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It's Essar vs. Essar in new $1 billion lawsuit

DULUTH, Minn. -- First there was Kramer vs. Kramer. Now there's Essar vs. Essar. The company formerly known as Essar Steel Minnesota has filed a $1 billion lawsuit claiming its former parent company, Mumbai, India-based Essar Global, siphoned hun...

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A 240-ton ore hauling truck is repaired at the Essar Steel construction site in October 2015. Bob King / Forum News Service

DULUTH, Minn. - First there was Kramer vs. Kramer. Now there's Essar vs. Essar.

The company formerly known as Essar Steel Minnesota has filed a $1 billion lawsuit claiming its former parent company, Mumbai, India-based Essar Global, siphoned hundreds of millions of dollars off the Minnesota project to pay for other ventures worldwide.

Now known as Mesabi Metallics, the fledgling company trying to restart a taconite mine and processing center project in Nashwauk, Minn., is asking the federal bankruptcy court in Delaware to hold its former parent company liable for the idled project now years behind schedule and more than $1 billion in debt. The suit claims top officials of Essar Global and its affiliates are responsible for "breach of contract, fraudulent transfer, breach of fiduciary duties and aiding and abetting breach of fiduciary duties, tortious interference" and other derelictions.

The suit is an effort to open the deep pockets of the parent company which had been at arm's length and not legally responsible for the Minnesota project's debts.

"...Essar Global and certain Controlling Persons abused the corporate structure of its subsidiaries and affiliates by engaging in fraudulent and deceptive conduct," the 138-page suit claims.

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The suit, filed Wednesday, claims Essar Projects Limited, another division of Essar Global, orchestrated and directed every material aspect of Essar Steel Minnesota, including "all financing efforts. They prepared all technical feasibility reports and engineering and design plans necessary to make decisions to construct the Project. They dictated all contractual terms, including as to the scope of the project and its price."

But the parent company bled the Minnesota operation dry without finishing the project, the suit claims.

"Essar Global failed utterly in its obligations to contribute sufficient equity to" Essar Steel Minnesota, the suit claimed, forcing the Minnesota operation into financial failure, unable to pay contractors or vendors to keep working.

"From 2008 to 2016 (Essar Steel Minnesota) paid Essar Global and its various affiliates over $1.1 billion to complete the Project - everything it was obligated to spend under the governing Project Contracts," the suit alleges. But Essar Steel Minnesota "is left with a half-completed iron ore pellet plant that will cost hundreds of millions of dollars more to finish; and (Essar Steel Minnesota) is burdened with over a billion dollars in claims asserted against it that are directly attributable to the Essar Affiliates' failures to fulfill their obligations with respect to the Project. These circumstances resulted from a course of conduct in which (Essar Steel Minnesota) was treated as if it existed solely for the benefit of the Essar Global enterprise, without regard for (Essar Steel Minnesota's) interests or its creditors."

The suit claims that Essar affiliates charged Essar Steel Minnesota $438 million for overseas procurement of goods that cost only about $155 million to acquire, giving the parent company a $280 million profit as the Minnesota project foundered unfinished.

"Essar Global and multiple Essar Affiliates, often acting in concert, funneled money paid to them for Project uses to wherever it was deemed to be needed by those in control of Essar Global and Essar Affiliates, without regard for corporate structures, operative contracts, or the law - or any repayment ability," the suit claims. "Indeed, of the over $1.1 billion (Essar Steel Minnesota) paid to Essar Affiliates, almost half (approximately $500 million) was not even used on the Project even though it was needed to complete engineering, procurement and construction work."

The suit also names former Essar Steel Minnesota CEO Madhu Vuppuluri as having known of the fraudulent movement of funds away from the Minnesota project.

Officials from Essar Global did not return a request to comment on the suit Thursday; the company has not yet filed a response to the lawsuit. Mitch Brunfelt, an attorney for Mesabi Metallics, declined to elaborate on claims in the suit.

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Bankruptcy

The Minnesota project filed for bankruptcy in July, minutes before critical state mineral leases were to be pulled away and potentially given to a competitor, Cliffs Natural Resources. The project already had burned through $1.8 billion with the facility only about halfway finished. It's now estimated that it will take another $800 million to finish the job, by far the most expensive private construction project in Minnesota history.

Mesabi Metallics - now a subsidiary of California-based SPL Partners LLC - hopes to rise from the Essar Steel Minnesota bankruptcy, strike a deal to pay off some of the old debt, raise the $800 million needed and resume work as early as this summer.

But as Mesabi Metallics works to break free of the debt and damage left behind by Essar Steel Minnesota, they also are now trying to help creditors by pulling in the former parent company.

Essar's Nashwauk facility was supposed to be employing 350 people by 2014, producing some 7 million tons of taconite iron ore pellets each year. Plans originally called for an iron and steel plant on the site, creating even more jobs, although Essar scrapped those years ago.

Ground was broken in 2008 but work occurred in fits and starts. As recently as November 2015, the company appeared poised to finish the project and begin making taconite pellets in 2016. But that promise was dashed last winter when 700 construction workers and most of Essar's own newly hired employees were sent home, with Essar out of cash.

Matthew Stock, the new Mesabi Metallics CEO, has said the new company still can deliver on many of the failed promises of Essar. He also envisions a day when the Nashwauk project expands to include a directly reduced iron plant - not just a DR-ready pellet - the kind of added-value products Iron Range promoters have been waiting decades for.

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