Motion To Sell Adak Plant

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. 09-00623 DMD ) Debtor. ) Chapter 11 ________________________________________________) DEBTOR’S APPLICATION TO SELL ADAK PLANT FREE AND CLEAR OF LIENS

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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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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

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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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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 2:

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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.

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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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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. 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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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 broadform 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

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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.

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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. Is this the same entity? Response: Independence Bank believes it is a group of Norwegian investors. The Purchase and Sale Agreement states that it is a Delaware Corporation. 2. The dissolved Adak Seafoods, LLC was controlled by Kjetil Solberg. 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 quiestion should be directed to Mr. Celeste.

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4. Are any employees of Independence Bank connected with the proposed 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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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

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(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

6

Defined within APA as the Aleut lease, the Pollock Agreement, and the Offshore Pollock Agreement. 7

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

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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 Utilities due City of Adak Sales taxes due City of Adak Repair costs for damage to housing units and plant (est.) Environmental clean up costs (est) Security deposit Total monetary cure amount

$ 138,108 $ 428,729 $ 546,191 $ 190,000 $ 1,000,000 ($50,000) $2,253,028

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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

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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 UCC1's in favor of several Toyota entities, and those secured claims will either be paid off or PAGE 9:

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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

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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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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. PAGE 10:

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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

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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 & SPRAKER Attorneys for Debtor

By: /s/ Cabot Christianson 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 now appears to the Debtor that Mr.Solberg may be in complete charge of the Buyer’s new operation. PAGE 11:

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Cabot Christianson List of Exhibits A - Asset Purchase Agreement B - Adak Seafoods, LLC Biennial Report C - Adak Seafoods, LLC Articles of Dissolution D - Delaware Division of Corporations information re: Adak Seafood, LLC E - Christianson email dated 9/18/2009 F - Willig letter dated 9/23/2009 G - Christianson emails 10/9/2009

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

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-- 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 as indicated on the Notice of Electronic filing. By: /s/ Margaret Stroble Margaret Stroble

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