HAMPTON -- Friction between its key lender and Foss Manufacturing has intensified in the last few weeks, the company's lawyer, Kenneth S. Leonetti, states in court documents.

That friction caused a bankruptcy judge to appoint J. O'Maley, of Development Specialist Inc. in Chicago, to act as the company's trustee in the bankruptcy proceedings and to operate and eventually sell the business.

The company sought Chapter 11 bankruptcy protection on Sept. 16 after its key lender, CapitalSource Finance, cut off its credit.

CapitalSource Finance has accused the company of providing misleading financial information over several months, which Foss admits, that led CapitalSource to over-advance millions of dollars.

Foss Manufacturing made the request to appoint an objective, disinterested trustee to operate the company during the bankruptcy proceedings after talks between the company and CapitalSource deteriorated.

While Foss's longtime CEO, Stephen Foss, resigned before the bankruptcy filing, other Foss Manufacturing directors stayed on, including Foss' wife, daughter and the daughter's father in law.

According to court documents, CapitalSource's lawyer wrote that it was "difficult to imagine" that the directors "did not, at a minimum, breach their duties as directors for allowing such malfeasance to continue under their noses."

The latest cause of friction arose when the company made a request to retain Woolard Harris as the chief restructuring officer and the Carl Marks Advisory Group LLC as financial advisers.

CapitalSource, which has a $30 million claim against the company, and others were against the move, which would have paid Carl Marks $150,000 a month. CapitalSource also requested to examine all of the company's financial records.

"This case has gone beyond the normal infighting between a debtor, its secured lender, and its creditors committee," stated Leonetti. "...The level of distrust and disagreement has threatened to bring the case to impasse and the debtor believes that may soon find itself unable to move forward to run the business."

Leonetti stated in court documents that he doesn't believe Foss and its creditors will be able to come to terms on an exit strategy. He is hoping the appointment of trustee will expedite the process.

Meanwhile, on Nov. 1, the judge authorized the use of cash assets totaling $4.8 million to make payroll and keep the company operating for another three weeks.

The judge also ordered the trustee to make a one-time payment to CapitalSource in the amount of $260,926.81, which accounts to one month's worth of interest on its loan.

The Coastal Economic Development Corporation is also a significant creditor through a $3 million loan to Foss that was backed by the N.H. Finance Authority.

The company was ordered to pay the state $21,988.18 The last payment that was made on the loan was July 27.

The collateral for the loan is Foss's machinery and equipment.

The company has also paid back taxes it owed to the town of Hampton in the amount of $116,679, according to Tax Collector Joyce Sheehan.

Since filing for bankruptcy in the aftermath of being accused of fraud, Foss Manufacturing has lost only one significant customer.

Out of a work force of 375, only 14 employees have decided to leave the company, which is located in Hampton and manufactures non-woven fabrics and synthetic fiber, as it seeks potential buyers.