By Barry A. Chatz and Kevin H. Morse
Originally published in The Bankruptcy Strategist, Dec 2018 www.ljnonline.com/ljn_bankruptcy
On Oct. 3, 2018, the United States Bankruptcy Court for the Central District of California (Los Angeles) confirmed the Chapter 11 Liquidating Plan of Eclipse Berry Farms, LLC and its affiliated companies. Confirmation of the plan concluded a two-year journey from one of the largest strawberry growers in the country, with nearly $230,000,000 in annual revenue, to the cessation of operations and eventual liquidation.
An agricultural Chapter 11 case brings a unique set of circumstances generally not often prevalent in other Chapter 11 cases. Robert Marcus, an Illinois attorney specializing in food and agricultural matters, served as Chief Restructuring Officer of Eclipse and guided a team of professionals who transitioned more than 3,000 jobs, sold substantially all of Eclipse’s assets, avoided a $22,000,000 secured lien, and produced more than $13,000,000 for the benefit of creditors in less one year after filing for bankruptcy.
The History of Eclipse
At its origins, Eclipse began with a 240-acre farming operation in Oxnard, CA, which expanded over time. At its peak, Eclipse had a 2,500-plus acre farming operation and more than 3,000 employees working in offices and on farmland across its various leased farms and offices in Northern and Southern California. Eclipse did not own any of the real property on which it operated its farms or its offices, and was counterparty to more than 25 leases of real property.
December 2018
Eclipse’s core operation was farming strawberries and its expanded operations allowed it to offer an extended growing season over many of its competitors. Eclipse’s customer base included national retailers, brokers/wholesalers, and processors. In order to provide its extensive customer base with year-round strawberries, Eclipse also entered into supply agreements with strawberry growers in California, Florida and Mexico.
On Jan. 14, 2017, Eclipse’s founder passed away and, shortly thereafter, the members of Eclipse decided to exit the strawberry farming business and undertook a process to sell its businesses as a going concern — a business that ended calendar year 2016 with nearly $230,000,000 in gross revenue.
The Sale Process
On March 22, 2017, the Debtors retained Ken Nofziger and Murray Wise Capital, LLC, a Champaign, Illinois-based farm and agricultural focused financial advisory firm (MWC), to provide financial advisory services to Eclipse for the going-concern sale of its strawberry growing, packing, and marketing businesses.
MWC undertook a broad approach to marketing Eclipse’s assets by approaching private equity and other non-traditional potential purchasers, in addition to numerous businesses in the farming industry. By mid-May 2017, MWC went to the potential marketplace for the sale. MWC issued between 25-30 non-disclosure agreements to potential purchasers, and eventually received seven non-binding indications of interest prior to the July 2017 deadline, with a legitimate range in price of $45-$60 million for Eclipse’s assets and operations.
In late-July 2017, Eclipse’s lender informed Eclipse that it would no longer renew its long-standing $49 million lines of credit that were essential to Eclipse’s operations. Traditionally, the growing season in California began in August of the preceding year, with the season ending in July through November of the following year. Financing for farming operations followed the traditional growing season. Like most farms, Eclipse would draw on its line of credit at the beginning of the growing season (August), when overhead and capital were required to plant the new crops, and pay off the outstanding line of credit by the end of the growing season (following year).
Shortly after its lines of credit were pulled, Eclipse also received the financial results from its production for the first half of 2017, which was difficult for the strawberry industry as a whole as well as Eclipse. The company’s financials showed a loss between $5-6 million for the first half of 2017. As a result of its loss of financing and poor financial results, all legitimate indications of interest were no longer feasible as submitted for the purchase of Eclipse’s assets as a going concern.
By early August 2017, Eclipse-member Ventura Strawberry Farms, Inc. had advanced $21.6 million to Eclipse to satisfy the full amount of the line of credit and allow for Eclipse to begin the planting season. On Sept 1, 2017, Ventura filed a UCC-1 financing statement purportedly securing the $21.6 million July and August advances against all of Eclipse’s assets.
Chief Restructuring Officer Appointed
On Sept. 6, 2017, with the consent of the respective managers and members, Eclipse appointed Robert Marcus, Esq. of Maksimovich & Associates, P.C. as Chief Restructuring Officer. The CRO retained all Eclipse employees to wind-down operations and carry-out urgent concerns. As of Sept. 6, 2017, Eclipse had already undertaken substantial efforts toward its 2018 crop season. Eclipse planned 1,535 acres for the 2018 crop. By September 2017, Eclipse had made substantial progress in preparing its land for the 2018 crop, investing approximately $10 million in preparation for the 2018 crop season. The 2018 crop season expenditure was necessary given the narrow windows available for preparation and planting as well as preserving a potential going concern sale.
This expediency required the CRO to take immediate action to preserve the value of these critical investments. Eclipse completed the 2017 crop harvest by mid-November in Santa Maria and all remaining farming operations ceased in late November. All processing was completed by the end of November, with inventory remaining to be sold in cold storage. The Mexico-grown berry operations ceased imports in mid-December 2017.
Shortly after his appointment, with the assistance of MWC, the CRO identified and began negotiations with Superior Fruit for the assumption of certain agricultural leases, crop expense reimbursement, and purchase of substantially all of Eclipse’s assets. By Sept. 25, 2017, the CRO had agreed to terms with Superior Fruit that, in summary, consisted of the assumption of a majority of Eclipse’s leases, significant reimbursement and assumption of 2018 crop expenses related to such leases, cash payments for the reimbursement of labor related to such leases, purchase of certain equipment, and purchase of certain inventory. A total of $5.5 million was paid to Eclipse prior to December 2017, and nearly all 3,000 former agricultural employees had been paid in full and transitioned to Superior Fruit.
Overall, from Sept. 6, 2017 through the end of 2017, Eclipse had gross deposits in excess of $45 million from completion of the 2017 crop season harvest, processing, wind-up of Mexico, recovery of receivables, and reimbursement for 2018 crop expenses. After payment of necessary expenses, including operational and downsizing costs, the post-September 2017 activities resulted in net benefits to Eclipse of more than $12,000,000 in cash on hand and more than $13,000,000 in relieved liabilities.
The CRO continued negotiations with creditors in an attempt to complete the liquidation of Eclipse’s assets without the filing of a bankruptcy petition. The CRO also engaged restructuring counsel to ensure an equitable distribution to all creditors would not be disrupted by disagreeable creditors. Unfortunately, on Jan. 15, 2018, one of Eclipse’s largest unsecured creditors, informed the CRO that, rather than negotiate an equitable resolution, it would file an action against Eclipse, which would cause significant harm to Eclipse’s ongoing efforts to maximize recovery for all creditors.
The Chapter 11 Cases
On Jan. 16, 2018, the threatened creditor actions forced Eclipse and its affiliated companies to file Chapter 11 petitions for relief in the United States Bankruptcy Court for the Central District of California (Los Angeles). The three related Chapter 11 cases were jointly administered and heard before the Hon. Barry Russell.
Following the entry of first day orders, the Office of the United States Trustee appointed seven creditors to serve on the Official Committee of Unsecured Creditors (the Committee).
The exigent circumstances surrounding the filing of the bankruptcy cases further prevented the complete consummation of the sale of Eclipse’s assets to Superior Fruit. This interruption in the transaction and transition potentially put the 2018 crop season at risk. With Eclipse’s $10,000,000 capital investment for the 2018 crop season on the line, only 37 days after the petition date, the Bankruptcy Court entered an order authorizing and approving the sale of substantially all of Eclipse’s remaining assets to Superior Fruit and assumption and assignment of all unpaid 2018 crop expenses.
On March 9, 2018, Eclipse closed the sale of substantially all of its assets with Superior Fruit, and an additional $1,780,488.45 was paid to the estates. In total, the Superior Fruit transaction provided the bankruptcy estates $7,280,488.45 in cash and the reduction of more than $10 million in liabilities. Further, as part of the Superior transaction and as a result of negotiations between Eclipse, Ventura, and the Committee, the parties agreed to set aside $2,750,000 for the benefit of general unsecured creditors, to be paid through a plan, to all non-insider general unsecured claimants.
The Issue of Wages
In addition to preserving the 2018 crop season and recouping Eclipse’s capital investment, a unique issue Eclipse faced was the reissuance of paid prepetition wages to former Eclipse agricultural workers. Most of Eclipse’s 3,000 prepetition employees were seasonal agricultural workers who worked in the fields and followed the yearly planting and harvest seasons throughout California as well as other states and countries. Many of these employees did not rely on traditional banking methods. For example, employees would often treat their paychecks as a “savings” account by holding on to their paychecks, rather than cash them or deposit them in a bank. The checks were safer to travel with than cash, and most employees did not open traditional bank accounts. Prior to the cessation of farming operations, Eclipse timely funded and provided all prepetition wages to the agricultural workers; however, the agricultural workers’ distinct financial methods resulted in a significant number of outstanding checks for certain employees and more than $200,000 in unpresented prepetition checks. The agricultural workers relied on the paychecks for their day-to-day living expenses and as a necessary backstop when the growing and harvesting seasons slowed.
On March 27, 2018, the Bankruptcy Court entered an order authorizing Eclipse to pay the outstanding prepetition wages to the agricultural workers. The agricultural workers order permitted Eclipse to pay all unpaid, prepetition wages for the agricultural workers immediately and as an administrative priority, even if the subject wages were outside of the 180-day priority period.
Another Roadblock
On April 3, 2018, Ventura filed a secured claim in the amount of $22,484,084.07, and a general unsecured claim in the amount of $9,176,304.67 in the bankruptcy cases (the VSF Claims). The secured portion of the VSF Claims stood as a barrier to any recovery for the more than $22,000,000 in general unsecured claims, beyond the $2,750,000 carve-out from the Superior Fruit transaction.
On April 16, 2018, without leave of the Bankruptcy Court or derivative standing from Eclipse, a malfeasant creditor filed an adversary proceeding against Ventura and the shareholders and respective trustees of Ventura seeking, inter alia, avoidance of the UCC-1, equitable subordination of the VSF Claims, and recharacterization of the VSF Claims, plus, an open-ended demand for damages (Unauthorized Litigation). Eclipse and Ventura opposed the Unauthorized Litigation, and Eclipse sought dismissal of the Unauthorized Litigation, including sanctions for violation of the automatic stay.
On Aug. 2, 2018, the Bankruptcy Court entered an order approving a global settlement between Eclipse, Ventura, the Committee, and the remaining defendants in the Unauthorized Litigation. In summary, as part of the Ventura settlement, on the effective date of a plan, Ventura would release, waive, and forever relinquish any lien against Eclipse’s property, created pursuant to the UCC-1. The release of the UCC-1 would allow for general unsecured creditors to share in a distribution of estate assets. Furthermore, in agreement for the consensual release of Ventura’s UCC-1, Ventura would receive a distribution on account of the VSF Claims on the effective date of the plan approximately equal to 25% of the outstanding VSF Claims. On the date of filing the Ventura settlement, it was estimated that, as a result of the global settlement, general unsecured creditors would receive an approximate distribution between 35-40% of outstanding unsecured claims.
Approval of the Ventura settlement resolved all outstanding issues raised in the Unauthorized Litigation; however, it did not resolve the issues attendant with its improper filing. On Sept. 24, 2018, the Bankruptcy Court approved a settlement of all outstanding claims Eclipse had against the malfeasant creditor for the filing of the Unauthorized Litigation. As part of the settlement, Eclipse agreed to the allowance of creditor’s claim with a $10,000 reduction on any distribution on behalf of the claim as a sanction for the filing of the complaint.
Less than six months after the petition date, on July 2, 2018, Eclipse and its affiliated debtors filed an Amended Disclosure Statement and Amended Chapter 11 Liquidating Plan. On July 31, 2018, the Bankruptcy Court approved the Amended Disclosure Statement and set Oct. 3, 2018, as a hearing on confirmation of the amended liquidating plan. No objections to the plan were filed and, on Oct. 3, 2018, less than ten months after the petition date, the Bankruptcy Court entered an order confirming the plan. The plan went effective on Oct. 18, 2018, when Eclipse paid more than $7,000,000 to Ventura and transferred more than $6,000,000 to a liquidating trust.
Analysis
The end of Eclipse Berry Farms, LLC came suddenly and seemingly unexpectedly. The ability of the professionals and parties-in-interest to mutually resolve the major issues in the case, the sale of Eclipse’s assets, the agricultural workers, and Ventura’s secured status, allowed the CRO and his professionals to hand over more than $13,000,000 to creditors in less than a year. The more than 3,000 agricultural workers will continue to work in the fields paid in full from Eclipse, creditors will receive a substantial distribution, and, in summarizing The Beatles, there will be strawberry fields forever or, at least, until the next La Niña event.