Judge halts all action on Simply Essential bankruptcies until venue can be decided

By Bob Steenson, bsteenson@charlescitypress.com

There are two competing bankruptcy proceedings in the works for Simply Essentials LLC, the chicken processing company that closed its doors in Charles City last summer.

One is an involuntary Chapter 7 bankruptcy petition filed against Simply Essentials by claimed creditors in U.S. Bankruptcy Court for the Northern District of Iowa, entered March 6.

The other is a voluntary Chapter 11 case filed by Simply Essentials in U.S. Bankruptcy Court for the Eastern District of California, filed Aug. 10.

On Wednesday morning, attorneys representing the parties in both cases argued on the telephone before a judge why theirs was the case that should be allowed to proceed.

Iowa Northern District U.S. Bankruptcy Judge Thad Collins ruled at the end of the hearing that all action on the cases in Iowa and California is temporarily stayed, or halted, until another hearing is held in his court on Sept. 10 to determine which state is the appropriate venue.

Issues include where the creditors – the people claiming to be owed money by Simply Essentials – are located, other litigation against Simply Essentials, whether Chapter 7 or Chapter 11 will best protect the interests of the creditors and present the best chance of the plant being reopened, and even whether the judge in Iowa has the authority to issue a temporary stay or to rule on the venue.

Yes, Collins assured those on the phone, he does have that authority.

Attorney Joseph Peiffer, of Ag & Business Legal Strategies of Cedar Rapids, representing the creditors that filed the involuntary petition in Iowa, said the Charles City plant is the only plant Simply Essentials had and a majority of the creditors are located in the MIdwest.

“Why should all the creditors and everybody else be required to participate in a court 1,500 miles from the plant?” Peiffer asked the judge.

But attorney Terry Gibson, of Wandro & Associates, Des Moines, representing Simply Essentials, said that in the days of COVID changing venues just means dialing a different phone number. Whether the case continues in Iowa or California, the people involved will participate over video conference or by telephone.

Gibson said the California filing shows a total of 84 creditors.

“The corporate headquarters are in California. All the corporate records are in California. The creditors are dispersed across the U.S. The financing is going to come from a parent of the company in California. Whether or not the Chapter 7 proceeds in Iowa or 11 in California, something has to occur with respect to the plant,” he said.

Gibson argued that many of the potential creditors’ rights were not being protected, because they did not even know the Iowa hearing Wednesday morning was taking place.

Attorney Elizabeth Janczak, with Freeborn & Peters of Chicago, representing AARK Food Co. Inc., a potential creditor, said Chapter 11 – which is used to help a business reorganize its debts so it can continue operating – isn’t going to result in Simple Essentials reopening the plant.

“They filed a Chapter 11 with no operations and no plan to ever operate again in the future,” Janczak said.

“Chapter 11 is expensive, as evidenced by the fact that yesterday Simply Essentials submitted a motion to borrow $308,000 from its parent company, Pitman Farm, and not only does that proposed budget project that Simply Essentials will be almost $24,000 cash negative by the middle of January of 2021, 76% of that $308,000 that it’s borrowing is budgeted to pay attorney’s fees of Simply Essentials at a rate of roughly $50,000 per month,” she said.

In this case, Janczak argued, “the only thing to do in a Chapter 11 or a Chapter 7 is to sell the plant and sell the equipment. If the California case isn’t stayed, Simply Essentials will continue to incur tens if not hundreds of thousands of dollars in unnecessary administrative expenses before this court has ever had an opportunity to rule on the involuntary petition, or on which venue is appropriate.”

She argued that there is no urgency in the case moving forward until the venue is decided, and a stay order issued Wednesday would avoid unnecessary confusion and avoid unnecessary costs.

Judge Collins, along with temporarily staying all the proceedings, ordered that all the potential creditors from both cases be notified of the Sept. 10 hearing, when the venue question will be taken up.

“I think it’s fair and a good path to proceed on to get everybody involved in this,” Collins said.

Several interesting things about the Simply Essentials situation came out during the hearing Wednesday morning, including information about attempts to sell the plant so it could be reopened.

“The involuntary (bankruptcy petition) has extended over five months because there’s been discussions between the alleged debtor and the petitioning creditors about their attempts to put together financing to acquire the plant. They were not able to do that,” said attorney Gibson.

“They then turned their attention toward an entity that they wanted to acquire the plant, Pure Prairie, who they were hopeful would enter contracts with them. … Pure Prairie was not able to get its financing together to make a proposal,” he said. “We’ve waited five months for an offer to come forthcoming and we haven’t got one.”

Gibson also touched on a potential $31 million liability with New Market Tax Credits, which the Press has reported on previously.

“If the plant is not maintained or leased or sold in a way that satisfies those requirements of that New Market Tax Credit, there’s a $31 million liability that’s going to come back to the estate. It may or may not have a tax priority. It may or may not be an administrative expense claim, but it will surely be, at the least, an unsecured claim. That will diminish the return to all the creditors of any recovery,” Gibson said.

He said Simply Essentials is hoping to sell or lease the plant property in a way so that it can be reopened to minimize that potential liability.

In its summary of assets and liabilities filed last week in the Chapter 11 case in California, Simply Essentials lists $29.22 million in assets.

The largest of those are $22.91 million in machinery and equipment at the Charles City plant; $4.25 million for the processing plant and property; and almost $658,000 in various vehicles, including trailers and semis.

Also included in assets is a potential claim of $900,000 listed as attorney’s fees in a “breach of contract” claim, and a potential $400,000 listed as a cross complaint against AARK.

Under potential creditors, Simply Essentials lists a total of $18.13 million in secured creditors and $132.21 million in unsecured creditors, including unknown amounts for a long list of former chicken suppliers.

Included in the secured creditor total is a $13.22 million first mortgage owed to Farmer Mac, and a $4.92 million second mortgage owed to parent company Pitman Farms Inc.

Under the unsecured creditor list, the largest amounts are $34 million in New Market Tax Credits; $94.86 million for “loans, advances and guarantees” to Pitman Farms; $800,056 for “additional advances” to Pitman Farms; $2.11 million to Prairie’s Best Farms in Fairfax, Minnesota; and $424,237 to Western Grain & Milling in Sangor, California.