Creamery says books off at least $50 million

Chapter 11 bankruptcy protection sought; cooperative members hope to make a bid to buy back business

Originally published in the "4-23-09" issue.

Tuesday was former Humboldt Creamery CEO Rich Ghilarducci’s 49th birthday. It was also the day that the 80-yearold cooperative filed for Chapter 11 bankruptcy protection.

Wednesday morning, creamery board members and management appeared before a federal bankruptcy court judge in Santa Rosa, in an emergency hearing asking for approval of a $3 million “bridge” loan to keep the creamery running and producing through the summer and to help pay dairymen and plant employees. The “debtor in possession” loan or DIP was granted, reported creamery board member Dennis Leonardi on Wednesday afternoon, returning from the hearing.

Meanwhile, CoBank, now the “debtor in possession,” wants the company to sell the business. The 50 member/owners say they will try and find the financing to buy it back.

What is the business really worth? When it was pitched to potential investors late last year, the financial statements said the cooperative had $84 million in assets. Now, creamery officials say that number may be off by more than $50 million.

“It’s hard to believe,” said new CEO Len Mayer. “I think everyone is incredulous. How in the world is it possible to have banks and all the other auditors looking at this and it’s not found? It seems unbelievable.”

Ghilarducci’s attorney has said his client had done nothing wrong. While the alleged fraud case is being investigated by federal authorities, no charges have been filed.

Mayer said if the bridge loan is approved, it will allow the creamery to operate “normally” through the summer, build inventory and “put on a second shift.”

Producers were paid only a portion of what was due them for March milk on April 15. Mayer said $380,000 in checks were written with another $270,000 paid on Tuesday. On Friday, Mayer said he hopes the final $75,000 due to the producers will be paid this Friday. In all, the creamery states in court filings that the association’s members collectively have foregone approximately $5.7million since January 1, 2009.

With the business up for sale, Mayer said CoBank will obviously try to get the highest bid. He said the company’s estimated value is between $20 million and $60 million.

“There’s been a number of dairy companies who have expressed interest and some have visited the plant,” he said. “The interest ranges from a minority stake to much more of that.”

Dairy Farmers of America already owns 25 percent of Humboldt Creamery LLC. Mayer said the company “doesn’t have a whole lot of interest” in the creamery, “at this point.” He said Clover Stornetta, Organic Valley, Aurora Dairy and Foster Farms Dairy have all expressed interest.

As to members buying the company, Mayer and creamery board member Dennis Leonardi said the members are working on a plan to get financing to allow them to make a bid. Mayer said there are obvious advantages to keeping the creamery locally owned.

“Probably the biggest advantage is that there are no real wild cards,” he explained. “The owner would not be subject to the whims of an economy in Indonesia, France or Pennsylvania for that matter. They would know who they are and what their mission is. If a large dairy company owns it from a different state, there’s just more unknowns.”

In the emergency motion made Wednesday before the court “authorizing the debtor to honor pre-petition obligations to employees,” the argument is made that loan money is needed meeting employee obligations “to ensure a smooth transition into Chapter 11” and that the payroll amounts should be paid ahead of unsecured claims.

“The debtor is continuing to operate its business post-petition and believes that failure to honor certain employee-related obligations in the ordinary course of business would create hardship and discontent among its employees,” the motion states, adding that if the creamery can’t assure its employees that it will promptly pay employment related payments and benefits, “employee morale and the debtor’s operations will suffer.”

In all, $245,000 is requested to meet payroll and benefit obligations for 170 employees.

Any delay in meeting employee obligations, according to the motion, “will destroy its relationship with its employees, irreparably impair employee morale, andmay cause a mass exodus of employees.”

As for member producers, the court declarations state that dairymen are in “extreme financial distress.”

If the payments are not caught up and paid on time, creamery officials say the members “will face grim financial consequences, including defaults to their lenders, bankruptcy and liquidation.”

Failure to make “immediate” payment will likely be the “final straw” for many of the members, states the declaration.

Leonardi also presented a declaration on Wednesday to the court, stating that as of April 19, in addition to approximately $60,000 due to him for his January milk and about $108,000 due for March milk, he is owned approximately $70,000 by the creamery for milk delivered through Monday.

Leonardi states that he has not been able to buy $15,000 - $20,000 worth of seed needed to plant for future feed for his cows next winter and spring. He is also concerned about costs to irrigate his farmland with electric bills runing about $8,000 per month in the summer.

“We are small family farmers that have been tending the land and dairying for gnerations,” stated Leonardi. “We don’t have massive reserves to weather this massive economic storm and there is no bailout of stimulus money, just sweat equity lost.”

Meanwhile, according to minutes from the creamery’s board meeting last Friday, in the event Mayer resigns from his position, board members have agreed that former board member and dairyman Frank Leonardo would be hired as the association’s president, secretary and chief financial officer. The naming of someone to take Mayer’s place “in case he hits a redwood tree,” explained Mayer, is a legal necessity..