Knudsen Seeks Way to Avoid Dairy Closure by Weekend

Lawyers for Knudsen and its two largest creditors launched round-the-clock negotiations late Thursday to come up with enough money to keep the West’s largest dairy company operating beyond today.

The talks became necessary after a Los Angeles Bankruptcy Court judge Thursday evening blocked an infusion of cash from a new lender, claiming that it would have jeopardized the rights of other creditors. Without new loans, Knudsen will be out of business by Saturday, the company’s chief executive told the court.

Meanwhile, many dairy farmers throughout the state stopped shipping milk to Knudsen on Thursday after the company said it could no longer pay them. Robert Feenstra, general manager of the Milk Producers Council in Ontario, said it appeared that “no milk went to Knudsen today (Thursday), not a drop.” Knudsen normally buys 25% of the milk produced in California.

The developments came a day after Knudsen filed for protection from its creditors under Chapter 11 of the federal bankruptcy law. The company is buried under a mountain of debt that it took on as a result of its acquisition of rival Foremost Dairies last year.

Request Denied

At an unusual night hearing Thursday, Bankruptcy Judge Barry Russell denied Knudsen’s request to borrow $5 million from Los Angeles-based Foothill Credit Corp., saying the new investment would threaten the ability of Knudsen’s existing creditors to recoup the money owed them.

The request was opposed by New York-based Citicorp, Knudsen’s biggest creditor with $155 million at stake, because under the terms of the loan, Foothill would be paid before Citicorp if the dairy were liquidated. But Knudsen’s second largest creditor, FD Partners, an investor group that sold Foremost and is owed $40 million, supported the request.

Russell called Knudsen’s predicament a “disastrous situation” and suggested that lawyers for Citicorp and FD Partners negotiate through the night to determine if new cash can be found for Knudsen.

“The ball is in their (Citicorp’s) court and in the junior secured creditors’ (FD Partners),” he said.

Citicorp’s lawyers declined to comment Thursday.

“It’s really rather sad, to say the least,” Russell said. “Certainly it’s a tragedy for the employees and everyone involved in this case.”

Jeffrey C. Krause, a lawyer representing Knudsen, said the company has enough money to pay its 5,000 employees as scheduled today. But without a new, $5-million loan, Knudsen will have to begin shutting down late today, Knudsen chief executive John P. Brincko testified.

The company has been losing $500,000 a week, Brincko said, and has depended for its survival on multimillion-dollar weekly cash infusions from Citicorp. As an operating company, he estimated, Knudsen is worth $200 million but would be worth only $80 million if liquidated.

In its bankruptcy filing, Knudsen and its related companies had liabilities of $601.3 million and assets of $525.2 million. In addition to $195 million owed Citicorp and FD Partners, Knudsen owes $20 million to other secured creditors and about $100 million to unsecured creditors.

Meanwhile, state government and dairy industry officials predicted no milk shortage in California as a result of Knudsen’s problems.

“There is enough processing capacity for milk in the state, and I imagine the grocery stores are contacting other processors to obtain milk,” said Glenn Gleason, chief of the milk pooling branch at the state Department of Food and Agriculture.

Alternative Sources

Jack Brown, chairman and chief executive of Colton-based Stater Bros., one of Knudsen’s largest milk customers, said Knudsen “has advised us that they have enough milk supplies for over the weekend.” He said, however, that Stater has developed alternative sources of milk and “will put those plans into motion if we get the word Knudsen can’t supply us.”

Officials at Knudsen’s parent company, Winn Enterprises, refused to confirm that milk shipments had stopped or to discuss the company’s financial problems, according to spokesman Simon Barker-Benfield.

Knudsen had been paying its dairy farmers on a cash-on delivery basis since July, after the company failed to pay dairy farmers $36 million for milk.

Plant Closure

In another development, Knudsen on Thursday began making plans to close one of its plants. Knudsen notified workers that it planned to close a plant in Tipton, Calif., Monday, said Ronald Costa, a Teamsters Union official in Visalia. The Tipton plant produced powdered milk that was sold as surplus to the federal government through the Commodity Credit Corp.

Knudsen has seven plants in California, including two in Los Angeles. In order to pay off its $266.2-million debt, the company has said that it is looking for a buyer for some or all of its business.