Farmers Sue Banks for $28.5 Million in Knudsen Billings

Nearly 1,000 California dairy farmers who are owed $28.5 million for milk they delivered to Knudsen before it collapsed last fall sued the Los Angeles dairy company’s bankers Tuesday to recover the money.

In lawsuits filed in Los Angeles and 13 other Superior courts around the state, farmers charged that the banks deceived them about Knudsen’s financial health. The banks also prevented Knudsen from paying the farmers for milk, the suit alleged.

According to the suit, a group of banks led by New York-based Citicorp in June, 1985, lent a nearly insolvent Knudsen $20 million to finance the troubled dairy’s day-to-day operations. The suit alleges that the banks “had every intention of not paying Knudsen milk producers” in order to protect their own investment.

Knudsen was the largest dairy company in the West until it filed for bankruptcy protection last September. Most of the dairy company’s holdings have been sold to repay its creditors, including $150 million to Citicorp and four other banks that lent it money.

Financing for Acquisition

The bank loans went to finance Knudsen’s acquisition of rival Foremost Dairies in June, 1985. The banks lent Knudsen $168 million to pay for the $50.1-million purchase of Foremost as well as to refinance Knudsen’s other debt.

Knudsen and its subsidiaries pledged virtually all their assets to the banks as collateral for the loan.

According to the suit, Knudsen first sought funds for the Foremost acquisition from Wells Fargo Bank, which required Knudsen to come up with $20 million in equity before it would finance the deal.

But giant Citicorp, which was seeking entry into the California banking market, made a competing offer, the suit claimed. Citicorp didn’t require the additional equity. Instead, Citicorp lent Knudsen a $20-million “special advance” to keep it going on a day-to-day basis.

According to the suit, Citicorp recovered the $20 million last July when Knudsen failed to pay dairy farmers for milk. The dairymen “unwittingly put up money” that Citicorp should have required Knudsen itself to put up in order to get the loan, Michael Bidart, lawyer for the farmers, said in an interview.

A spokeswoman for Citicorp in New York didn’t respond to a request for comment on Tuesday. Spokesmen for other banks participating in the loan--Goldome Bank, a Buffalo, N.Y., savings bank, and the National Bank of Canada in Montreal--also failed to respond to requests for comment. A spokeswoman for Security Pacific Bank in Los Angeles said it was the bank’s policy not to comment on litigation. A spokesman for Wells Fargo in San Francisco said bank officials had not seen the suit and couldn’t comment.

The suit alleges that the banks deceived dairy farmers about Knudsen’s financial health so they would continue to ship milk to the ailing company. Without the milk, Knudsen would have been unable to continue its operations and the banks’ ability to recover their loans would be in jeopardy, the suit says.

If the dairy farmers had known that Knudsen was on the verge of collapse last summer, they would have found other customers for their milk, the suit says.

Awareness Claimed

Citicorp was well aware that Knudsen was in poor financial shape, the suit said. Under a factoring arrangement with Citicorp, all of Knudsen’s accounts receivable went into a special account from which Citicorp repaid itself before paying other creditors, it claimed.