January 30, 2019 – In the end, there was just not enough meat on the bone for Sam Kane Beef Processors to complete its original plan to be sold to a stalking horse bidder, with the debtors filing a motion on January 28 seeking approval for an auction of the assets as a going concern and an order authorizing abandonment of any assets not sold at auction.
The decision is a blow not only to the debtors and substantial creditors of the company, but also the region’s cattle suppliers, which could have serious knock-on effects. The Corpus Christi processing facility, considered the hub of the South Texas beef industry, has no nearby alternatives. “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,” commented Lou Waters, Jr., a cattle rancher from Houston who purchased the company in 2013 and sold it to a subsidiary of South American dairy operator The Fernandez Group in December 2015.
Sam Kane Beef filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas (case number: 19-20020) on January 23, citing “sudden events” that had left the company with little or no choice but to file. Those included the company being in violation of waste water treatment regulations, which threatened its ability to maintain operations, and notice from Marquette Transportation Finance that funding necessary for cattle purchase and operations was no longer 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.
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).
Richard S. Schmidt, who has served as Sam Kane Beef’s court-appointed receiver since October 5, 2018, engaged the Gordian Group to market and sell the debtor’s assets, and by the time of the filing the company was in “the process of selecting a lead bidder and negotiating definitive documentation for a stalking horse transaction”.
However, in the latest motion filed on January 28, the company laid out the new realities. “Since the filing [on January 23], and as result of circumstances well beyond the Debtor’s control, the Debtor has determined that moving forward with its previously identified stalking horse purchaser is not practicable.”
While it said the primary focus had been to sell the assets as a going concern, the Gordian process also attracted alternative bidders and the company believes that maximum value for the estate’s assets could be obtained by moving for a quick auction of the estate’s assets.
“The Debtor intends to hold an auction to sell substantially all of its assets. The Debtor believes that, with the exception of any accounts or other intangibles, any real or physical personal property remaining in the estate after the auction and subsequent sale hearing will be of inconsequential value and benefit to the estate, or will be burdensome to the estate. As a result, the Debtor intends to abandon certain property and assets not sold at the proposed auction,” the motion said.
The company has set February 6 as the date for the auction of the assets, with any party intending to bid needing to file a Notice of Intent no later than mid-afternoon on February 1. In the meantime, many of Sam Kane Beef’s 726 employees will be furloughed, reports said.
The auction is a sad end for a venerable company whose roots go back to 1949, when on his way out of town in search of greener pastures, Sam Kane (born Kanengiesser in Spisske Podhradie, Czechoslovakia), a one-time rabbinical student turned resistance hero
, took some advice from a ticket agent at the bus terminal to “Check out the vacancy for butcher at the grocery store.” The rest of Sam’s life became a 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 in the Holocaust. Kane, who ended up owning one of the world’s largest meat packers, lived by two simple mottos: “God bless America” and “People love beef”.
The company’s problems really took a turn for the worse in the spring of 2016, when the Department of Agriculture began an investigation of Sam Kane Beef into purported violations of the Packers and Stockyards Act (PSA) of 1921, which requires packers like Sam Kane Beef 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, in July 2018 Sam Kane Beef was ordered to repay sellers roughly $35mn as part of an agreement with the government to comply with the Act. The company was paying about $500,000 a month to settle the matter. The US government also sued for the appointment of a receiver, with that appointment being made on October 5, 2018.
“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,” Richard S. Schmidt, Sam Kane’s court-appointed receiver, said in the original petition filing.
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