State Agency Says It May Attempt to Shut Knudsen

The director of the state Department of Food and Agriculture said Wednesday that he might try to shut down Knudsen’s California operations if the ailing dairy company can’t guarantee milk payments to dairy farmers.

However, Clare Berryhill, director of the Food and Agriculture Department, said the department’s options may be limited since Knudsen faces an involuntary bankruptcy court action, which freezes other legal actions against the firm.

“We will use whatever legal power we have to bring Knudsen to a close . . . unless they assure us they will pay dairy farmers on a daily basis,” Berryhill said.

Knudsen, the largest dairy in the West, produces one-quarter of the state’s dairy products. The Los Angeles dairy already owes farmers $36 million for milk. Winn Enterprises, its parent company, owes its lender, Citicorp Industrial Credit Bank, about $150 million. It also faces action in federal bankruptcy court in Los Angeles, where three of its creditors are seeking to force Knudsen to reorganize its finances.

Since June 16, dairy farmers have received cash on delivery for milk shipped to Knudsen under week-to-week agreements with Citicorp.

Berryhill said that Knudsen told him late Wednesday afternoon that it wasn’t sure it would be able to pay dairy farmers for milk delivered Friday. Berryhill said that Knudsen said it was still trying to obtain additional financing from Citicorp, which had agreed to extend the company $20 million a week in loans.

Meanwhile, Berryhill said, the department is developing contingency plans to shift Knudsen’s raw milk supplies to plants owned by other companies so that consumers would not experience a milk shortage if Knudsen were forced to close. “I feel we will be able to continue to supply milk to the consumer,” he said.

Meanwhile, a Knudsen spokesman confirmed on Wednesday that the company hired Gilbert C. Osnos & Co., a New York crisis management firm, to run the company. The spokesman said that an Osnos consultant, Kenneth E. Glass, 45, replaces Knudsen’s chief executive and president, both of whom resigned recently. Four other top Knudsen executives who resigned, including its chief financial officer, haven’t been replaced.

Knudsen said that, among his assignments with Osnos, Glass previously served as president and chief executive of Massey-Ferguson, a troubled Canadian manufacturer of farm equipment. The Osnos firm is also helping Knudsen find a permanent president and chief executive, the company said.

Berryhill said that in moving against Knudsen, he is considering increasing to $2 million per plant the size of bonds that the dairy is required to post.

The bonds, normally $20,000 per plant, are used to pay dairy farmers when a processor misses a milk payment to them.

He said the larger bonds would help protect dairy farmers if Knudsen missed another payment. But he acknowledged that it is more likely that Knudsen would be unable to post the bond and would have to close down.

In another step to protect the dairy farmers, he said the department might ask the bankruptcy court to place a lien against Knudsen’s assets on behalf of the 400 dairy farmers that supply Knudsen.