Busted Allens' liability argued

Owed $3 million, 2 firms tell court

FAYETTEVILLE -- A bankruptcy judge continued to hear cases Thursday on the validity of more than $3 million in claims against Veg Liquidation.

Formerly known as Allens Inc., Veg Liquidation argued that it doesn't owe several claims made under the Perishable Agriculture Commodities Act.

On Thursday, federal Judge Ben Barry heard Veg Liquidation's objection to $1.16 million in claims by H.C. Schmieding Produce Co. Inc. of Springdale.

"These are big cases, they're important," said Barry.

Later in the day, Barry heard the bankrupt canning company's argument that it does not owe D&E Farms Inc. of Pennsylvania $1.95 million in claims made under the act. After closing arguments, Barry gave attorneys until June 5 to file post-trial briefs on both claims.

The act regulates the sale of fresh and frozen produce to avoid unfair trade practices and ensures that sellers are paid in a timely manner. Valid claims are paid dollar for dollar in bankruptcy cases and are moved to the head of the line for payment, even ahead of secured debt.

In late October, the canned-vegetable company filed for Chapter 11 protection in U.S. Bankruptcy Court for the Western District of Arkansas. Allens owed its primary lenders $114.36 million and its secondary lenders $65.6 million. Sager Creek Acquisition Corp., owned by investment funds controlled or advised by two of Allens' creditors, bought the company at auction in February with a winning bid of $123.8 million. The total value of the deal is just less than $160 million.

Soon thereafter Allens took the name Veg Liquidation.

Veg Liquidation indicates in court filings that since the sale of Allens, the debtors and Sager Creek have worked to resolve disputed commodities act claims. More than $19 million in claims have been made since Allens filed for bankruptcy.

Before his closing argument Thursday, Schmieding Produce's attorney, Greg Brown of Washington, D.C.-based McCarron & Diess, asked for a directed verdict, saying Veg Liquidation had failed to prove its case. Barry denied the motion.

In his closing argument, Jason Klinowski of Freeborn & Peters of Chicago, Veg Liquidation's special commodities-act counsel, told the judge that Schmieding Produce acted as an agent of Allens and breached its fiduciary duty to the company, secured secret profits through inflated transportation expenses and charged too high an interest rate on its contracts.

"This is a case of greed," Klinowski said.

Brown argued that Schmieding was a third-party contractor of Allens, not its agent. He said Schmieding had a right to make a profit and had disclosed its rates to Allens. Brown said both federal and state law allows the 18 percent interest that Schmieding charged.

"The debtors don't have the money to pay Schmieding, so they're trying to turn PACA on its head," he said, referring to the commodities act.

In the second case Barry heard Thursday, Veg Liquidation is refusing to pay $1.95 million in claims made by D&E Farms, saying the company charged 18 percent annual interest on its contract, a higher rate than allowed under Arkansas law and that the company should back out "contemplative expenses" from its bill, including costs for fuel, freight, storage and harvesting, even though the Veg Liquidation never paid those costs.

Brown, who also represents D&E Farms, told the court the objections had no legal basis.

Veg Liquidation has asked the court to shift its Chapter 11 bankruptcy status to Chapter 7 to help liquidate the remaining debt still owed after the sale of the company. Barry will hear objections to the shift May 29.

The canning company employs nearly 1,200 people across its U.S. operations. In addition to its Siloam Springs plant and other Arkansas holdings, the company has operations in Georgia, North Carolina and Wisconsin.

Business on 05/23/2014

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