February 8, 2021 – Tyson Fresh Meats, Inc., one of the Debtors' creditors, asked the Court hearing the Debtor's case to order appointment of a Chapter 11 trustee "to assume control of the estate of Debtor Easterday Ranches, Inc." [Docket No. 79].
In its motion, Tyson provides details of the events leading up to the Debtor's Chapter 11 filing, placing particular import on the fraudulent activity allegedly masterminded by Cody Easterday, the President of Easterday Ranches, in which at least $225.0mn was allegedly used to purchase and feed nonexistent cattle on behalf of Tyson. In addition, Tyson alleges that Easterday Ranches secretly, and without proper marketing, sold its most valuable real property in the days leading up to the bankruptcy filing and that newly retained ranch operator Paladin Management had a hand in accomplishing that sale.
Tyson also announced plans in the motion to move its younger cattle off of Easterday Ranches' property, noting "This should allow a cessation of business at the Easterday Ranches feedlots and grow yards by the end of June."
The trustee appointment motion states, "There is no dispute over the underlying facts in this case: Debtor is responsible for a massive fraud upon Tyson and other creditors. Debtor now argues that it has clean hands because it has retained Paladin Management to operate Easterday Ranches and has retained an independent board. But even after the fraud was uncovered and Debtor was operating under the auspices of Paladin, Debtor engineered a surreptitious sale of its largest unencumbered parcel in a fire sale transaction on the eve of bankruptcy and then distributed over eighty-five percent of the proceeds (almost $13 million) to affiliates, insiders and professionals rather than to third party creditors.
Debtor’s management, however constituted, cannot be trusted to keep the interests of creditors of this estate, rather than other entities owned by the Easterday family, at heart. Further, Debtor’s belated wholesale management change – composed of a passel of newly installed professionals selected behind the scenes in an extra-judicial process – demonstrates rather than refutes the case for a trustee.
Everyone agrees the company needs management untainted by the Easterday family, providing new, independent guidance. That guidance should come from a trustee appointed in accordance with the Bankruptcy Code, not the proposed more expensive alternative including Paladin, which was selected by the Easterday family and which participated in (or at the least, failed to prevent) the final fraudulent and preferential transactions. For all these reasons, a trustee is necessary for the protection of the estate and is in the best interests of creditors and others."
In respect of the fraud allegations and prepetition request for appointment of a receiver, Tyson further explains in the motion, "Easterday Ranches purchases calves on behalf of Tyson, then feeds and takes care of the cattle as they grow to marketable size, whereupon the cattle are delivered to Tyson’s processing plant in Pasco. Cody Easterday, the President of Debtor Easterday Ranches, initiated and carried out a fraudulent scheme whereby Easterday Ranches reported to Tyson purchases of calves that did not exist, requested and received reimbursement from Tyson for those purchases, then reported purchases of feed and other supplies for those fictitious cattle, and requested and received reimbursement from Tyson for the nonexistent feed purchases as well. By the time the fraud was uncovered in December 2020, Tyson had been defrauded out of more than $225 million, and there were more than 200,000 cattle “missing” from Easterday Ranches.
Receiver Motion and Property Sale
Tyson does not believe any of those facts are now controverted by Debtor or anyone else. In any event, those facts were all demonstrated in Tyson’s Complaint and Motion for Appointment of Receiver and Injunctive and Other Relief (the 'Tyson Complaint' and the 'Receiver Motion') filed January 24 in Franklin County Superior Court. The Receiver Motion was scheduled for hearing the afternoon of February 1, but Debtor filed its chapter 11 petition that morning. The Receiver Motion requested appointment of a receiver over Easterday Ranches based on the fraud perpetrated by Easterday Ranches and Cody Easterday, and also requested that the Franklin County Superior Court issue a temporary restraining order (TRO) against Easterday Ranches, preventing it from selling the 'North Lot' – its most valuable unencumbered real property.
When Tyson filed the Receiver Motion, Tyson feared that Debtor would sell the North Lot at a firesale price and distribute the proceeds to insiders and others, thus causing three harms: depriving Debtor’s estate (whether receivership estate or bankruptcy estate) of a valuable asset for inadequate consideration; preferring some creditors, even legitimate creditors, to the detriment of others; and sending significant assets out of the estate and to other Easterday family interests, including Easterday Farms and others. What Tyson did not then know was that just two days before the filing of the Receiver Motion, Debtor had already surreptitiously closed on the sale of the North Lot….
Tyson immediately took action to protect its rights, filing the Complaint and Receiver Motion that Sunday (January 24) in an effort to stop the sale of the North Lot before irreparable harms could occur. Only after receiving notice of the Complaint and Receiver Motion did Debtor inform Tyson, on Monday, January 25, that the sale had already closed the previous Friday.
In response to Tyson’s request, Debtor later provided Tyson with a schedule disclosing how the proceeds of the North Lot sale were distributed. Of the $16 million sale price, approximately $15.1 million was apparently immediately distributed, and of that $15.1 million:
- About $5.0 million went to Easterday Farms and another company owned by Easterday family members, English Hay Company, on account of outstanding feed costs.
- About $2.0 million went to Easterday Farms as a prepayment for feed that had not yet been invoiced.
- About $4.75 million went to Easterday Farms on account of a loan, apparently long outstanding and unsecured.
- About $1.2 million went to Debtor’s professionals.
Thus, of the $15.1 million in sale proceeds that were disbursed, $13 million went directly to affiliates or professionals: only $2.1 million (less than 14%) went to third party creditors and almost $12 million (close to 80%) went directly to Easterday Farms and other Easterday family owned entities. In short, Tyson was absolutely justified in fearing that the North Lot sale would be used to benefit insiders to the detriment of everyone else. Further, it appears Tyson was absolutely justified in fearing the North Lot sale would be accomplished through a fire-sale process yielding an inadequate price. There is no indication in any of Debtor’s pleadings that there was an organized marketing process for the North Lot. Instead, it appears Debtor went only to one party – a competitor of Tyson’s who could be trusted not to let news of the sale leak – and closed the sale in a rush, all behind the backs of Tyson and the other creditors. We will not know how much value Debtor left on the table unless and until the North Lot is the subject of a true marketing process or the transaction is reviewed by an independent party. We do have, however, two indications that the value received by the Debtor was woefully inadequate."
Plans for Operations
According to the motion, "Tyson has recently determined that the most efficient means of dealing with its 53,000 cattle currently on Debtor’s feedlots is to leave the more mature cattle on the Easterday Ranches properties and move the younger cattle off the Easterday Ranches properties. This should allow a cessation of business at the Easterday Ranches feedlots and grow yards by the end of June. Whatever the scope or length of the operations, of course, Tyson is by an order of magnitude the largest creditor in this case, has intense interest in maximizing the value of the estate and thus in the identity and conduct of management of the Debtor and believes a trustee should be appointed."
The Debtor, in the wake of the December 2020 death of family patriarch Gale Easterday, is owned by three remaining members of the Easterday family; each of whom has recently resigned as officers of the Debtor, which explains in part the need for a pair of CROs at the suddenly leadership-less company. Documents filed with the Court listed Tyson as the Debtor's largest unsecured creditor, with an "at least" $225.0mn litigation claim).
On December 21, 2020, cattle client Tyson Foods, Inc (“Tyson”) announced (8-K here) that it was undertaking an internal review relating to one of its cattle suppliers (that supplier later named as Easterday) and has determined that "this supplier made misrepresentations regarding the number of cattle the supplier purchased on behalf of the Company’s Beef segment…[with] the misappropriation of Company funds by the supplier caus[ing] the Company to overstate live cattle inventory as of the Company’s fiscal year ended October 3, 2020 by an estimated amount of $285 million." Given Tyson's size, it makes a determination that the alleged fraud (occurring from 2016-2020) "did not…result in a material misstatement of the Company’s previously issued annual or interim consolidated financial statements and that such financial statements may continue to be relied upon."
Nonetheless, an undetected $285.0mn fraud over 4 to 5 years raises some rather significant internal control issues and Tyson notes that (i) it "identified a material weakness in the Company’s internal control over financial reporting ('ICFR') relating to the physical existence of live cattle inventory." (ii) that it would be amending its 2020 10-K and (iii) that PricewaterhouseCoopers LLP ('PwC'), will also amend its opinion on the Company’s ICFR to state that the Company’s internal control over financial reporting as of October 3, 2020 was not effective."
Although that $285.0mn represented only 2% of Tyson's annual beef supply over the relevant period, the impact may have been considerably more significant at Tyson's meat packing facility near Pasco, Washington, which reportedly supplies a substantial proportion of Wendy's beef patties.
Tyson does not detail how the discovery was ultimately made, but at the end of January 2021 it initiated legal proceedings in Franklin County Superior Court where it stated in filings that“… [the Debtor's] President Cody Easterday, has admitted to a scheme in which Defendant [Easterday] has falsified records and submitted fictitious invoices in order to defraud Plaintiff [Tyson] out of more than $225 million. Among other things, Defendant has manufactured documents in order to hide the fact that it was reporting to Plaintiff approximately 200,000 cattle that simply did not exist.” Those filings also note that the allegedly embezzled funds were used “to offset over $200 million in losses (company president Cody Easterday) incurred in the commodities trading markets.”
Tyson is suing to recoup its payments, along with 54,000 head of cattle, and asked the county court to appoint a receiver. Tyson's efforts to seize cattle and the bankruptcy Court's efforts to restore some semblance of order will be complicated by Easterday's recent reported sale of a feedlot to Agri Beef Co, a Tyson competitor.
A hearing on the trustee appointment motion has been scheduled for March 8, 2021, with responses due by March 1, 2021.
About the Debtor
According to the Debtor: “From the early stages of planting to the final phase of packaging and shipping, you will find the Easterday family actively involved in all aspects of delivering you high quality produce you can trust. We are a family-owned and operated farming business. We believe that the size of our business is a unique balance between the economy and efficiency of scale and the attention to detail necessary for customer satisfaction. We are a proud grower and packer of conventionally raised onions and potatoes."
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