Easterday Ranches, Inc. – Major Beef Supplier to Tyson Foods Files for Bankruptcy After Tyson Discovers Alleged $285mn Fraud in Respect of 200K “Non-Existent Cattle”

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[Just filed. Developing story.] February 1, 2021 – Easterday Ranches, Inc. (“Easterday” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Eastern District of Washington, lead case number 21-00141. The Debtor, "a family-owned and operated farming business" based in Pasco, Washington, is represented by Thomas A Buford of Bush Kornfeld LLP. Further board-authorized engagements include (i) Davis Wright Tremaine LLP as general bankruptcy counsel and (ii) T Scott Avila and Peter Richter of Paladin Management Group ("Paladin') as Co-Chief Restructuring Officers. The Debtor, in the wake of the December 2020 death of family patriarch Gale Easterday, is owned by three remaining members of the Easterday family; each of whom has recently resigned as officers of the Debtor which explains in part the need for a pair of CROs at the suddenly leadership-less company.

At filing, the Debtors note between 200 and 1,000 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Tysons Fresh Meats, Inc. ("at least" $225.0mn litigation claim), (ii) Segale Properties ($8.7mn unsecured loan claim) and (iii) Animal Health International ($1.1mn trade claim).

The Debtor trades as "Easterday Farms" where a recently updated website tells the all-American story of a potato farming family that moved West from Idaho in 1958 to Washington state in search of "fresh dirt" to grow an agricultural empire based on potatoes and onions. The website makes no accounting of any present or past involvement in cattle ranching (scrubbing references (cached page here) to their grain feed and cattle operations, formerly including "Easterday Farms has now grown to more than 18,000 acres of potatoes, onions, corn and wheat. The grain products are used to feed cattle in the Easterday Ranches feedlots…") or even being a ranch; and herein lies the rub in an evolving "Where's the Beef" scandal.

On December 21, 2020, cattle client Tyson Foods, Inc (“Tyson”) announced (8-K here) that it was undertaking an internal review relating to one of its cattle suppliers (that supplier later named as Easterday) and has determined that "this supplier made misrepresentations regarding the number of cattle the supplier purchased on behalf of the Company’s Beef segment…[with] the misappropriation of Company funds by the supplier caus[ing] the Company to overstate live cattle inventory as of the Company’s fiscal year ended October 3, 2020 by an estimated amount of $285 million." Given Tyson's size, it makes a determination that the alleged fraud (occurring from 2016-2020) "did not…result in a material misstatement of the Company’s previously issued annual or interim consolidated financial statements and that such financial statements may continue to be relied upon." 

Nonetheless, an undetected $285.0mn fraud over 4-5 years raises some rather significant internal control issues and Tyson notes that (i) it "identified a material weakness in the Company’s internal control over financial reporting ('ICFR') relating to the physical existence of live cattle inventory." (ii) that it would be amending its 2020 10-K and (iii) that PricewaterhouseCoopers LLP ('PwC'), will also amend its opinion on the Company’s ICFR to state that the Company’s internal control over financial reporting as of October 3, 2020 was not effective."

Although that $285.0mn represented only 2% of Tyson's annual beef supply over the relevant period, the impact may have been considerably more significant at Tyson's meat packing facility near Pasco, Washington which reportedly supplies a substantial proportion of Wendy's beef patties.

Tyson does not detail how the discovery was ultimately made, but at the end of January 2021 it initiated legal proceedings in Franklin County Superior Court where it stated in filings that“… [the Debtor's] President Cody Easterday, has admitted to a scheme in which Defendant [Easterday] has falsified records and submitted fictitious invoices in order to defraud Plaintiff [Tyson] out of more than $225 million. Among other things, Defendant has manufactured documents in order to hide the fact that it was reporting to Plaintiff approximately 200,000 cattle that simply did not exist.” Those filings also note that the allegedly embezzled funds were used “to offset over $200 million in losses (company president Cody Easterday) incurred in the commodities trading markets.” 

Tyson is suing to recoup its payments, along with 54,000 head of cattle, and has asked the county court to appoint a receiver. Tyson's efforts to seize cattle and the bankruptcy Court's efforts to restore some semblance of order will be complicated by Easterday's recent reported sale of a feedlot to Agri Beef Co, a Tyson competitor.

In a tragic side story, Cody Easterday's father Gale appears to have ended his life in a head-on collision with one of his company's potato trucks just days before the scandal broke: "Gale Easterday entered onto I-182 in Pasco, Wash., on an exit ramp in the middle of the afternoon. As he drove west in the eastbound lanes he hit a semi head-on that was hauling potatoes for Easterday Farms. The collision caused the semi driver to swerve and hit a second pickup. The semi then veered into westbound lanes where it finally came to a halt. Gale, who was 79 years of age, was pronounced dead at the scene."

About the Debtor

According to the Debtor: “From the early stages of planting to the final phase of packaging and shipping, you will find the Easterday family actively involved in all aspects of delivering you high quality produce you can trust. We are a family-owned and operated farming business. We believe that the size of our business is a unique balance between the economy and efficiency of scale and the attention to detail necessary for customer satisfaction. We are a proud grower and packer of conventionally raised onions and potatoes."

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