A federal judge is appointing a receiver to oversee a Canadian-owned swine operation in South Dakota after its bank alleged a check kiting scheme.
The bank claims the scheme created an illusion of substantial funds, but once the bank stopped honoring checks, losses totaled over $30 million.
Sunterra is the parent-company to a pig operation in South Dakota. It has offices in Beresford and pig barns in the Yankton area. It finances operations through loans with two banks: Compeer and CWB.
Compeer alleges that Sunterra drew checks on one subsidiary’s account and then deposited them another with neither having substantial funds. Compeer said this allowed Sunterra to avoid overdraft fees earn interest on falsely inflated account balances.
BACKGROUND
In October, Compeer and Sunterra’s subsidiaries agreed to a loan agreement allowing a combined borrowing amount of $11.5 million. Sunterra’s 110,000 pigs in South Dakota were listed as collateral.
Sunterra’s accounts were also coupled with Farm Cash Management accounts. Those allowed Sunterra to deposit excess cash into accounts to earn interest.
On Feb. 10, Compeer’s in-house counsel identified suspicious activity coming from the three Sunterra accounts. Company officials recognized nearly identical amounts and number of checks were being sent back and forth between Compeer and CWB. Through the first month of the year, they wrote on average 18 checks a day totaling over $16 million.
All the checks ranged in value from around $800,000 to $990,000. Compeer claims the checks were written to those amounts because checks sent international greater than $1 million are reviewed by the United States Bulk Exchange.
The next day, Compeer spoke with Sunterra CEO Ray Price to ask about the suspicious activity. Price said he was unsure of the reasoning, other than it was “timing” issue. Compeer informed him they were terminating all check-writing privileges for intercompany transfers aside from those needed for necessary expenses such as required for the feeding and care of the pigs.
The same day as the meeting, CWB tried to draw 18 checks, $16,302,000 in total, from Sunterra’s Compeer accounts. The bank dishonored all of those.
The next day Compeer had a second video conference with Price. In that meeting, Price said Sunterra was moving funds back and forth between the banks to create the illusion Sunterra had sufficient funds and admitted the practice “wrong.”
Once Compeer stopped honoring checks to CWB, CWB began to do the same. CWB dishonored 65 checks for nearly $60 million. The Compeer accounts had a positive balance at the time, meaning the Sunterra companies owed more than $36 million to Compeer.
That is despite Sunterra’s contractual agreement to only borrow up to $11.5 million. After assessing the value of Sunterra’s collateral, Compeer valued the total collateral around $19 million.
Compeer filed a complaint in federal court, due to the international nature of the situation. The complaint said because of Sunterra’s insolvency, the swine were “in imminent danger of not being cared for” due to feed, propane, veterinarian, labor and other necessary costs to maintain the health of the 110,000 pigs.
COURT CASE
US District Court Judge Eric Schulte ordered an emergency hearing.
Steve Grosland, the Principal Credit Officer Risk of Compeer, was the only witness called to the stand. He said, due to a broken trust, Compeer would not be willing to work without a receiver in place.
A receiver is an impartial third party appointed to take control of and manage specific property or assets. The receiver, in this case, has ultimate decision-making power over Sunterra’s assets and management decisions.
During questioning, Grosland said Compeer has honored checks since the complaint, but only those necessary to keep the pigs from dying. That included feed shipments once they were close to running out.
The defense brought up the concern that some of the pigs Sunterra operates are not part of the collateral agreement. They are paid for and owned, in part, to Tyson and The Pork Group, Inc.
The worry is that if Tyson paid money to Sunterra for their operating costs, it would be directly applied to the balance owed to Compeer.
When questioned about it, Grosland stated all funds going in “are automatically applied to the overcommitment.” The defense argued that’s not their money to take. Tyson’s legal representation agreed, but said they believe a receivership is necessary due to the exposed business practices of Sunterra.
Sunterra argued the only issue that couldn’t be solved by money was a lack of trust, and therefore a receivership is not necessary. Instead, Sunterra argued Judge Schulte should allow Sunterra the opportunity to restructure its agreement. It also argued that in the pressing needs of the pigs day-to-day, Compeer cared more about balancing its books by denying checks leading up to the hearing, than choosing to keep them in good health.
Grosland disagreed.
“Compeer takes a high road, and I am not aware of any pigs that are starving today that are Compeer’s collateral,” Grosland said.
Compeer argued that because Sunterra had not denied check kiting, caused a lack of trust, was proven to be insolvent, had no other assets to give and provided zero evidence it could protect the animals, a receivership is needed.
Grosland said while Compeer, as a creditor, is not required to save the pigs – but is choosing to do so because the company believes it is the right thing to do. Without a receiver, the only solution would be to pay Sunterra directly to address the issues, something Compeer is unwilling to do.
Another issue in the case is the lack of communication between Compeer and CWB. Under the Farm Credit Administration, Compeer is not allowed to share information about the lines of credit with CWB. Sunterra told Compeer that CWB has similar restrictions.
Compeer requested the ability from the Price’s to communicate with CWB but was denied. Compeer said in a receivership, it would want the ability for the receiver to connect the two in some capacity. Sunterra also refused to share some information about the company’s financial situation in Canada.
Compeer said the lack of transparency from the Prices is a large driver behind needing a receiver.
RULING
Schulte ruled in favor of a receiver being instituted. In his written opinion, he said the Sunterra-owned companies “expressly consented to a receiver in the event of a default” on their loans.
He looked to South Dakota statute and precedent to help him conclude. In state statute, receivers can be put in place when a “corporation is insolvent or is in imminent danger of insolvency.”
Judge Schulte said he believes the situation warrants that. He added that “appointing a receiver will do more good than harm.”
All three parties agreed on Pipestone Management as a good, neutral third-party for the receiver.
Pipestone is granted the ability to “execute any consent to disclose information” for Sunterra in relation to the allegations of check kiting.
The receiver agreement included specific protections for TPG and Tyson’s pigs. All the pigs will go under the direction of the receiver, but funds to maintain TPG pigs will not go towards Sunterra’s debts owed to Compeer.
Any other action needs express written approval from Tyson or TPG.
Pipestone is also helping run the day-to-day business operations of the Sunterra-owned companies.
Judge Schulte said the receiver is temporary, and he wants more information within 60 days.
