The company that bought Allens Inc. of Siloam Springs out of bankruptcy was just a week away from filing its own Chapter 11 bankruptcy in February, according to the trustee for Allens.
Sager Creek Vegetable Co. “had significant cash-flow problems,” Allens’ Chapter 7 Trustee R. Ray Fulmer II of Fort Smith told Arkansas Business.
Fulmer said he didn’t know what caused the financial problems at Sager, and company officials didn’t return several calls for comment.
Fulmer said the potential bankruptcy was avoided, however, when Del Monte Foods Inc. of San Francisco announced on March 11 it had bought Sager Creek for $75 million, a marked drop from the $160 million that Sager Creek paid for Allens alone in February 2014.
Sager Creek’s sale “caught everybody by surprise,” said Jason Klinowski, an agricultural and food law attorney whose Alabama firm, Wallace Jordan Ratliff & Brandt LLC in Birmingham, is working with Fulmer.
But the news shouldn’t have been too shocking. An attorney representing produce producers, Gregory Brown of the law office of McCarron & Diess of Washington, told U.S. Bankruptcy Judge Ben Barry in a Jan. 13 letter that sources told him that Sager Creek was looking for a buyer and a deal could close by March 1.
An attorney for Sager Creek dismissed the claims in a Jan. 15 letter to Barry. Michael Mervis of the Proskauer Rose LLP law firm of New York wrote he did not believe “it is appropriate to comment on rumor mongering by ‘sources’ that Mr. Brown did not identify.”
Mervis didn’t return calls for comment.
It’s unclear what Del Monte plans to do with Sager Creek’s assets. Del Monte referred calls to its public relation agency, Coyne PR of New York, which didn’t return responses to questions from Arkansas Business by Thursday.
Meanwhile, Fulmer is pushing ahead to recover about $13.05 million from Allens’ former officers, Roderick “Rick” Allen, who was chairman of the board, and his sons, Josh and Nick, who were the company’s CEO and executive vice president.
Klinowski said the Allens should have set aside that money to pay produce suppliers but didn’t.
Instead, nearly $9 million went to pay attorneys and turnaround experts in the months leading up to Allens filing for Chapter 11 bankruptcy protection in 2013.
“The trustee now is getting his stride, … where he is looking to pull money back into the estate to pay some of the unsecured guys,” Klinowski said.
Attorney Grant Fortson of Little Rock is representing the Allen family and declined to comment. In a court filing, though, he asked that the case be dismissed because the unpaid produce suppliers were dealt with in a previous ruling from Barry. Those Perishable Agricultural Commodities Act claims have either been paid or disallowed, he said.
A hearing was held on Thursday, but Barry didn’t immediately rule on whether the case should be dismissed.
If money is recovered from the Allen family members and the turnaround firm, which is also being sued, those funds would go to pay creditors of Allens Inc.
As of last week, the company’s bankruptcy case shows $146.6 million worth of claims, but Fulmer said some of those claims might be duplicate PACA claims that have already been paid.
“I’m looking right now at nine bankers’ boxes full of paper claims,” Fulmer said. “We’re talking about weeks of work to determine who should be paid and who shouldn’t be paid.”
Fulmer said that after Allens sold its assets to Sager Creek, Allens’ bankruptcy was converted to a Chapter 7, leaving Fulmer with no assets to sell.
“We have a very large number and very large dollar amount of non-PACA creditors, as you can imagine,” he said. “My job as bankruptcy trustee is to try and see that they get some return on their [claims].”
Financial Trouble Begins
Sometime in 2011, Allens was “insolvent and lacked the ability to pay their debts,” according to a bankruptcy filing on behalf of Fulmer.
Klinowski said Allens’ situation wasn’t that unusual.
“Companies can be balance-sheet insolvent and operate, robbing Peter to pay Paul,” he said.
In early 2013, Allens should have set aside money to pay its produce suppliers, but didn’t squirrel away enough, Klinowski said. “It’s hard to say where the money went,” Klinowski said.
Some of the money apparently went to outside consultants. Between Feb. 1 and Oct. 18 of 2013, Allens Inc. paid $7.5 million to Alvarez & Marsal, a global professional services firm specializing in company turnarounds and interim management, according to the court filings.
Allens also paid $1.4 million to the New York office of the international law firm Greenberg Traurig LLP, according to the bankruptcy file.
Money also might have been used to pay other expenses, Klinowski said.
“We’re not saying that [the Allen family members] lined their pockets or they stole it,” he said.
But in October 2013, Allens Inc. filed for Chapter 11 bankruptcy protection after 87 years in business. In bankruptcy filings, Allens cited nearly $290 million in debt and $295 million in assets.
Klinowski said Allens Inc. had set aside about $19.3 million to pay produce suppliers who have a valid Perishable Agricultural Commodities Act claim, and that amount has been paid.
But in the lawsuit, the trustee said that under the PACA statute, the debtor is required to maintain assets to pay all the unpaid produce suppliers.
“Don’t give the turnaround consultant $7.5 million to save your business only to find out you could have paid [the suppliers] and saved your business,” Klinowski said.
The trustee is seeking $13.05 million from the Allen family, which is the total of all the unpaid claims of the produce suppliers, the lawsuit said.
Members of the Allen family have asked that the case be dismissed.
Similar lawsuits were filed in an attempt to recover money from Alvarez & Marsal and Greenberg Traurig. They also have asked that the case be dismissed.
It’s unclear what happened inside Sager Creek. CEO Chris Kiser didn’t return a call for comment.
The company had lofty goals when it acquired Allens Inc. on Feb. 28, 2014.
“I am honored to be joining the Allens team, and look forward to working hand in hand with our valued associates, customers and suppliers to create a bright future for this great American food company,” Kiser said in a news release at the time.
In the first paragraph of the news release, the company said it would remain “an independent Arkansas headquartered food company.”
Sager Creek is owned by investment funds managed or advised by Sankaty Advisors LLC and GB Credit Partners LLC of Boston. Neither Sankaty nor GB returned messages for comment.
Although he wasn’t sure what caused Sager Creek to sell, Klinowski said he had “seen this type of situation many times in the past.”
He said venture capitalists might be disappointed with the returns from food companies.
“Food companies can be very profitable, … but they may not always meet the profitability margin of Wall Street,” Klinowski said. “You can’t compete with tech companies and these high-end guys that can put up these staggering returns, but it’s a great space to be into.”
Klinowski said that he thinks Sager Creek’s management team was managing the company for long-term growth and development, because they hired Kiser, who had 26 years of experience leading food and beverage companies, including Campbell Soup Co.
“Managing for long-term success is not going to throw up immediate huge profitability numbers on day one,” he said. “If I had to guess, because I don’t know for sure, did you really give the management team the opportunity to do what historically they can do?”
Sager Creek’s revenue was approximately $250 million, according to Del Monte’s news release. The revenue was off from Allens’ reported revenue of $420 million in the fiscal year that ended in February 2012, which was down 30 percent from the previous year.
The first sign that something might be wrong at Sager came in January.
Gregory Brown, the Washington attorney for three PACA creditors, said he learned Sager was looking for a buyer.
“We also understand that Sager Creek has begun cancelling orders for seed it had placed with its suppliers,” Brown wrote in the Jan. 13 letter to Bankruptcy Judge Ben Barry. “We are concerned that this is evidence that Sager Creek is winding down its operations.”
Mervis, the attorney representing Sager, blasted Brown for making the statements in a public filing. He said in his letter that Brown’s statements have caused a “needless and wholly unwarranted distraction, a circumstance for which Sager Creek reserves all rights to seek redress at the appropriate time.”
Mervis also said Sager Creek “has invested tens of millions of dollars to revitalize the debtors’ former business — a business that employs hundreds of people in Arkansas.”
Sager Creek issued a media statement in January in response to Brown’s letter.
It touted “exceptional progress” during the first 11 months of the turnaround.
Still, Sager said it had hired the investment banking firm Jeffries of New York “to explore all strategic alternatives and partnerships to best position the company.”
It said the process with Jeffries should be completed by early in the second quarter of 2015.
In the meantime, it was “business as usual at Sager Creek with operations going strong. … All contracts are being honored, orders are being filled, and plans are in place to continue on this path,” Sager said in the January news release.
Del Monte announced its purchase on March 11.
No mention was made in the press release about the future of the operation in Arkansas.