The federal bankruptcy court has allowed State Rep. John Martin and a partner to buy back their Eagle Lake convenience store for $125,000 even though they owe almost $300,000 to a variety of creditors, including the IRS.

Martin, a Democrat, has been a power in state government going back to the 1960s. He was speaker of the house an unprecedented 10 terms and currently serves on the committee with oversight of the state’s $6 billion budget. He is running for reelection from House District 1, which includes Eagle Lake and Fort Kent.

While some creditors may be paid in full and others in part, some may not be paid at all, depending on a report from the trustee appointed by the court half way through the court proceedings. A hearing on the status of the case is scheduled for tomorrow in federal bankruptcy court in Bangor.

In an email response to questions, Martin said the bankruptcy and his legislative roles should not be linked.

“My personal dispute with Irving has nothing to do with my role as a legislator. I’m committed to doing what is best for the people of my community and the state,” he wrote.

The store and gas station, called Bald Eagle, had been owned by Eagle Lake Outfitters, whose partners were Martin and Gary Voisine; they filed for Chapter 11 bankruptcy in February due to a $250,000 debt to Irving Oil.

A trustee appointed by a federal bankruptcy judge negotiated a sale of the business to Bald Eagle, Inc., a company formed just three months ago. Martin said he and Voisine own the company jointly.

The court approved the sale to Martin’s newly formed business on Sept. 4, according to court documents. The sale closed Oct. 17.

Martin said “private business equity” provided the  $125,000.

The new company will not be liable for debts incurred by Eagle Lake Outfitters, according to the documents.

Creditors listed in the Feb. 15 Chapter 11 voluntary petition include Irving Oil; the IRS for $7,754 in unpaid payroll taxes and penalties; $2,183 to the state Department of Inland Fisheries and Wildlife for licenses and regulations; $2,960 in property taxes to the town of Eagle Lake; $259 for water and sewer services; Tulsa, Inc. of Van Buren for a $21,387 fuel delivery on the day before the bankruptcy was filed; and other creditors such as accounting services, electrical services and phone.

The original list of creditors included the Maine Revenue Services for a debt of $1,674 for sales taxes from the store. But on Aug. 15, the Service sent a letter to the court withdrawing its claim. Martin said he has paid that debt.

Martin said, ‘By law, all public entities” including the town, will be paid fully.

“Beyond that,” he said, “the court will determine who gets what and how much. I believe that will occur next week.”

Trustee appointed over business

Susan Hauser, a professor and bankruptcy expert at North Carolina Central University Law School and resident scholar at the American Bankruptcy Institute said that a bankruptcy that ends up with many creditors getting half a loaf is not unusual, but the way the Eagle Lake case unfolded was atypical.

“What normally happens, with cooperation of the secured creditor, everyone will kind of agrees to cut their losses and get something rather than nothing,” she said.

But the bankruptcy files also reveal what she called an unusual development: Halfway through the proceedings, Judge Louis Kornreich approved the appointment of Bangor attorney Michael Haenn to be trustee of Eagle Lake Outfitters.

The appointment was made shortly after a scathing list of accusations by Irving’s attorney in a May 24 motion to dismiss the Chapter 11 case. If approved, the motion might have led to the direct liquidation of the store, according to Hauser.

The motion claims Martin and Voisine made improper and unauthorized use of Irving’s cash collateral and failed to deliver records to Irving as ordered by the court, such as profit statements, proof the store was paying its taxes, a complete inventory and maintaining “appropriate” insurance.

While the court did not grant the dismissal, it was following these claims that it appointed the trustee.

Hauser said the appointment of a trustee is “somewhat unusual … a trustee is not normally appointed” in a Chapter 11, where usually the debtor keeps control of the business while working on a plan to settle the debts.

The bankruptcy statute, she said, gives two justifications for the court to appoint a trustee for a business that has filed for Chapter 11 protection.

One is, “for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management,” according to the statute.

The other is “if such appointment is in the interests of creditors …”

Nothing in the court filings specifies which reason was the basis for appointing the trustee, who did not return calls or emails, nor did a top official in the regional office of the court.

Martin wrote, “At no time did any other party operate the store. The trustee was assigned as a neutral third-party by the court to dispose of the store and its assets.”

No other bids

In his motion to the court that requests permission to sell the store, Trustee Haenn said he “believes in the exercise of his business judgment that the best way to maximize value … is to conduct a sale process …”

He added that bankruptcy laws do not require the trustee to “produce enough money to pay all or most of the claims.”

Notice that the business was for sale was given to all of the creditors, who could have also bid on the business. However, no competing bids were filed.

Hauser said that process “looks a little funny to the outside world, but the trustee is basically charged with maximizing the value of what’s there.

“It’s actually permissible to sell to insiders as long as the sale is opened up to the entire world,” although she said the judge and trustee are allowed to limit notification as they did in Martin’s case.

Court documents show that Irving, by far the largest creditor, consented to the sale.

Earlier this year, Rep. Martin sponsored a bill that became law that will make it easier for J. D. Irving Company, a Canadian firm, to mine for valuable minerals in Martin’s legislative district.

A J. D. Irving spokesman has said there is no legal relationship between that company and Irving Oil. Because the companies are all privately-held, there are few public documents describing the connections within what Canadians call “the Irving empire.”

Martin said at the time that there is “absolutely” no connection between the debt to Irving Oil and his mining bill.