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Wednesday, October 13, 2010

Veblen West Trustee Skewers Bogus Lease Plan, Calls for Nov. 1 Sale

Trustee Forrest C. Allred lost his bid to liquidate the Veblen West Dairy last week, but he's not done fighting the tricky owners of that polluting dairy. Attorneys for financier AgStar*, which has a big stake in the dairies, filed a blistering brief last week that confirms what readers here have heard: the Veblen West owners' plan to lease their bankrupt dairy back to themselves and their objections to last week's sale are a sham intended to delay court action until Rick Millner can talk enough investors into floating him the capital necessary to keep the "hopelessly insolvent" dairy in his hands.

Extra kudos to attorneys Damgaard and Morehead for banging out this damning 18-page assessment of Millner et al.'s hoodwinkery in less than 24 hours. You guys should blog!

Some highlights from the brief [In Re: Veblen West Dairy, "Brief In Response To Objections Of Certain Equity Owners Of Veblen West Dairy Llp And Hill Grain Farms, Inc., To Trustee’s Motion For Authority To Sell All Or Substantially All Assets Of The Bankruptcy Estate By In Court Auction," U.S. Bankruptcy Court, District of South Dakota, Case 10-10071, Document 441]:

Some of the Equity Owners were apparently able to obtain financing for, and successfully bid at the Veblen East 363 sale. The Veblen East sale featured notice and bidding procedures that were materially-indistinguishable from Trustee Allred’s. In fact, the 363 Motions in East and West are nearly identical in that regard. This begs the question: why are the Equity Owners objecting now, when some of them purchased Veblen East under identical conditions? Clearly, the Equity Owners were unable to secure the necessary financing to purchase Veblen West. They are objecting to buy more time. The plan the Equity Owners have proposed is so deficient in so many ways, that it must be an effort to delay the proceedings [p. 9].

The evidence will show that Vantage Cattle, one of the Debtor’s related insider entities, and a source of replacement heifers for debtor, did not have a claim against the Debtor as of the date of filing. Indeed, Vantage Cattle is not one of the creditors in Debtor’s case. However, the evidence, including Debtor’s aged accounts payable reports, will show that, in August and September 2010, the Debtor purchased approximately 450 head of fresh replacement heifers at a cost of over $680,000. But the Debtor never paid for them.

This evidence will highlight the Debtor’s efforts to show a positive cash flow, while keeping cattle numbers up artificially. During June and July 2010, the Debtor’s cattle herd numbers dropped significantly. (Doc. 253 at 8-22.) The Debtor was then faced with a choice. It could spend the money on cattle and show a negative cash flow, or it could continue to experience a drop in cattle numbers and a drop in milk production. Either result would have been damaging to Debtor’s claim that it could successfully reorganize. The Debtor avoided these two alternatives in part by obtaining hundreds of additional cattle from its insider-owned sister entity, Vantage Cattle. But Debtor but did not pay Vantage for the livestock. If it had, it could not have shown a positive cash flow. In other words, Debtor has covered up its negative cash-flow by playing a shell-game with an insider related entity. It is this type of insider transaction that led to a Trustee being appointed in this case [emphasis mine; pp. 13–14].

The Equity Owner’s plan also comes with projections purporting 8 to support their claim that the plan is feasible. (Doc. 412 at 127 – 156.) However, when even a few of the assumptions made in those projections are tested, it is clear they are simply too optimistic to be believed. The Equity Owners rely on a “pounds of milk given, per cow, per day” assumption starting at 77 lbs/cow/day, quickly escalating to 81/cow/day. During the case Debtor has never achieved that target, and has at times been under 70 lbs/cow/day.

The Equity Owners also assume a combined cull and death loss for the cattle of 2.62% monthly or 31.44% on an annualized basis. Through Sept, 2010, the Debtor’s herd has an annualized cull and death rate of 60.5% and that, during the same period, the Veblen East lactating unit has an annualized rate of 64.8%, showing that the 2010 results West has achieved are not artificially poor by comparison. In other words, the Equity Owners’ projections assume a much lower expense for herd replacement–one of the largest expenses in the projections [footnote, p. 14].

Trustee Forrest C. Allred filed a new motion yesterday requesting a sale free and clear of liens on November 1. The motion notes that certain members of the Veblen West ownership have asserted that the dairy will be in full compliance with the environmental clean-up ordered by DENR of the dairy's manure lagoons. DENR has not confirmed but will be inspecting on Friday, the deadline for compliance. Interested parties have until October 29 to file objections.

correction: I originally incorrectly attributed the brief to bankruptcy trustee Forrest C. Allred. The brief actually came from attorney Roger Damgaard and Sander Moorhead, representing AgStar. I regret the error.

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