Costco wants peanuts back
November 13, 2013
CMI PROJECTS EDITOR
The largest processor of organic Valencia peanuts in the country was so strapped for cash, its single largest customer — Costco — had to front it $20 million. And most employees didn’t get paid for their work in the final days before the Portales plant was shuttered last month.
That’s according to the latest filings in the Sunland Inc. bankruptcy.
The Costco cash, according to lawyers, was used to purchase peanuts in December and again in February during a federally mandated recall and shutdown of the plant.
Lawyers for Costco and CoBank of Denver said about $12.5 million was placed in an escrow account in an attempt to ensure farmers and growers got paid for their peanuts.
Lawyers for Costco say most of the peanuts Costco fronted millions to buy in February remain in storage around Portales and Costco wants them back.
A Nov. 25 hearing is set in Albuquerque federal bankruptcy court to try and settle the issue.
Costco’s claims are part of dozens of new filings popping up almost daily since Sunland filed Oct. 9 for Chapter 7 protection and liquidation.
On Monday, Sunland filed an amended financial statement indicating more than 75 employees didn’t get paid for their last days of work. They are owed amounts ranging from $100 to almost $1,000, the larger figure claimed by Sunland CEO Jimmie Shearer, according to court records.
Sunland attorney William Arland of Santa Fe said all employees by law have a priority claim and will eventually be paid. He said the employee pay period ended on the Friday before the bankruptcy filing, meaning some employees lost about two days pay.
Costco is one of Sunland’s three largest first-secured creditors, along with CoBank and Production Credit Association of Southwest New Mexico. The three combined are owed almost $16 million, according to court records.
The designation as a first-secured creditor is critical, meaning they will get first crack at proceeds when a court-appointed trustee sells Sunland’s assets.
Sunland estimates its assets at $49 million, a projection labeled “wildly optimistic” by CoBank attorney Paul Fish of Albuquerque.
The prospect of Sunland’s largest peanut butter customer fronting millions to its cash-strapped supplier for a raw product is all part of a complicated deal set up Dec. 4 and Feb. 5 by Costco, CoBank and Sunland.
According to court records:
• Sunland didn’t have the cash and Costco agreed in December to front $12.5 million for 21 million pounds of raw unshelled conventional Valencia peanuts. Costco also fronted another $7.5 million for 8 million pounds of raw unshelled organic Valencia peanuts.
• The 21 million pounds of conventional peanuts were subsequently sold to an unnamed third party.
• On Feb. 5, Costco amended its agreement with Sunland and fronted another $12.5 million for an additional 21 million pounds of conventional peanuts.
According to a motion filed by Costco: “The proceeds from the sales of the peanuts were deposited in an escrow account, from which disbursements were made to peanut growers to discharge ...(Sunland’s) debts to those growers,” according to court records.
“It is unusual for Costco to arrange purchases of raw materials in this fashion as opposed to simply buying finished goods. The transaction was structured in order to make sure that growers were paid most of what was owed them. At that time ... (Sunland) was in financial distress due to the FDA-mandated recall and shutdown ... could not afford to pay the farmers without Costco’s financial support.”
As an inducement for Costco to front the cash in February, CoBank, which is owed money for buildings and equipment at Sunland, agreed to take a subordinate financial position.
“It’s my understanding that because we wanted the peanut butter ... previously supplied ... that we were willing to buy the peanuts,” said Dave Giddens, Costco’s bankruptcy attorney.
Costco is now claiming the peanuts in storage should be separated from all of Sunland’s other assets, thus not included in the trustee sale.
Giddens said his client is willing to pay costs “within limits” of retrieving the peanuts and having them shelled and processed. Costco has proposed a maximum of $200 per ton. Trustee Clarke Coll, however, is demanding more money than Costco has proposed, thus setting up the Nov. 25 hearing.
Meanwhile, according to a motion filed Friday by Giddens, the value of the peanuts in storage in Portales and Hereford, Texas, are declining daily.
“Certain of such (storage) facilities are refrigerated and others are not,” according to Giddens’ motion requesting release of the product.
Costco is arguing the peanuts not held in cold storage “face the worst risk of deterioration and ... declining value.” They also argue continuing to keep the peanuts in storage will force the trustee to spend a sizable chunk of some of the estimated $4 million in cash Sunland has left in various bank accounts “to the detriment of secured and unsecured creditors.”
Among those directly affected by the dispute: Richard and Laura Robbins of R&L Peanut Co. in Portales, who are storing some of the Costco peanuts. Their attorney Chris Pierce filed a lien Tuesday against the peanuts R&L is storing.
Pierce wasn’t immediately available for comment.