Sam Kane Beef Processors, LLC – All Debt and No Cattle? Texas Meat Packer Files Chapter 11, Looks to Sell Business

January 23, 2019 – Sam Kane Beef Processors (“SKB” or the “Company”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 19-20020 [Docket No. 1]. The Company, which has operated a meat-packing plant in Corpus Christi, Texas since 1949 (see “God Bless America” and “People Love Beef” below), is represented by Matthew Okin of Okin Adams LLP. The Company’s petition notes between 100 and 200 creditors; estimated assets between $50mn and $100mn; and estimated liabilities between $50mn and $100mn. Documents filed with the Court list the Company’s three largest unsecured creditors as (i) Marquette Commercial Finance ($47.6mn), (ii) Luckey Custom Feedlot ($5.8mn) and (iii) Carrizo Feeders ($4.2mn).

In a declaration in support of the Chapter 11 filing (the “Schmidt Declaration”) [Docket No. 3], Richard S. Schmidt, who has served as SKB’s court-appointed receiver since October 5, 2018, outlined the Company’s goals for the Chapter 11 process and detailed the events leading up to SKB’s sudden Chapter 11 filing. 

In respect of SKB’s Chapter 11 goals, the Schmidt Declaration states, “On or about November 3, 2018, the Receiver engaged the Gordian Group, LLC (‘Gordian’) to market and sale the Debtor’s assets. Pursuant to such engagement, Gordian has marketed the Debtor’s assets, solicited and received bids, and has engaged in continuing negotiations with potential purchasers. As a result of the efforts, the Debtor has received certain bids for the purchase of the Debtor’s assets. The Debtor, with the aid of counsel and Gordian, is in the process of selecting a lead bidder and negotiating definitive documentation for a stalking horse transaction. The Debtor filed this bankruptcy case, in part, to ensure its ability to consummate such a transaction and intends to move quickly to do so.”

Events Leading to the Chapter 11 Filing

As is the case with many, non-prepackaged Chapter 11s, SKB’s Chapter 11 filing was preceded by sudden events that left the Company with little or no choice but to file. In SKB’s case, those events were (i) the receipt of a notice that the Company was in violation of waste water treatment regulations, which threatened SKB’s ability to maintain operations and (ii) notice from a finance source, Marquette Transportation Finance, LLC (“Marquette”), that funding, necessary for cattle purchase and operations, was not assured. Absent that assurance, cattle suppliers, cognizant of a recent history of bill payment problems on the part of the Company, refused to supply further cattle.

For cattle suppliers this is a difficult moment, on the one hand SKB is a key processing facility with no nearby alternatives; on the other hand SKB has a recent history of being a poor partner, especially when it comes to all-important payment issues. Commenting on the importance of SKB to the industry, Lou Waters, Jr., a cattle rancher from Houston who purchased SKB in 2013 and sold it in 2015, said “Well, this plant is a key link in the beef business in South Texas….It’s the only plant that processes beef for the feeders down here, and if this plant were to close, the entire industry would close with it in the southern half of Texas.”

In the Spring of 2016, the United States Department of Agriculture began an investigation of SKB related to purported violations of the Packers and Stockyards Act of 1921, as amended (‘PSA’ or the ‘Act) which requires ‘packers, like SKB, to pay promptly for livestock purchased for slaughter. As a result of an investigation, and persistent failures to remedy payment practices that were found to be in violation of the Act, ultimately the U.S. Government sued for the appointment of a receiver, with that appointment being made on October 5, 2018. The payment issues have been both large and persistent with the Schmidt declaration noting, “In January 2018, as a result of the late payment violations, seventy-seven (77) livestock sellers filed Packer Trust claims against SKB under the provisions of the PSA in the total amount of $142,965,561.12….On June 8, 2018, SKB, as required by the Consent Order, provided to the United States an unaudited report showing it owed $34,960,000 to livestock sellers, and that the payments to sellers were made 38 days late, on average.”  38 days is a long time in respect of the PSA’s prompt payment regulations and the commercial realities of selling a perishable good like beef [the Schmidt Declaration somewhat ironically underlining the “emergency” nature of SKB’s need for Court bankruptcy protections when noting, “The nature of the Debtor’s operations is such that, if the processing of the slaughtered beef is not completed in a timely manner, the product may spoil and become worthless”], so it is easy to imagine cattle suppliers taking issue with effectively waiting for payment until after SKB has in all likelihood collected payment for processed and packaged beef.

Further Beefs to Come?

While suppliers might beef at being treated as unwilling underwriters of the Company’s business operations, the Company has a more pressing problem with Marquette, its existing source of financing. Pushed into Chapter 11 in large part over concerns that Marquette was refusing to assure a continued source of operational financing, the Debtors’ are now asking the Court to approve measures that Marquette is likely to find objectionable. The Schmidt Declaration continues on the issue of access to cash collateral, “For these and the reasons set forth in the Cash Collateral Motion, the Debtor asks this Court to grant emergency relief (i) directing the Debtor’s customers to remit all amounts owed directly to the Debtor, rather than Marquette, (ii) requiring Marquette to immediately turn-over to the Debtor all cash proceeds received by Marquette after the filing of the Debtor’s petition, and (iii) that Marquette provide an accounting of all receivables collected since it last funded the Debtor’s operations on Thursday, January 17, 2019.”  

Sale Efforts

The cooperation of Marquette, to whom it owes $47.6mn, and perhaps also the many cattle suppliers, to whom it owes tens of million more, will depend significantly on what SKB and Gordian have already managed to line up in terms of a sale of the Company’s assets/business. The Schmidt Declaration provides the following detail on the value of the business on a going concern basis and its assets, “With the closest comparable facilities located in the Texas panhandle, using an alternative facility would require many Texas cattle ranchers to bear additional costs to transport their product for processing. 

As a result, the Debtor’s 238,186 square foot facility in Corpus Christi is considered the hub of the South Texas beef industry. The Debtor’s Facility is capable of processing 1,200 head of cattle per shift, or approximately 8,400 head of cattle per week. In 2017 alone, the Debtor processed 204,000 head of cattle, and production increased to 324,000 head in 2018. Due to its large commercial scale capabilities, the Debtor’s Facility has appraised value of approximately $55.6 million, and an estimated replacement value of $100 – $150 million. In the fourth quarter of 2018, the Debtor had working capital assets of approximately $25 million in accounts receivable and $10 million in inventory.”

 “God Bless America” and “People Love Beef”

SKB was founded by Sam Kane (born Kanengiesser in Spisske Podhradie, Czechoslovakia), a one-time rabbinical student turned resistance hero, almost completey by chance. In 1949, on his way out of town in search of greener pastures, the then plumber’s assistant took some advice from a ticket agent at the bus terminal, “Check out the vacancy for butcher at the grocery store.” The rest of Sam’s life became Texas-sized legend for the Czech resistance fighter who at 98 lbs once gnawed at a cowhide he found in the snow and survived two years fighting the Nazis while losing his entire family to the holocaust. Kane, who went from gnawing cowhide to owning one of the world’s largest meat packers lived by two simple mottos, “God bless America” and “People love beef.”

In May 2013, the business (then managed by Sam’s son Jerry Kane; Sam lived into his 90’s) was sold to a group of Texas ranchers and cattlemen who subsequently onsold SKB to its current owners, a subsidiary of South American dairy operator The Fernandez Group, in December 2015.