A Food Fight Over Egg City : Scramble: The majority owner of a Moorpark egg ranch files a countersuit against his Japanese partner, claiming the company conspired to take over the business.

In March, 1989, Richard Carrott got a letter from his Japanese partner in Egg City, a Moorpark egg ranch. The partner, a division of the Japanese Okura & Co., Ltd., says it loaned Egg City about $30 million and helped the ranch climb out of bankruptcy. But Carrott wasn’t feeling very good about his relationship with the Japanese group. Not long before the letter arrived, he’d had some angry exchanges with some Okura executives at Egg City.

The letter, Carrott said, made him feel like the moment in a failing marriage when the husband or wife realizes “things just weren’t like they always were before.”

“Do not move, as mountain does not,” wrote Hiroshi Toyokawa, president of Okura’s American subsidiary, quoting a Japanese shogun in the letter to Carrott. “Stay quiet, as forest is always so.” Then Toyokawa added, more sternly: “You and (Carrott’s other partner) Mr. Rosen have been trying my patience.”

Carrott says he considered the letter a threat. “I was floored,” says Carrott, who owns 54% of The Careau Group, the company that operates Egg City.

But R. DeWitt Kirwan, Okura’s attorney, laughs at the mention of Toyokawa’s letter, saying it was fatherly advice from a seasoned executive. The note, he says, was centered on Toyokawa’s suggestion that Carrott should avoid being “angry or nervous or emotional very often.”

It’s been hard for either side to be calm recently. Each has sued the other in U.S. District Court. Okura, the Japanese company that owns 40% of Egg City, in February sued to foreclose on Egg City, saying Careau defaulted on $30 million in loans. Two weeks ago, Careau, under Carrott’s control, countersued Okura for $72.5 million in damages, claiming the Japanese trading company set out secretly to acquire Egg City “at a fraction of its true value” by forcing Okura into default and taking control of the company as part of an elaborate business conspiracy.

The case isn’t likely to come to trial before the end of the year. Attorney Kirwan calls it “a simple vanilla collection action.”

Careau’s attorney, A. Barry Cappello, says it’s a story of “insidious business practices by a Japanese trading company.”

The case pits Kirwan, a fairly staid attorney with the downtown Los Angeles law firm Lillick & McHose, against Cappello, a flamboyant Santa Barbara lawyer known for his work in lender liability cases, much like the Egg City case, in which borrowers claim that the lenders have defrauded them or simply interfered with business.

Cappello won a $37 million judgement--later overturned--in one of the earliest and best known lender liability cases, claiming that the Bank of America forced some Sonoma County apple growers out of business by calling loans too early.

Lender liability cases have multiplied in recent years, but they’ve become harder to win, according to Hal Scott, a professor at Harvard Law School. “The appellate courts have cut back severely on judgements issued in lower courts, and I think the trend is to limit the liability of lenders,” Scott said.

This liability case is the outgrowth of the chronic financial problems at Egg City--once the world’s largest egg farm with 3.5 million chickens, according to the Guinness Book of World Records. Egg City was losing about $300,000 a month before it filed for Chapter 11 bankruptcy protection in 1986, Carrott said. Careau bought the ranch in 1985 in a $19-million leveraged buyout from Kroger Co., the Cincinnati-based grocery chain.

In 1986, the United Farm Workers struck Egg City, after the ranch filed for protection from its creditors. Carrott claimed that Egg City’s losses at the time stemmed from labor costs and asked the bankruptcy judge to approve a $2-an-hour wage cut. The judge granted the decrease, over the UFW’s objections, but the strike went on, leading to boycotts of wholesalers and restaurants that bought Egg City eggs.

In late 1987, Okura--which had been buying millions of dollars worth of eggs each year from Egg City--reached an agreement with Carrott under which it would loan Careau $13 million to pay off creditors and come out of bankruptcy--in exchange for a 40% stake in the ranch.

Okura said it lent Careau the money to keep the ranch going as a reliable source of eggs for the trading company. Okura also sent two executives to work at Egg City, and sit on its board of directors.

Okura soon lent more money to Careau--a total of about $30 million, Okura claims, to upgrade the ranch and keep it operating. Okura now complains that Egg City is $19.8 million behind in making principal and interest payments on that debt.

While the lawsuit proceeds, Careau maintains that Egg City has been making a profit since October and is not falling further into debt, as Okura claims.

The thrust of Careau’s countersuit against Okura is that the Japanese company structured its investment from the start in a way that guaranteed Careau would eventually default on the loans, and turn over Egg City to Okura.

The company’s evidence against Okura includes a memo dated just about a month after the original deal with Okura was made in January, 1988. The memo between Okura officials discusses the possibility of foreclosing on the $13-million loan almost immediately after signing the deal, according to Careau’s complaint, but dismisses the possibility because “even third parties would probably believe that Okura contrived the takeover.”

Lawyer Kirwan says the memo discussed a number of possibilities for dealing with new demands for loans and maintains that the fact that Okura didn’t try to foreclose then is proof of the Japanese company’s good faith.

Careau’s suit also claims that the Japanese group coerced him into agreeing to the loan by delaying negotiations until he had no other choice but to sign for it. Kirwan denies this. Careau also alleges that when Carrott went to put his signature to the deal in December, 1987, that he was forced to sign blank pages so he would not know that the terms of the deal had secretly been changed.

But Kirwan said that not only were the papers on hand at the signing, but everything in them had been discussed and negotiated for months.

Carrott blames much of Egg City’s troubles since early 1988 on Okura. He claims Okura forced Egg City to sell a large amount of egg products to the Japanese Q.P. Corporation--a good customer of Okura’s--below production costs, causing Egg City a loss of up to $3 million.

Kirwan denies that Okura pressured Careau into the contract and says the set-priced egg-buying deal with Q.P. was a good one when it was struck, before egg prices started to climb in late 1988.

Careau’s suit also claims that Okura’s two representatives at Egg City dealt behind Carrott’s back.

The suit claims that the March, 1989, letter from Toyokawa containing the shogun’s advice followed Carrott’s discovery that the two Japanese executives were preparing secret financial reports for Okura about Egg City.

Kirwan said the letter stemmed from a disagreement about whether Egg City should reimburse Carrott for about $821,000 in expenses, including some household expenses. A 1985 employment contract called for the company to make the reimbursements, but Carrott hadn’t included them in paper work submitted during Careau’s bankruptcy proceedings.

Careau’s suit also claims that Okura cost Egg City potential profits by negotiating along with Q.P. Corp. to buy a stake in a major Midwest egg producer late last summer. In January, Q.P. Corp. acquired a 56% stake in Henningsen Foods without Okura’s involvement. Careau claims that acquisition makes both Okura and Q.P. “direct competitors of Egg City.”

But Okura decided not to invest in the Midwest egg producer to avoid any such claim of conflict, according to Kirwan, Okura’s attorney, and he said the Henningsen deal wouldn’t have hurt Egg City, anyway.

Careau’s attorney Cappello claims that matter is more complex than it seems--and that the case, too, is far more complex than the usual foreclosure.

Said Cappello: “I’m not going to let them file some simple little pleading saying it’s just a loan and that’s all.”