$40 Million Affiliated Foods Lawsuit Set for Mediation

On Tuesday a mediator will begin hearing arguments between the bankruptcy trustee for Affiliated Foods Southwest Inc. of Little Rock and its former directors over allegations that the board failed to stop a nearly half-billion dollar check-kiting scheme.

The trustee, Richard Cox of Hot Springs, is seeking at least $40 million in damages from 14 members of Affiliated’s board of directors.

He alleges they ignored several red flags that should have alerted them to crimes committed by Affiliated’s former CEO, John Mills, and former CFO, Alexander “Lex” Martinez, in late 2008 and early 2009.

Cox also named Al Miller and Ron Rivers, former Affiliated executive vice presidents, as defendants.

Cox’s lawsuit was first filed in U.S. Bankruptcy Court on April 18, 2011 but was transferred in July to U.S. District Court in Little Rock.

The board of directors “breached the duties of good faith, loyalty and due care and acted negligently in the failure to implement and supervise policies, practices and controls, including accounting controls, for Affiliated Foods,” Cox said in a Dec. 12 filing.

The board members “failed to properly supervise and manage Affiliated Foods. … Affiliated Foods ultimately failed, leading to bankruptcy and enormous monetary damage to the creditors of Affiliated Foods for whom the Trustee seeks to recover,” Cox said in the filing.

The lawsuit details the collapse of Affiliated Foods, once one of Arkansas’ largest private companies with annual revenue of $730 million in the fiscal year that ended June 30, 2008, the last full year of operation before filing for bankruptcy protection. In the bankruptcy filing, it listed $47.6 million in assets and $101.5 million in debt, of which $62.5 million was to unsecured creditors.

The directors insist they did nothing wrong.

“The board was not aware of the true financial condition of [Affiliated] or its subsidiaries, but this belief was based upon false information provided by management,” ac-cording to the answer filed by attorney H. William Allen of Little Rock, who is representing several of the board members.

The answer also said that if Affiliated had been damaged, the damage was caused by the “fraud and deceit” of Mills and Martinez, who are both serving federal prison sentences for their roles in the check-kiting scheme.

Mills, who pleaded guilty in 2010, is scheduled to be released on June 15, while Martinez, who was found guilty by a federal jury last year, is scheduled for release on Oct. 18.

In his complaint, Cox blamed the board of directors for never pressing for an audited financial statement for the fiscal year that ended in mid-2008.

Cox said in the lawsuit that the financial strain could have been detected if directors had demanded an audit, as had been provided in the past. Instead, board members relied on management’s pro forma draft, “which inaccurately presented the company’s bleak financial condition, or relied on no financial data regarding AFS,” Cox said in the lawsuit.

The board “failed to ask questions or demand an explanation for the missing information,” Cox said in the lawsuit.

Allen said in his answer that board members relied on information provided to them by Affiliated’s officials. Allen also said the directors did their job “in good faith, with the care an ordinary prudent person in a like position would exercise under similar circumstances, and in a manner they reasonably believed to be in the best interests of” Affiliated.

Both sides have agreed to use Jed Melnick of JAMS the Resolution Experts LLC of New York.

He is scheduled to hear the arguments on Tuesday and Wednesday and will be paid $6,500 a day plus expenses.


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