Egg City Partners Hurl a Scramble of Charges : Litigation: A legal feud is raging as the Moorpark ranch claims its Japanese partner, Okura & Co., conspired to take it over. Okura denies it.
In March, 1989, Richard Carrott received a letter from his Japanese partner in Egg City, a Moorpark egg ranch. The partner, a division of the Japanese Okura & Co., 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 group. Not long before, he had had some angry exchanges with some Okura executives at Egg City.
And then there was the letter, which Carrott says made him feel as one would at that moment in a failing marriage when one realizes that “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 has been hard for either side to be calm recently. Each has sued the other in U.S. District Court. In February, Okura, the Japanese company that owns 40% of Egg City, sued to foreclose, saying Careau defaulted on $30 million in loans. Next, Careau, under Carrott’s control, two weeks ago countersued Okura for $72.5 million in damages, claiming that 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 as part of an elaborate business conspiracy.
The case isn’t likely to come to trial before the end of the year, but attorney Kirwan says, “It’s a simple vanilla collection action.”
Careau’s attorney, A. Barry Cappello, counters that it’s a story of “insidious business practices by a Japanese trading company.”
The case pits Kirwan, a fairly staid attorney with the downtown 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 interfered with business. Cappello won a $37-million judgment--later overturned--in one of the earliest and best-known lender liability cases, claiming that 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 while the cases have increased in frequency, they have become harder to win, according to Hal Scott, a professor at Harvard Law School. “The appellate courts have cut back severely on judgments issued in lower courts, and I think the trend is to limit the liability of lenders,” Scott says.
The roots of the case trace back to chronic financial problems at Egg City, once the world’s largest egg farm with 3.5 million chickens, according to “Guinness Book of World Records.” Egg City was losing about $300,000 a month before filing for Chapter 11 bankruptcy protection in 1986, Carrott says. Careau acquired the ranch in 1985 in a $19-million leveraged buyout from Kroger Co., the Cincinnati-based grocery chain.
In 1986, the United Farm Workers Union launched a strike against 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.
Meanwhile, 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 says 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 even 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 principal and interest payments.
While the lawsuit is being sorted out, Careau maintains that Egg City has been making a profit since October and isn’t falling further into debt, as Okura claims.
The thrust of Careau’s countersuit against Okura is that the Japanese company structured their investment from the start in a way that guaranteed Careau would eventually default on the loans and forfeit Egg City to Okura.
Their evidence against Okura starts with a memo dated about a month after the original deal with Okura, 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 at Egg City and maintains that the fact that Okura didn’t try to foreclose at the time 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 in the first place by delaying negotiations until he had no other choice but to sign. Kirwan denies the charge. Careau even alleges that when Carrott went to sign the deal in December, 1987, he was forced to sign blank pages so he wouldn’t know that the terms of the deal had secretly been changed.
But Kirwan says the papers were on hand at the signing and everything in them had been discussed and negotiated for months.
Carrott also blames much of Egg City’s troubles since early 1988 on Okura. For instance, he claims that Okura forced Egg City to sell a large amount of egg products to Q. P. Corp., a good customer of Okura’s, for 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-price, egg-buying deal with Q. P. was a good one when it was struck, but 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. It 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 says, however, that the letter stemmed from a disagreement about whether Egg City should reimburse Carrott for $821,000 in expenses. A 1985 employment contract called for the company to make the reimbursements, but Carrott hadn’t included them on the books 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, which Careau claims makes both Okura and Q. P. “direct competitors of Egg City.”
But Okura decided not to invest in the other egg producer to avoid any such claim of conflict, according to Okura’s attorney. And Kirwan says the Henningsen deal wouldn’t have hurt Egg City, anyway.
Careau’s attorney Cappello claims that incident is more complex than it seems--and that the case, too, is far more complex than the usual foreclosure.
Says Cappello: “I’m not going to let them file some simple little pleading saying it’s just a loan and that’s all.”
