Simply Essentials motion, unrelated to plant sale, alleges discrepancies under former owner

By Bob Steenson, bsteenson@charlescitypress.com

When a U.S. Bankruptcy Court judge approved the sale of the Simply Essentials property and equipment in Charles City to a new owner this week, the order specifically did not include one particular asset in the sale.

A footnote to the order approving the sale states, “For the avoidance of doubt, the ‘Assets’ shall not include the Pitman Causes of Action or the Proceeds thereof. … Further, the ‘Assets’ do not include any preference actions, avoidance actions, or fraudulent transfer actions.”

What that is referring to is the latest wrinkle in what has been a long and winding road from closing the plant in August 2019 to its sale to a new company this week.

This wrinkle likely will have little to no effect on the sale of Simply Essentials to Pure Prairie Farms Inc., or on the eventual reopening of the Charles City plant. Judge Thad Collins’ order approving the sale says that it is “final,” “shall not be stayed” and “is immediately effective.” Closing on the sale is expected before the end of the year.

But a separate, earlier, motion to sell the “Pitman causes of action” to one of the Simply Essentials creditors does provide possible background behind the operations of the Charles City plant under Pitman Farms’ ownership, and possibly actions leading up to the 2019 announcement that Simply Essentials was being closed, putting more than 500 employees out of work.

A lengthy document filed by the bankruptcy trustee in November includes claims that Simply Essentials’ former owner may have fraudulently sold chicken processed by Simply Essentials under one of the owner’s different brand names and did not credit the revenue to Simply Essentials, and that $125 million in last-minute loans made by the former owners to Simply Essentials “managed to simply evaporate” with no trace of what happened to the supposedly loaned money.

The trustee, Larry Eide, filed a motion for permission to sell the right to pursue possible legal action against the former owner, Pitman Farms, of Sangor California, to a company that had a contract to market Simply Essentials’ products.

ARKK Food Co. Inc., of Bloomington Hills, Michigan, has claimed since the beginning of the Simply Essentials bankruptcy that Simply Essentials did not fulfill the terms of a contract between the two companies to pay ARKK to market and support sales of Simply Essentials’ chicken products directly and through third parties.

The contract called for ARKK to be paid a percentage of all Simply Essentials sales, whether ARKK contributed directly to some particular sales or not, ARKK said. ARKK originally claimed that Simply Essentials owed it at least $2.3 million in unpaid commissions.

Now, however, one of the founders of Simply Essentials is claiming that Pitman Farms sold tens of millions of dollars worth of chicken that was processed at Simply Essentials, but sold it under its Mary’s Chicken label without recording the source as Simply Essentials and without crediting the revenue to Simply Essentials.

Based on that and other practices, ARKK now says Simply Essentials owes it about $23.4 million.

Trustee Eide’s motion asking permission to sell the rights to sue Pitman “and other insiders” to ARKK says that in return, ARKK would drop its opposition to the sale of the Simply Essentials assets and would give the bankruptcy estate 15% percent of any judgment ARKK receives against Pitman or others.

ARKK would be responsible for all the legal costs of pursuing those claims.

A hearing has been set in U.S. Bankruptcy Court for the Northern District of Iowa on Wednesday, Dec. 15, regarding the motion by the trustee to sell the rights to sue to ARKK, and a motion by Pitman Farms objecting to that sale and arguing that the actions are not assets of the bankruptcy estate and the trustee’s motion would not benefit the estate.

The trustee’s motion notes that the list of Simply Essentials creditors includes about $150 million in unsecured claims, but about $100 million of that is claimed by Pitman Farms, the former owner.

“Over a year has passed since an order for relief was entered in this case, and yet, creditors are still left to wonder why a once-successful processor and seller of premium chicken products was thrust into Chapter 7 liquidation and is purportedly so insolvent that it has assets of $9.5 million against liabilities exceeding $150 million,” Eide’s motion says.

“This situation is made more confounding by the fact that the Debtor’s Schedules assert that the Debtor received over $125 million in loans (many of which were made mere months before the Debtor closed its operations), yet that money (not to mention untold tens of millions in equity infusions) somehow managed to simply evaporate; there are no large sums sitting in cash accounts, and, as already mentioned, the value of the remaining assets is but a fraction of a fraction of these amounts,” Eide’s motion reads.

The “debtor” referred to is the Simply Essentials company, under ownership of Pitman Farms.

“The Settlements, if approved, provide the best prospect of reversing this bleak situation for non-insider unsecured creditors, shedding light on the misdeeds leading to the Debtor’s distress, and driving meaningful recoveries to these claimants,” Eide’s motion states.

Part of the 85-page document includes a sworn statement signed by Todd Henning, who was the co-founder and chief operating officer of Simply Essentials before it was sold to Pitman Farms.

Henning said that he and Dennis Krause formed Simply Essentials as a beef processing company in 2012, then decided to expand into poultry processing in 2015.

The company borrowed $34 million from Tillridge Global Agribusiness Partners for that expansion, and spent $28 million to $32 million to build the Charles City poultry processing plant. As part of the financing Henning and Krause each owned 1.7% of Simply Essentials and Tillridge owned the rest.

“Carrying on SE’s reputation from its beef operation, and in partnership with its producers, SE was well regarded in the industry for selling the highest-end chicken product. Indeed, the chicken obtained the highest claims qualification in the industry for the ratio of omega 3 nutrients,” Henning wrote.

Henning described the contract with ARKK to market the product, and said that figuring ARKK’s commission depended on detailed records of how many chickens the Charles City plant was receiving and harvesting weekly, and how much meat each chicken yielded.

In November 2017, Tillridge was winding down its portfolio and looking to sell Simply Essentials beef and poultry operations, and negotiated a stock purchase agreement with Pitman Family Farms to purchase the Charles City chicken plant, Henning wrote.

He said that shortly after the purchase, Pitman replaced the accountants in charge of maintaining Simply Essentials accounts and invoices, and soon after that Henning “began to notice serious discrepancies in SE’s records between the number of chickens the plant was receiving and the amount of product sold that was attributed to SE.”

Henning said that poultry processed in Charles City was regularly being diverted to Pitman’s other business, Mary’s Chicken, and Simply Essentials “received no value in exchange for the diverted chicken.”

The result of this diversion was that ARKK was not receiving the commissions it was entitled to, and Tillridge was not receiving its share of earnings that had been part of the agreement selling Simply Essentials to Pitman, Henning wrote.

He said he could track the diversion of poultry through Simply Essentials’ computerized records system, and based on that he could see this diversion occurred on a weekly basis, including an average of five to seven truckloads per week, with each truck carrying about 40,000 pounds of chicken.

“Assuming this pattern continued consistently for the approximately 80-week period from January 2018 to the plant’s closure in August 2019, I estimate that approximately $32 million in revenue was diverted by Pitman from SE to Mary’s Chickens or other Pitman-owned subsidiaries,” Henning said.