US Trustee - Marc Wilhelm,Esq. - Micheal Mills, Esq. by first class regular mail, to the address noted above, or by electronic means through the ECF system as indicated on the Notice of Electronic filing. By: /s/ Margaret Stroble Margaret Stroble

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“Thus, in evaluating the rejection decision, the bankruptcy court should presume that the debtor-in-possession acted prudently, on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the bankruptcy estate. See Navellier v. Sletten, 262 F.3d 923, 946 n. 12 (9th Cir.2001); FDIC v. Castetter, 184 F.3d 1040, 1043 (9th Cir.1999); see also In re Chi-Feng Huang, 23 B.R. at 801 (“The primary issue is whether rejection would benefit the general unsecured creditors.”). It should approve the rejection of an executory contract under § 365(a) unless it finds that the debtor-in-possession's conclusion that rejection would be “advantageous is so manifestly unreasonable that it could not be based on sound business judgment, but only on bad faith, or whim or caprice.” Lubrizol, 756 F.2d at 1047.” 476 F.3d at 670. PAGE 5:

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