UPDATE: Investors Claim They Were Misled But Jury Disagrees

by Mark Friedman  on Monday, Sep. 20, 2004 12:00 am  

UPDATE: In October 2008, the catfish investors who claimed they were misled about the financial status of a catfish processing plant lost their lawsuit, which was originally reported below, in Pulaski County Circuit Court. Later, the defendants, Catfish Producers LLC, won a counterclaim against the plaintiffs for breach of contract. You can read more about the outcome of the case reported below in this December 2008 article.

Original story:

The defunct Arkansas Catfish Growers LLC of Eudora, which operated as Seacat, revealed earlier this month that it has $15.7 million in debt and only $3.5 million in assets.

The Arkansas Development Finance Authority helped push the catfish cooperative into involuntary bankruptcy in June in an attempt to collect on $7.5 million worth of loans, which were secured by Seacat's processing plants, mortgages on the real estate and guarantees by the 16 fish farmers who owned a slice of Seacat.

Meanwhile, several owners of Seacat want their names removed as guarantors. They claim they were misled about the true financial picture of the catfish processing plants before they invested $2.5 million into them in 2001 in exchange for delivery rights.

The eight catfish farmers have sued some of the other owners of Seacat, which operated the processing plant called Farm Fresh Catfish Co.

The plaintiffs said it wasn't until they opened a file cabinet which had been sealed with duct tape that they discovered board minutes indicating that Farm Fresh had been gasping for air for years.

"It now appears that, from its inception, the catfish processing operations of Farm Fresh Catfish Co. were always economically disastrous," the plaintiffs said in their lawsuit filed in Pulaski County Circuit Court on Aug. 13.

The plaintiffs have named Catfish Producers LLC and its owners Baxter Land Co. of Watson and its owner, Jeff Baxter; Frank Pugh of Portland, Ore.; Tom Pugh of Little Rock; and David Yocum IV of Dermott. The plaintiffs are suing for an unspecified amount of damages for intentional misrepresentation, intentional interference with contract, breach of contract and negligence.

Frank Pugh declined to comment and the others didn't return calls.

The lawsuit also names Little Rock law firm Friday Eldredge & Clark and ADFA as defendants.

Friday attorney Price Gardner, who wrote the stock memorandum for Catfish Producers, said he didn't do anything wrong.

"We're disappointed that certain owners felt the need to sue the other owners of the business when they were involved in the operations," Gardner said. "Now that it's in bankruptcy they want to blame the others for the failure of the business."

An attorney for ADFA, James Dowden of Little Rock, said the allegations that ADFA was negligent in making the loan are "meritless. ... We intend to defend it vigorously."

Search Begins

The Catfish Producers began the frantic search for funding for its processing plants in 2001, the lawsuit said.

In March 2001, Farm Fresh Catfish Co. apparently was close to merging with the company that was operating the plant, Farmland Industries. But Farmland backed out of the deal when it learned it was going to have to assume $4.1 million in debt that had not been previously disclosed.

In addition, when Farmland pulled out as operator of Farm Fresh's plants it took several customers with it.

To make matters worse for Farm Fresh, in April 2001 it discovered that nearly 500,000 pounds of fish, with a retail value of $1.5 million, were missing. This still can't be explained today.

But some possible good news was on the horizon in the spring of 2001. Farm Fresh launched merger talks with Country Skillet of Greenville, Miss.

Those talks ended, though, when Country Skillet said "Farm Fresh is not the size originally thought [and] that the book value is less than expected," the minutes said.

It didn't help negotiations when Country Skillet wouldn't commit to keeping the Lake Village plant open. Farm Fresh also had a plant in Hollandale, Miss., at the time.

Just before the merger talks fell apart, though, David Mack with the White Oak Group had been hired as a consultant. Mack's fee was $300 an hour, and his first assignment at Farm Fresh was to look for financing sources.

When he returned with his report on Farm Fresh's operation, it was devastating.

Scathing Report

"Where are we? Out of money!" Mack's report said, which was quoted in the lawsuit.

A loss of $200,000 in May 2001 brought the company's annual loss to more than $2 million.

"There is no reason to be in the business based on these returns [other than control and delivery rights], nor will a financial institution find this attractive," Mack said.

What was killing the company was Farm Fresh had no operating or strategic leadership, he concluded. Also, Farm Fresh wasn't able to plan or pay for preventative maintenance or repairs in a timely manner.

Worse, its customers were getting their fish elsewhere. Between December 2000 and May 2001, 25 companies had stopped buying catfish from Farm Fresh.

"The 25 companies' sales loss totaled $13 million over six months — annualizing the sales loss amounts to $26 million annual loss!!" Mack wrote.

Piling on Farm Fresh's troubles was the loss of salesman David Tyson.

"He sold/controlled $13 [million to] $15 million of annual business," Mack wrote. "He left [Farm Fresh] out of frustration, lack of comfort with the direction of the company, and lack of financial commitment of ownership."

The best plan for Farm Fresh was recapitalization, he said.

Stock Offer

Sometime between mid-July and Aug. 15, 2001, the Friday firm's Gardner created a 133-page private offering memorandum.

The purchase price was $5,000 per unit for Class B stock with a minimum investment of $20,000. Farm Fresh was trying to raise at least $2.4 million. It eventually raised $2.5 million.

With the money raised from the offering, "[Farm Fresh] will significantly strengthen its financial position," the private offering memorandum said.

The company's management "believes that the additional equity provided through the offering will not only provide for the working capital needs of the company on a short term basis, but also favorably affect the company's ability to refinance its existing working capital loans."

Farm Fresh also would consider expanding its Hollandale, Miss., and Lake Village plants using low-interest loans and government grants.

"Management firmly believes that the consolidation [with the other fish farmers] will lead to excess in the supply of live fish for processing and that the delivery rights represented by the Class B Preferred Stock issued by the company will be of significant value to the holder," the memorandum said.

(Catfish Growers and Bankruptcies: Click here for a printable PDF version of the chart.)

At an Aug. 15, 2001, meeting at the Knights of Columbus Hall in Lake Village, Farm Fresh President and CEO Bill Arnold began "by a declaration ... that none of the 'farmers' would have any basis to expect any further fish purchasing or processing from Farm Fresh Catfish Co. unless they bought" shares in the company, the lawsuit said.

Arnold also said Farm Fresh was well capitalized and the owners would stand behind the company, the lawsuit said.

"When, in fact, as they [the owners of Farm Fresh] well knew, the 'farmers' were being solicited solely because no other conventional financing could be secured; because there was no other entity willing to purchase or otherwise invest in the failing venture," the lawsuit claims.

The plaintiffs' attorney, David Hargis of Little Rock, said in the lawsuit that the stock offering was not for the benefit of Farm Fresh but for the defendants to recoup their own losses and to minimize their future losses.

The Collapse

The financial health of the company didn't improve despite the infusion of the plaintiff's money.

At a December 2001 board meeting, with none of the new investors present, a Farm Fresh owner, Tom Pugh, said "we are a dying company."

Still, various debts of the company, which were guaranteed by the defendants, were being paid — including a loan from Simmons First Bank of South Arkansas for $3.5 million, the lawsuit said.

"More precise allegations of how fiduciary responsibilities were violated during this time, and thereafter, will be provided following discovery," the lawsuit said.

In February 2002, United Farms Inc., which is one of the plaintiffs, was induced to loan Farm Fresh another $800,000 in order to bring the payments for processed fish current.

Also in February 2002, after an examination, ADFA approved a funding package for Farm Fresh of $8.5 million.

This funding package would have created the strong company which the defendants represented existed in August 2001, the plaintiffs argue. But the defendants only took $3 million, "which was necessary to extinguish an equal debt already guaranteed by these defendants and overdue," the lawsuit said.

In 2002, Farm Fresh lost more than $2 million, resulting in ADFA taking control of the operation.

Under ADFA's representative Charlie Lynch, "the company had been turned around and was then showing profitability," the lawsuit said.

The plaintiffs then agreed to guarantee a loan from ADFA for $3.5 million in July 2003, the lawsuit said.

Mac Dodson, president of ADFA, said the agency got involved because the catfish industry "is a very important aspect of the economy in that part of the state."

In 2003, about 250 people worked at the processing plant.


In August 2001, the plaintiffs said they were promised they would receive financial statements on Farm Fresh but never did. Farm Fresh blamed trouble with the software system for never producing the reports.

But in November 2003, more than two years after the plaintiffs made their investments, they finally received a financial report.

Ronnie Fair, a representative of United Farms, asked a Farm Fresh employee if he could produce a document that showed losses for 2003.

The employee did. The report showed Farm Fresh had a loss of $6 million for the year.

It was "the final killing blow to the enterprise known as Farm Fresh Catfish Co. and to the 'farmers' who had relied on the representations of these defendants," the lawsuit said.

Farm Fresh stopped production in May or June.

More: Jury Finds for Defendants in Catfish Case



Please read our comments policy before commenting.