Humboldt Creamery, LLC

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
1
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re
HUMBOLDT CREAMERY, LLC, 	No. 09-11078
Debtor(s).
______________________________________/
Memorandum on Sale of Creamery Assets
_________________
Debtor Humboldt Creamery, LLC, filed its Chapter 11 petition on April 21, 2009. 	Its business
consists of processing, distributing and marketing an array of dairy products, including powdered milk,
fluid milk, packaged ice cream and various frozen novelty products.
On July 7, 2009, the debtor filed a motion to establish bid and sale procedures for the sale of its
creamery operations, which are essentially all of its assets. The “stalking horse” buyer was named as
Foster Farms Dairy, which would either be the successful bidder at a price of $20.5 million or be paid
a $300,000.00 break-up fee. The court with the concurrence of the Creditors Committee, approved the
procedure on a provisional basis.
There were no bidders other than Foster Farms. The principal secured creditor, CoBank, is
owed over $50 million. Thus, approval of the sale leaves little for the unsecured creditors other than
some tort claims which may or may not be covered by insurance. CoBank, which supports the sale,
has agreed to some concession in order to keep the bankruptcy estate at least administratively solvent.
Objections to the sale were filed by the Creditors Committee and by a large group of unsecured
note holders. The court ordered a full hearing with witnesses to be held on August 13, 2009. At the
hearing, the debtor announced that both objections had been withdrawn. There were no objections to
the court making its necessary findings based on the declarations filed in support of the sale.
The sale of substantially all of a Chapter 11 debtor’s assets outside a confirmed plan of
Entered on Docket
August 14, 2009
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 09-11078 Doc# 212 Filed: 08/14/09 Entered: 08/14/09 15:01:18 Page 1 of
3

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26 	1See In re Chrysler LLC, – F.3d –, 2009 WL 2382766*6 (2nd Cir. 2009).
2
reorganization is often called “sub rosa” plan, although a more accurate description might be a “de
facto” plan, a “rump” plan, or a “reorganization in effect” 1 in that it is a court-approved financial
restructuring stripped of all the procedural safeguards built into Chapter 11 of the Bankruptcy Code by
Congress, including disclosure and voting. Legal rights are reduced to the sole discretion of a lone and
often over-worked bankruptcy judge.
Courts have articulated various factors the court should consider when presented with a
reorganization in effect. The factors generally include a business justification based on sound
judgment, the nature of the asset and whether it is increasing or decreasing, whether the sale furthers
the interests of the debtor, creditors and equity holders alike, and whether it renders creditors’ rights
under Chapter 11 meaningless. In re Lionel Corp., 722 F.2d 1063, 1071 (2nd Cir. 1983); In re Braniff
Airways, Inc.,700 F.2d 935 (5th Cir.1983); In re Continental Airlines, Inc., 780 F.2d 1223, 1228 (5th
Cir. 1986); In re Work Recovery, Inc., 202 B.R. 301, 304 (Bkrtcy.D.Ariz.1996).
Modernly, one overriding factor has come to dominate consideration of sales of substantially
all of a debtor’s assets outside a proper plan: whether the asset is a “melting ice cube” with its value
decreasing day after day and no ability to continue in business for any length of time. See In re
Chrysler LLC, supra, at *8. That is certainly the case here, with the debtor arguing that it will not have
funds to operate after September 4, 2009, so the entire going concern value of the debtor’s business
will be lost if the sale is not approved. This is the debtor’s major support for its desired finding that
there is a compelling business justification for a sale without a formal plan.
The problem with the “melting ice cube” argument is that it is easy enough for the debtor to
unplug the freezer prior to bankruptcy. Historically, the best preparation for a successful Chapter 11
reorganization was to file early, husband resources and arrange postpetition financing to give the
debtor the best possible chance to continue its business in Chapter 11. Modernly, it is a better tactic to
wait until the last minute and then file with no ability to survive in Chapter 11. This compels the court
Case: 09-11078 Doc# 212 Filed: 08/14/09 Entered: 08/14/09 15:01:18 Page 2 of
3

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
2It also places the creditors, like the court, “under the gun” with no meaningful alternative to
the debtor’s sale even though they get little or nothing out of it.
3
to find the urgency and sound business reason necessary to approve the sale.2 Unless the bankruptcy
judge is willing to show exceptional judicial courage, he or she must approve the sale. While
nominally “presiding” over the case, the judge is reduced to a figurehead without any meaningful
discretion and might as well leave his or her signature stamp with the debtor’s counsel and go on
vacation or shift attention to consumer cases where the law may still mean something.
Since all objections to the sale in this case have been withdrawn, the court accepts the debtor’s
representations that the property has been fully marketed and the only offer is that of Foster Farms.
The court also accepts that a sale is necessary because the debtor has no ability to continue its
operations. The court would like to extend an inquiry into the relationship between insiders of the
debtor and Foster Farms, but will not do so sua sponte since the creditors have acquiesced in the sale
after raising the issue. Accordingly, the court accepts the debtor’s representations that the sale is put
forth in good faith and that Foster Farms has proceeded in good faith. 	The court also finds that notice
was proper, the court has jurisdiction by virtue of 28 U.S.C. § 1334 and this proceeding is a core
proceeding pursuant to 28 U.S.C. §§157(b)(2)(A), (M), (N) and (O). The court reluctantly concludes
that the purchase price is fair and reasonable and in the best interests of the bankruptcy estate.
For the foregoing reasons, the sale will be approved. A separate order will be entered. This
memorandum constitutes the court’s findings and conclusions pursuant to FRCP 52(a) and FRBP
7052.
Dated: August 14, 2009
SAlan Jaroslovsky
U.S. Bankruptcy Judge
Case: 09-11078 Doc# 212 Filed: 08/14/09 Entered: 08/14/09 15:01:18 Page 3 of
3