Trustee charges collusion in Allens' case: did creditors conspire in bankruptcy of one of largest companies?
In a 47-page adversary complaint being contested in U.S. Bankruptcy Court in Fayetteville, trustee R. Ray Fulmer II blames the creditors and more than a dozen other entities, including the "turnaround" specialists the creditors insisted Aliens hire.
Fulmer spells out his suspicion that Ball Metal Food Container Corp., which was one of Aliens' largest unsecured creditors, and the holders of $65 million worth of second liens worked to prevent Seneca Foods Corp. from buying the Aliens assets in a bankruptcy sale.
If Seneca, of Marion, New York, had won the auction, those creditors would have faced a financial blow: The $65 million worth of second liens would have become unsecured and Ball, of Broomfield, Colorado, would have lost a customer contract worth $50 million-$100 million annually.
What's more, Ball might have been forced to repay nearly $10 million it received from Aliens in the three months before it filed for bankruptcy protection, Fulmer's complaint said.
For other creditors, meanwhile, a winning bid by Seneca would have made millions more dollars available to settle claims, Fulmer told Arkansas Business last week.
Instead, there was nothing left for unsecured creditors after Sager Creek Acquisition Corp. --which was backed by Ball and the holders of the $65 million in second liens--won the bid in February 2014, purportedly for $160 million.
Also alarming to Fulmer: Sager Creek changed its bid at the last minute to prevent any attempt to collect $74 million worth of possible preferential payments that Aliens had made to certain creditors shortly before declaring bankruptcy.
Under bankruptcy law, a trustee can scrutinize payments made by a debtor to creditors in the 90 days prior to a bankruptcy filing. If any creditors seem to have been favored ahead of others, the trustee can seek to recover those payments and redistribute the money equally among all creditors.
Unlike Sager Creek's final terms, Seneca's bid didn't foreclose this avenue of recovering money for creditors, so a Seneca win could have meant that some or all of the $74 million might have been recovered and redistributed.
Fulmer said all the details about the transaction weren't released to U.S. Bankruptcy Judge Ben Barry, who approved the deal. If they were, Barry would have prevented the sale to Sager Creek, Fulmer said.
More than a year passed before questions about Sager Creek's bid were raised.
"There was no reconciliation of how Sager Creeks' bid remained at net $160 million both before and after the $74 million in avoidance actions were included as a sale asset," the lawsuit said. The trustee also couldn't figure out why Sager Creek ultimately paid less than $125 million, not the $160 million it supposedly bid.
Fulmer's attorney, Whitney Aaron Davis of Fort Worth, Texas, told Arkansas Business last week that he couldn't reconcile the difference.
"The valuation of the bid was $160 million during the actual auction," he said. "And the agreement came out at $120-some-odd million. My math doesn't work that way."
Fraud on the Court
The complaint Fulmer filed last month accuses Ball and the second lien holders--alleged to be led by Sankaty Advisors LLC of Boston, which is now known as Bain Capital Credit --of fraudulent transfer, breach of fiduciary duty, conspiracy to commit fraud on the court and other charges. The second lien holders included entities with names such as 1903 Onshore Funding LLC, Cortland Capital Market Services LLC and Sankaty Credit Opportunities IV LP.
"That's part of the case is to find out who is doing what," Davis said.
The trustee's complaint also gives a peek into the final months of Aliens, which was once one of Arkansas' largest private companies. In 2013, it had about 1,175 employees, with 450 in Arkansas. In addition to the Aliens brand, the company's portfolio included Popeye Spinach, Princella, Freshlike and Royal Prince.
Even two years later, all the details involving the sale aren't clear to the trustee.
"We're already in possession of a huge number of documents that we're having to sort through," Fulmer said. "There's probably as much unknown as there is known right now."
As it stands, there is no money to pay Aliens' unsecured creditors.
"Our motivation is taking care of the Ma and Pa, those small, unsecured creditors [for whom] Aliens was 80 percent of their business," Davis said. "So Aliens went away, and they got nothing in return. They were devastated."
He said Aliens' bankruptcy triggered a number of other business failures and bankruptcies for the suppliers. If his lawsuit is successful, it could make available more than $100 million for the unsecured creditors.
The defendants, however, have asked the judge to prevent the trustee from challenging the sale order. A hearing is set for Thursday in Barry's courtroom.
A spokeswoman for Ball said it was company policy not to comment on pending litigation.
Attorneys for the other defendants didn't return calls for comment.
Sager Creek's ownership of Aliens didn't last long. About a year later, it sold the company to Del Monte Foods Inc. of San Francisco in a $75 million cash deal.
Surviving and Expanding
Founded in 1926 by Earl Allen, Allen Canning Co. survived the Great Depression and the severe droughts of the 1930s. In the 1940s, the company grew by selling canned vegetables to the military during World War II and to supermarkets afterward.
After Earl Allen's death in 1948, the company was led by his son, Delbert Allen.
"He built a sales and marketing department, developed branded products and established a generous profit-sharing program for all employees," according to a history compiled when Delbert Allen was inducted posthumously into the University of Arkansas' Business Hall of Fame in 2007.
After Delbert Allen's death in 1988, Allen family members, including CEO Roderick L. "Rick" Allen and his son Joshua, continued to manage and grow the business.
In the 2000s, Aliens expanded through acquisitions. In 2003, it bought the Veg-All brand of canned mixed vegetables from Birds Eye Foods Inc., and a year later it purchased Birds Eye's Freshlike brand.
The acquisitions inflated Aliens' revenue to $409 million in 2005, which was up 35 percent from 2001, according to data the company provided to Arkansas Business for its annual list of the state's largest private companies.
By 2006, Aliens reached "the saturation point in the market for canned vegetables," spokesman James Phillips told the Arkansas Democrat-Gazette. So it decided to jump into the frozen-vegetable market by purchasing the private-label brands that Birds Eye produced for customers that included Wal-Mart Stores Inc. and Kroger Co.
"We've never done frozen before," Phillips told the Democrat-Gazette.
That inexperience was soon apparent internally. Aliens "incurred substantial debt" to buy Birds Eye's lines, according to Aliens' bankruptcy filing seven years later.
Although the amount of debt wasn't listed, the additional business line improved its revenue. For the fiscal year that ended in February 2008, Aliens had $610 million in revenue, up nearly 38 percent from the previous year. And the numbers kept climbing.
Aliens' self-reported revenue peaked at $746 million in the fiscal year that ended in February 2010, at which point the company had 2,100 employees.
In 2011, Aliens started facing financial trouble as sales slid. During the year, Aliens had talks with Seneca about a merger, but the deal collapsed within two months.
To help "finance its operations," Aliens received in 2012 a $130 million revolving line of credit along with a $35 million loan from Bank of America, according to a 2015 affidavit by Josh Allen, who was the chief operating officer at the time of the loans.
Aliens also obtained a loan for $57 million from Cortland Capital Market Services, and one of its lenders was Sankaty Advisors, he said. Those loans, secured by Aliens' assets, started the chain of events that would sink the company.
In January 2013, Aliens was facing foreclosure and liquidation, according to Josh Allen's affidavit. To avoid that, the secured lenders insisted the company hire Alvarez & Marsal, a global firm specializing in company turnarounds and interim management, according to the court filings.
A&M was supposed to improve Aliens' financial performance and cash flow, Josh Allen said. There were other changes. In April 2013, Josh Allen became CEO, replacing his father, Rick Allen, who remained on the board.
By July 2013, the secured lenders "applied additional pressure to the Aliens family" for them to be replaced with A&M officers, according to the bankruptcy trustee's lawsuit.
A&M's managing director, Jonathan Hickman, was named chief restructuring officer of Aliens. "A&M's executive team took over exclusive control of the enterprise, reporting to two new directors selected by Defendant A&M," the lawsuit said.
The situation worsened for the Allen family.
During meetings in June and July 2013, the second lien holders planned to restructure Aliens through a sale in bankruptcy. Ball Metal Food Container Corp., as one of Aliens' largest unsecured creditors, agreed with the move and was offered a contract with the second lien holders' new company if the bid was successful, according to the contract. But Ball's interest in a specific outcome wasn't disclosed to the bankruptcy court, as the trustee argues it should have been.
The Allen family members, having already lost control of their company, were excluded from meetings involving A&M, the lawsuit said. Between Feb. 1 and Oct. 18, 2013, Aliens Inc. paid $7.5 million to A&M, according to court records.
And Then Bankruptcy
In one of Arkansas' largest bankruptcy cases, Aliens filed for bankruptcy protection (initially as a Chapter 11 reorganization) on Oct. 28, 2013. Its filings showed that Aliens had debts of nearly $275 million, with $108 million owed to unsecured creditors.
A few days after the filing, Ball would join the Official Unsecured Creditors Committee, which is appointed by the U.S. Trustee's Office.
"They are there as a back-stop when there's a debtor in possession," which was the case with Aliens at the time, said Davis, the Fort Worth attorney representing trustee Fulmer. "They're supposed to be the watchdog."
Ball held nearly $47 million in unsecured debt.
On Nov. 22, 2013, Aliens asked the bankruptcy judge for permission to sell its assets to Seneca Foods in an auction. Aliens also wanted Seneca to serve as the "stalking-horse bidder" in the auction process, meaning Seneca had the opportunity to match any other bids Aliens might receive. The transaction would have been worth $148 million.
Seneca said in a news release at the time that Aliens' assets would fit with its "long-term growth objective" to expand its canned vegetable offerings to include sweet potatoes and Southern vegetables and broaden its offerings of dried beans and spinach.
Hickman, the A&M employee who was acting as Aliens' chief restructuring officer, said the company was happy to reach a deal with Seneca. "We are encouraged by the interest Aliens has received and are committed to an outcome that provides the most value for our creditors," Hickman said in the news release.
Seneca's bid would have left $32.9 million to pay Aliens' creditors, and many of Aliens' Arkansas employees would have remained on the job, according to Fulmer's complaint.
In addition, had Seneca won the bid, those $74 million of possible preferential payment claims would have remained part of Aliens Inc.'s assets, leaving some creditors--including Ball--with millions of dollars in possible exposure.
In the 90 days prior to Aliens' bankruptcy filing, payments to Ball "accelerated from weekly to daily payments totaling $9.7 million," the lawsuit said.
On Jan. 8, 2014 -- two days after Judge Barry heard Aliens' motion to sell to Seneca--James Athanasoulas, a managing director at Sankaty Advisors, formed Sager Creek Acquisition Corp., according to the lawsuit. Athanasoulas and associates from Sankaty, as well as representatives of other second lien holders, were directors of the new company.
Sager Creek said it would bid $160 million for Aliens' assets.
At the auction, Sager Creek made a major change to the terms of its bid, according to the lawsuit. It included the transfer to Sager Creek of all $74 million of non-insider avoidance actions as an asset. But the $160 million bid price remained the same, the lawsuit said.
Sager Creek won the auction on Feb. 6, 2014.
The money generated from the sale went to pay the first lien holder, Bank of America, but not the unsecured creditors. The case was converted to a Chapter 7 liquidation in June 2014.
The new lawsuit also alleged that Judge Barry was kept in the dark about some of the details involving the bid, including that Ball was funding Sager Creek.
"Candid disclosure by the Defendants would have rendered the auction and the sale incapable of court approval as being subjected to agreement to control the price of the assets," the lawsuit said. "The absence of the material and candid disclosures by the Defendants not only reduced the value received by the estate of the assets sold, but likewise constituted fraud on the Court under applicable bankruptcy and Arkansas state law."
'The New Aliens'
After Sager Creek bought Aliens, it named an industry veteran, Chris Kiser, as CEO.
"This is a very exciting day for all of us at the new Aliens," Kiser said in the announcement issued Feb. 28, 2014. "I am honored to be joining the Aliens 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."
But the deal didn't last long. Del Monte Foods Inc. of San Francisco bought Sager Creek for $75 million in March 2015, which Davis described as a discount. Sager Creek has been disbanded.
Del Monte declined to be interviewed, but the Siloam Springs Chamber of Commerce said the company remains open.
"And thank God a veggie company took it over from a hedge fund," Davis said.
By Mark Friedman MFriedman@ABPG.com
(Editor's Note: This is the latest in a series of business history feature stories. Suggestions for future Fifth Monday articles are welcome. Please contact Given Moritz at (501) 372-1443 or GMoritz@ABPG.com.)
Allens Inc. Timeline
Earl Allen creates Allen Canning Co.
Earl Allen's 17-year-old son, Delbert, begins working at the canning plant and manages the company's books.
Aliens grows by providing canned vegetables to the military during World War II and then to supermarkets after the war.
Earl Allen dies. Delbert Allen takes control of the company.
Delbert Allen dies. Allen family members continue to manage the company.
Delbert Allen's son, Roderick "Rick" Allen, buys out his brother, Delbert "Pete" Allen.
Aliens buys Veg-All brand of canned mixed vegetable from Birds Eye Foods Inc.
Aliens' revenue reaches $409 million, up 35 percent in four years.
Aliens enters frozen vegetable market by purchasing private-label brands from Birds Eye.
Aliens' revenue peaks at $746 million for the fiscal year that ended Feb. 28.
Aliens starts to face significant operating challenges tied to the production of vegetables.
Aliens sells most of its frozen-vegetable business to the Bonduelle Group for an undisclosed price. The family forms All Veg LLC, which becomes 100 percent owner of Aliens Inc. The company restructures its debt with a $130 million revolving line of credit and a $35 million secured loan from Bank of America. It also obtains a $57 million loan.
January: The secured lenders insist that Aliens hire Alvarez & Marsal, a global professional services firm specializing in company turnarounds and interim management, to improve the company's performance.
October: Aliens files for Chapter 11 bankruptcy protection.
February: Aliens' assets are sold during a bankruptcy auction. The winning bidder is Sager Creek Acquisition Corp., an entity owned by investment funds managed or advised by Sankaty Advisors LLC and GB Credit Partners LLC.
June: The Chapter 11 bankruptcy reorganization is converted to Chapter 7 liquidation.
Del Monte Foods of San Francisco buys Sager Creek for $75 million.
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|Comment:||Trustee charges collusion in Allens' case: did creditors conspire in bankruptcy of one of largest companies?(FIFTH MONDAY)|
|Date:||May 30, 2016|
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