Uncooking the Books at Affiliated Eats Into Assets Available for Creditors

by Mark Friedman  on Thursday, Apr. 5, 2012 11:34 am  

Accounting records at Affiliated Foods Southwest Inc. were so messy that a Dallas accounting firm spent more than 3,300 hours trying to determine which vendors might have received improper payments before the grocery distributor filed for bankruptcy almost three years ago.

The firm, Lain Faulkner & Co., found that Affiliated paid 430 vendors a total of $88.5 million during the 90 days before it filed for bankruptcy protection in May 2009. Bankruptcy law forbids making preferential payments to some vendors while stiffing others, and Lain Faulkner’s analysis indicated that refunds could be pursued from 255 vendors who received a total of $77 million.

During the last several months, Bankruptcy Trustee Richard Cox of Hot Springs has been filing lawsuits and signing settlement agreements to recover a portion of the money that Affiliated paid out.

So far, Cox has entered into settlement agreements with dozens of companies for $1.1 million, which represents 12.8 percent of the money Affiliated paid them in early 2009, according to documents on file in U.S. District Bankruptcy Court in Little Rock.

To see the settlement chart, click here.

Meanwhile, Lain Faulkner & Co. received authorization to be paid $769,000 and donated another $32,000 worth of work.

“From the very start of our work, [Affiliated’s] computer system was on ‘life support,’” Lain Faulkner told the U.S. Bankruptcy Court in an Oct. 31 filing. “Only one person with any knowledge of [Affiliated’s] general ledger system was available to assist us on a part-time basis.”

When Lain Faulkner’s ac-countants finally received the electronic downloads, they were “incomplete, inaccurate, disjointed and inconsistent.”

For example, 167 wire transfers that totaled nearly $17 million weren’t recorded anywhere in Affiliated’s system.

One of the larger recoveries was from R.J. Reynolds Tobacco Co. of Winston-Salem, N.C., which received $1.6 million from Affiliated in early 2009 but has since agreed to return $112,500 of it.

Once Cox finishes collecting the money from the vendors, the assets will be pooled and distributed to the creditors who have valid claims against Affiliated Foods. A bankruptcy judge will approve the distribution plan.

It’s unclear how closely related the indecipherable accounting re-cords are to the check-kiting scheme that sent its former CEO, John Mills, and CFO, Alexander “Lex” Martinez, to federal prison.



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