MAHNOMEN, Minn. - The lowly potato chip was supposed to help save this tiny town.

A factory built with government aid two years ago in Mahnomen, a city of 1,200 on the White Earth Indian Reservation, set its sights on producing the world's first baked stackable potato chip -- a low-fat challenger to oil-fried Pringles and Stax.

Today, the $8.5 million plant sits idle. Mahnomen County remains the poorest place in the state.

Nearly $2 million in federal tax credits, and other help from the state and local governments, haven't produced a single chip, or any of the 39 promised factory jobs.

Instead, the effort degenerated into a drama of distrust, disputes and litigation. Whether taxpayers or the unemployed ever will benefit from the venture is an open question.

"We have to let the smoke clear," said Arlen Kangas, president of Midwest Minnesota Community Development Corp., a nonprofit based in Detroit Lakes that financed and controls Mahnomen Baked Chips LLC. He still holds out hope for the project.

It's been in jeopardy almost from the beginning because a money dispute erupted between the inventor of a stacked-chip process and a North Dakota businessman in charge of the startup.

Production equipment arrived, but experts disagreed over how to make a baked stackable chip, including whether the plant's 124-foot-long oven is right for the job.

"I am still hopeful for the reservation," said Dean Johnson, who was Mahnomen's city administrator when the project was conceived and now is tribal development director. "It would be a very good project for us, and employ a lot of people."

Falling out by businessmen

Businessman John Smart of Grand Forks had a checkered past, but not everybody knew it.

He once had a minority stake in the plant and was responsible for getting it running. A decade ago, Smart deliberately overcharged business associates in a Colorado potato plant startup. An arbitrator declared his conduct fraudulent and a breach of his fiduciary duty. Smart tried to dodge the $700,000 arbitration award by fraudulently transferring assets to trusts, a jury later found. He filed for bankruptcy in 2003, which he admits was part of a legal strategy. He eventually settled.

Inventor Steve Twitty and business partner Robin Holding say they didn't know those facts about Smart when they signed a 2007 contract with him to commercialize Twitty's stackable-chip technology in Mahnomen. Later, they alleged in court that Smart's actions made it impossible for the venture to succeed.

Smart, who has worked for decades in the potato industry, blames Holding and Twitty for violating their contract and walking away from the Mahnomen project. He says the Colorado case was a deal gone bad, one stain on a long career. He says Kangas knew about his past legal woes, and Kangas confirmed that he did.

Despite Twitty's exit from the deal, Smart says, the plant got built. "It did function, and make potato chips."

Unfortunately, Kangas said, the chips aren't sellable.

Desperate need for jobs

Mahnomen surely needs jobs.

One in five people in the county live in poverty. On the White Earth Reservation, which covers the county and parts of two others, unemployment runs at 50 percent, though the official rate is lower, said the tribe's Johnson.

The idea of manufacturing baked stackable chips emerged in discussions involving Smart and Kangas, whose non-tribal development corporation has invested on the reservation. Smart knew Kangas, and had done business with Twitty, an American living in Thailand who had a U.S. patent pending on the chip-making process.

Baked stacked chips could be a hit with consumers, but are hard to make. Every chip must have the same shape. Regular potato chips start as potato slices, but stacked versions are pressed from potato dough and cut to look like chips.

None of the snack food giants, including Frito-Lay, maker of Baked! Lays, sell baked stackable chips.

"I can see now why," said Kangas. "It is very complex, all the way from the formulation to cutting and baking."

Kangas, who is a Ph.D. economist, said the venture's "risk-reward ratio doesn't work well for private companies" and most are reluctant to invest on a reservation.

"We are willing to take the risk, for the social benefit plus the potential private benefit," he said. "If we don't take risk, given the capital that we have accumulated, I don't think we're doing our job."

The development corporation raised $6.65 million under a federal tax credit program that subsidizes private investment in high-poverty areas. The city of Mahnomen donated land worth $95,000. And the state awarded $316,000 to the city, which loaned the money to the venture.

Going smoothly, then not

The plant was finished in September 2008 and equipment began arriving.

But relations deteriorated between Twitty's group in Thailand and Smart, who was overseeing work in Minnesota.

Smart comes across "as a white-haired, very upmarket old gentleman with a lot of knowledge, lot of contacts and very well paid. ... So you tend to believe what he says," Holding said.

When Twitty and Holding differed with Smart about money, letters of credit to guarantee equipment purchases and other business matters, Smart's tone changed, Holding said. "When he gets threatening, he gets quite scary," Holding said.

Smart traveled to London and Bangkok to check on equipment being built, and stayed in hotels costing hundreds of dollars a night while Twitty and Holding sought cheap lodging because of the tight budget, Holding said. Once, Smart insisted on a chauffeured BMW even though Holding said he offered to pick up Smart at his hotel.

"We started thinking something is fishy here," Holding said.

Smart doesn't deny traveling in style. He said he has stayed in the same top hotels for years, and keeps a wardrobe at one. But he said his travel expenses came from his share of the fee. "How I spend my money I guess is my business," he said.

As distrust grew, Twitty and Holding refused to ship a key piece of the stacking equipment, which remains in Thailand. Patented molds to form the chips stayed in England, tied up in the liquidation of a supplier. In July 2008, Smart's firm sued Twitty's company for breach of contract, though the case later was dropped by both sides without a final ruling.

'Inventor' of Baked! Lays

Amid this mess, another expert arrived to advise the venture. He also had a surprise in his background.

Jeffrey Stamp has been a professor of entrepreneurship at the University of North Dakota in Grand Forks, and describes himself as a "master creative practitioner" who consults on "Discovery Thinking and cognitive fluidity." He formerly worked for General Mills and Frito-Lay and his online résumé claims he was the "inventor, creator, and brand manager" of Baked! Lays, which "achieved $230 million in first-year sales."

He was paid up to $3,000 a day to advise the Mahnomen project. Stamp concluded the plant's new oven needs to be replaced -- a finding that inventor Twitty disputes.

The surprise is that Frito-Lay says Stamp wasn't the inventor or brand manager of Baked! Lays. He left the company before the product was launched. Stamp, in an interview, conceded that he wasn't brand manager, and instead led a research team for a precursor baked chip.

Stamp insists he is an expert on baked potato chips and stands by his conclusions about the Mahnomen venture.

All of this has left Mahnomen Baked Chips LLC with a fateful decision -- whether to give up on stackable chips, or keep trying, which possibly means another $2 million investment to tackle the unacceptable moisture content found in chips made there so far, Kangas said.

"I'm being very cautious as we proceed ahead," said Kangas, who believes mistakes happened, but not fraud. "I want to make sure that we work with folks that we can rely upon and not worry about history and baggage."

His nonprofit continues to repay project loans. If the plant never opens, the IRS has the right to review whether the nonprofit must make the government whole for the $2 million in tax credits.

Smart said he no longer is connected to the project. Twitty, interviewed by phone from Thailand, said he is willing to help get the plant into production but can't do it for free. His partner, Holding, says that if he had the money, he'd buy the plant's equipment and make chips in England.

"We could have had a really good project with 40-odd people employed," Holding said. "This is what is so frustrating. It would have been a pioneering project in Mahnomen."

Staff writer James Eli Shiffer contributed to this article. David Shaffer • 612-673-7090