Klukwan, Inc. officials this week said bankruptcy papers filed in federal court offer the best hope for maintaining an income stream and keeping the doors open at the village Native corporation.
“This provides us an opportunity to reorganize and build ourselves back, which is exactly what we need to do. I have faith that we will be back,” said Dave Berry, a corporation board member.
President Ralph Strong said the corporation filed for Chapter 11 to protect “7-J” income, money it receives as its share from natural resource development by regional Native corporations, including from the Red Dog mine near Kotzebue.
At about $300,000 per year, the revenues are the local corporation’s main source of income. Travelers Casualty & Surety, an insurance company with an outstanding $8 million claim against the corporation, has seized the money, Strong said. “There’s a lot of disappointment that we had to resort to this, but Travelers has gone after our 7-J funds and we need to preserve them in order to exist.”
Under the Alaska Native Claims Settlement Act, 7-J funds cannot be levied against, Strong said. “They’re feeling they’re a multinational insurance company and they can do whatever they want. This is important to all Native corporations, if they can get 7-J money, this will be a precedent.”
The corporation’s battle with Travelers goes back 10 years and involves management problems at South Coast, a construction company that Klukwan, Inc. acquired as a subsidiary in 1991, Strong said. Travelers was its bonding company when South Coast defaulted on some projects around 2001, and it covered the cost of completing the jobs.
Travelers initially sought $13 million, a figure Klukwan, Inc. regarded as inflated. In 2007, the local company estimated its debt to the firm at $4.5 million. “There’s no way they’re going to get $8 million,” Strong said this week. “They may get some, but they have to agree to that some, rather than (getting) nothing.”
The village corporation made a fortune in logging and stevedoring, including at Long Island, timber-rich lands near Ketchikan it received as part of the Native claims settlement.
A federal law that allowed the company to sell its net operating losses boosted income and Klukwan, Inc.’s net worth reached $128 million in 1991, making it one of the wealthiest village corporations and among the biggest Alaska-based companies operating in the state.
Buying South Coast was an attempt to maintain value the company held in equipment from its logging operations. Strong said the construction firm once had $40 million in work annually, but also had a management issues, including for billing for extra work after the fact, instead of through change orders.
Klukwan, Inc. tried to change the company’s procedures, unsuccessfully, Strong said. “We had claims on a lot of different things we couldn’t (recoup) the money on. It was an overall fiasco… South Coast was the beginning of the demise of Klukwan, Inc.”
Other subsidiaries that came later, including a plywood mill in Port Angeles, Wash., and a Haines-based tour company, also foundered. Creditors listed in court papers last week include Sterling Savings Bank of Fircrest, Wash., the Internal Revenue Service and Klukwan Education Trust.
Sterling’s claims relate to operation of the operation of the Washington plywood mill. The IRS debt is for income tax that wasn’t filed in 2004. “We can’t pay it because Travelers keeps taking our money,” Strong said.
The education trust, general income trust and Long Island trust are named as creditors in connection to a shareholder action charging that corporation officials allowed a siphoning of funds from the trusts to corporation operations from 2006 to 2008. The corporation maintains that $3.6 million in transfers were made by a CEO who has since left the company and were made without board knowledge or approval.
During its 40 years of operation, Klukwan, Inc. pumped millions of dollars into the local economy including through shareholder dividends totaling $151 million, jobs, and scholarships.
The corporation’s three trusts were created in 1996 as a way of separating corporation savings from operating expenses. Following a $12.6 million distribution to shareholders last year, the general income trust stands at $7 million. There’s $250,000 in the Long Island Trust, established to maintain forestry income, and $800,000 in the education trust, according to Strong.
The corporation’s assets include second-growth timber on Long Island and property at Jones Point and at Portage Cove. Strong said ongoing corporation business includes remediation of soil at Jones Point.
Past philanthropic efforts by the corporation include donations totaling more than $250,000 to buy and maintain the local health clinic prior to management by Southeast Regional Health Consortium. For years the corporation also offered a free, summertime basketball camp for youths.
About one third of the corporation’s 415 shareholders live in the Chilkat Valley. President Strong said a reduction in distributions already is being felt in the valley. “Without that, there’s a lot of businesses that close down in the winter, where they used to stay open.”
Chip Lende, who served on the Haines City Council, said the corporation helped the town survive in the mid-1980s, during a statewide recession, before the rise of tourism. “After the (Pacific Forest Products) mill went down, Klukwan, Inc. dividends and jobs really kept the town going. You wouldn’t know it if you’d moved here in the past 10 years, but Klukwan kept the town afloat for many years,” Lende said.