Groeb Farms files bankruptcy; Peak Rock affiliate to acquire equity

By Caroline Salls

Pittsburgh, Oct. 3 - Groeb Farms, Inc. made a prepackaged Chapter 11 bankruptcy filing Tuesday in the U.S. Bankruptcy Court for the Eastern District of Michigan.

Chief financial officer Jack Irvin Jr. said in a statement filed with the court that Groeb Farms entered into a deferred prosecution agreement (DPA) in February 2013 related to an extensive Department of Justice investigation of the honey industry and the possibility that honey was being "transshipped" to conceal its origins.

The agreement required Groeb Farms to accept responsibility for historical purchases of transshipped honey, continue cooperating with the government's ongoing investigation for two years, pay a $2 million fine, dispose of any and all Chinese-origin honey in its possession that entered the country in violation of duty requirements and stop selling any of its finished goods containing such Chinese honey.

Although the company had hoped that the DPA would enable it to have a fresh start with new executives and a new compliance program, Irvin said two civil putative class action lawsuits were filed against it in April 2013 by producers, packers and/or distributors of honey.

Irvin said the DPA fine, attorneys' fees and litigation and other expenses have severely strained, and would continue to severely strain, the company's liquidity, and the mere existence of the class action lawsuits negatively affects Groeb Farms' value outside of a bankruptcy proceeding and impedes potential buyers from purchasing the company at a maximized value to resolve its financial issues.

Irvin said Groeb Farms defaulted on a credit agreement, and the lender imposed a $750,000 reserve in borrowing in July and reduced or limited the company's available credit.

"These actions significantly reduced the debtor's available cash, rendering it unable to buy necessary raw honey needed in the operation of its business," Irvin said.

Plan agreements

Irvin said Peak Rock Capital affiliate Honey Financing Co., LLC agreed to restructure Groeb Farms' debt obligations and acquire the equity of the reorganized company.

Groeb Farms entered plan support agreements with Honey Financing, as well as senior subordinated debtholders Argosy Investment Partners II, LP and Marquette Capital Fund I, LP.

The company also reached a settlement of the putative class action resulting in a restructuring support agreement with the class members.

Under the proposed settlement, the class action claimants will receive $1.75 million in proceeds from Groeb Farms' directors and officers' insurance policy.

Creditor treatment

Treatment of creditors under the prepackaged plan will include the following:

• Administrative claims, priority tax claims and other priority claims will be paid in full in cash;

• Holders of DIP facility claims will receive a share of new equity in satisfaction of $7 million of the claims, and will be paid in full in cash for the balance of the claim;

• Holders of senior loan claims will receive cash in satisfaction of any claim in excess of $3 million and a share of new equity in satisfaction of all remaining claims;

• Holders of other secured claims will either be paid in full in cash, have their claims reinstated or receive the collateral securing the claims;

• Holders of senior subordinated note claims will receive a share of new senior subordinated notes and new warrants;

• Holders of trade claims will receive either a cash recovery equal to the claimant's distribution if the claimant and company enter into a new trade agreement or a share of proceeds from a general unsecured claims litigation trust.

The company will satisfy the cash recovery by paying 110% on each invoice for products ordered post-effective date with each holder that executes a new trade agreement until the trade claim distribution has been paid in full. The distribution will be satisfied by no later than 18 months from the plan effective date;

• Holders of other unsecured claims will receive a distribution from the litigation trust;

• Unsecured convenience class claims will be paid in full in cash, subject to a $250,000 cap; and

• Holders of existing equity interests and section 510(b) claims will receive no distribution.

DIP financing

In conjunction with the bankruptcy filing, Groeb Farms obtained a commitment for $27 million of debtor-in-possession financing from Wells Fargo Bank, NA assignee HC Capital Holdings 0909A, LLC.

The interest rate will be Libor plus 250 basis points.

The facility will mature on the earliest of 110 days after the bankruptcy filing date, 36 days following the filing date unless a final order has been entered and termination of the facility.

The company received interim access to $17.1 million of the financing. The final hearing is scheduled for Nov. 7.

Debt details

According to court documents, Groeb Farms has $50 million to $100 million in both assets and debt.

The company's largest unsecured creditors are:

• Bees Brothers LLC of Miami, with a $1.98 million trade claim;

• Little Bee Impex, Kashmir Apiaries Exports, Thapar, Inc. and World Food Basket Inc., with a combined $1.79 million claim;

• Sunland Trading, Inc. of New Canaan, Conn., with a $1.72 million trade claim;

• JET of Onsted, Mich., with a $1.55 million subdebt claim;

• Delta Food International Inc. of Corona, Calif., with a $1.44 million trade claim; and

• Lamex of Bloomington, Minn., with a $1.42 million trade claim.

The company is represented by Tamar Dolcourt, Judy A. O'Neill and John A. Simon.

Groeb Farms is an Onsted, Mich.-based processor and packager of honey for food manufacturers, food service companies and retail customers. The Chapter 11 case number is 13-58200.

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