Tembec USA trustee files lawsuit to avoid transfers, object to claims

By Caroline Salls

Pittsburgh, April 25 - Tembec Industries Inc. and Tembec Investments USA II LLC (Tembec II) were named as defendants in a lawsuit filed Wednesday by Tembec USA LLC trustee Samera L. Abide to avoid, recover and preserve avoidable and preferential transfers, according to a filing with the U.S. Bankruptcy Court for the Middle District of Louisiana.

In addition to seeking avoidance of the transfers, the trustee objected to the allowance of $79.4 million in Tembec Industries and Tembec II claims.

As part of an alleged financial scheme, the trustee said Tembec Industries improperly billed or charged Tembec USA for consultation and/or management services that were actually the overhead operational expenses of Tembec Industries, "attributable to its exercising total control and domination over the finance and business operations of the debtor."

Abide said Tembec Industries, through many transfers of funds to and from Tembec USA and by treating Tembec USA's bank accounts as its own, dominated and controlled Tembec USA's finances and business operations so that Tembec Industries and the Tembec USA became a single business entity.

As part of this alleged scheme, the trustee said Tembec Industries failed to provide sufficient capital contributions for the acquisition of a Louisiana paper mill or for Tembec USA's business operations and prepared documents showing that the funds it advanced for the operations and mill purchase were loans, rather than capital contributions.

Tembec Industries directives

According to the complaint, Tembec Industries directed Tembec USA to cease active business operations and terminate substantially all of its employees, while continuing to fund the healthcare expenses of the current and former employees.

Abide said Tembec Industries also told Tembec USA to execute a mortgage, assignment of leases and rents and financing in Tembec Industries' favor and grant security interests in Tembec USA's real estate and assets to secure promissory notes that were actually capital contributions disguised as loans.

In addition, the trustee said Tembec USA was ordered to sell its paper mill assets. The assets were sold for $16 million, of which $6 million was cash and the balance was in promissory notes secured by a mortgage and security interest in the assets.

Within the two years before Tembec USA filed for bankruptcy, Abide said the cash portion of the purchase price and a $5 million promissory note was received by Tembec Industries, and Tembec USA received no value in exchange for the transfer, the lawsuit said.

The trustee said some of the promissory notes and the 2007 mortgage were transferred to Tembec II in 2010, and Tembec USA again received nothing in return.

Tembec USA is a forest products company based in Temiscaming, Quebec that filed for bankruptcy on April 25, 2011. The Tembec USA Chapter 7 case number is 11-10585.

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