I just came across two rulings from U.S. Bankruptcy Court Judge Charles L. Nail, Jr., that give some idea of the monkeyshines Millner is willing to resort to in his dairy endgame. The first ruling, dated July 9, deals with the question of whether AgStar, the receiver of Veblen East, has any security claim to milk Millner's cows have produced since AgStar took over the dairy in March. As I understand it, if your property goes into receivership, any products you make from that property after receivership or from other property you put up as security aren't wholly yours to do with as you please. The receiver can claim those products or the proceeds from the sale of those products to pay down the debts you owe.
Millner argued in court that milk from his cows is not a "product" of his cows.
Apparently, Millner's lawyers were able to cite some court rulings that support this remarkable conclusion. Fortunately for common sense, Judge Nail was able to cite a majority of rulings that "have reached the opposite conclusion." Let's hear from the judge:
Debtor is correct when it says neither the bankruptcy code nor the South Dakota Codified Laws define the term "products."[ 4 ] However, when a term used in a statute is undefined, courts interpreting that statute must give that term its ordinary meaning. Hamilton v. Lanning, ___ U.S. ___, 2010 WL 2243704, *6 (2010) (citation omitted).
AgStar argues "[o]ne does not have to grow up on a farm to understand that milk is a `product of' a cow." The Court agrees. Thus, the ordinary meaning of "product" includes milk produced by dairy cows. Debtor even admits as much — albeit most likely unintentionally — in its motion, in which it refers to its "dairy production operation" (paragraph 10), its "productive herd" (paragraph 13), its "production numbers" (paragraph 14), the "dairy production industry" (paragraph 14), "dairy products" (paragraph 17), and "dairy producers" (paragraph 18) (emphasis added) [In re: VEBLEN WEST DAIRY LLP , Chapter 11, Debtor. Bankr. No. 10-10071. United States Bankruptcy Court, D. South Dakota. July 9, 2010. CHARLES L. NAIL, Jr., Bankruptcy Judge. Retrieved 2010.07.19 from Leagle.com].
Sometimes it's got to be hard for a judge to keep a straight face.
The second ruling came just last Friday, as Judge Nail granted AgStar's motion to appoint a trustee to manage Veblen West. Apparently appointing a trustee in a Chapter 11 case is a big deal, something that happens only if there's serious concern about "fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case...."
AgStar asked for a trustee based on concerns about Millner's ongoing environmental issues and "numerous substantial transfers of assets and liabilities between and among Debtor and the several related entities."
The Court found the environmental problems "serious" and "ongoing." However, geologist Jeanne Goodman of the South Dakota Department of Environment and Natural Resources testified on Millner's behalf to outline Millner's compliance with DENR orders, and that was enough to convince the judge that Millner's response to his environmental violations is sufficiently "appropriate and reasonable" to avert appointing a trustee.
Worth noting: Judge Nail includes this footnote on the environmental portion of the July 16 ruling (emphasis mine):
The Court is mindful that in its July 8, 2010 motion seeking confirmation the automatic stay is not applicable to its waste water regulatory powers (doc. 261), South Dakota's Department of Environment and Natural Resources alleged:Debtor has not taken the actions necessary to reduce the level of wastewater in its holding ponds or to ensure that it will reduce those levels within the time necessary in order to mitigate the possibility of a discharge this coming Fall or Winter. Rather, Debtor has increased the number of cattle being milked and water used, resulting in increased stress on the holding ponds and their storage capacity. . . . A failure or overflow of Debtor's wastewater holding ponds would result in an immediate and serious threat to public health.
This is certainly troubling. However, the allegations were made after the hearing on the instant motion. The Department and Debtor have resolved the motion, but not the environmental problems, by stipulation (doc. 277) [Footnote #4, In re: VEBLEN WEST DAIRY LLP, Chapter 11, Debtor. Bankr. No. 10-10071. United States Bankruptcy Court, D. South Dakota. July 16, 2010. CHARLES L. NAIL, Jr., Bankruptcy Judge. Retrieved 2010.07.19 from Leagle.com.]
Judge Nail also ruled that AgStar failed to establish "incompetence or gross mismanagement" in Veblen West's daily operations that would support appointing a trustee.
Judge Nail did find cause to appoint a trustee in what appears to be a lot of shady asset-shifting. The Court cites evidence of Millner moving money around to pay off debts of his other dairy ventures instead of paying creditors:
Debtor acknowledged some of the transfers of assets and liabilities and the changes in equity positions Steiner had questioned, and it did little to ease any of the Court's concern that Debtor's and its management team's pre-petition actions were not evenhanded and were primarily intended to benefit insiders and the several affiliated entities, rather than Debtor's creditors. Significantly, Debtor chose not to offer explanatory testimony from Shan Betzold, Prairie Ridge's controller, the individual Millner testified made the decision whom to pay and whom not to pay and who would therefore be most likely to possess firsthand knowledge of the facts needed to explain Debtor's seemingly aberrant use of its milk proceeds. Millner's own attempts to explain some of the transactions were fruitless, and his testimony raised more red flags than it lowered.
...the record is abundant and alarmingly clear that an independent entity needs to assess the case for possible voidable pre-petition preferences and fraudulent or constructively fraudulent conveyances [IN RE VEBLEN WEST DAIRY LLP, 2010.07.16].
Judge Nail thus appointed the Chapter 11 trustee.
At some point, one would think it would be easier to just admit you've done wrong, clean up the mess, and do honest business from here on out. But these rulings from Judge Nail suggest that's not a route Millner is inclined to take.
Update 22:10 CDT: Millner isn't alone in bankruptcy: the U.S. Bankruptcy Court reports 1062 bankruptcy cases were filed in the District of South Dakota in the first half of 2010. That's up 11% from the same period in 2009