Simplot alleges partners mismanaging Northwest food processors

Two Northwest food processing giants are squaring off over management of their jointly owned businesses.

J.R. Simplot Co. is asking a federal judge to appoint a third party to take control of Pasco Processing and Gem State Processing. Both are Washington companies jointly owned by Simplot and two potato companies.

Washington Potato Co. and Oregon Potato Co. are controlled by Frank Tiegs, a Pasco grower and businessman.

Together they account for $400 million in annual sales and employ more than 2,100 in Washington, Idaho and Oregon.

The Boise-based Simplot, a non-controlling co-owner of the two businesses, sued recently in U.S. District Court, saying a pattern of mismanagement has placed the processing companies at risk of imminent collapse.

It accuses Tiegs of jeopardizing the companies’ future through a pattern of self-dealing, such as knowingly buying rotten potatoes and peas contaminated with glass from companies he controls.

Tiegs’ Portland attorney called the claims groundless and accused J.R. Simplot of litigating a matter that would better be handled in mediation.

Joe Van Leuven, a lawyer in the Portland office of the firm Davis Wright Tremaine LLP, said Simplot is simply unhappy with the management agreement it signed with Tiegs.

“The deal they made requires them to sell the businesses to us in the event of a deadlock,” he told the Herald.

Simplot’s suit calls into question the viability of Pasco Processing and Gem State Processing, saying it is concerned about the sustainability of the two as balance sheets crumble and lenders call meetings to discuss evaporating profits and a technical loan default.

Simplot accuses the companies and Tiegs of breaching their fiduciary duty to Simplot. In addition to asking for a court-appointed receiver to manage the businesses while the two sides negotiate, it said it reserves the right to seek damages. A hearing is scheduled in March.

Tiegs oversees all operations and has interests in unrelated farming operations and other food-related companies that buy and sell to the two processors.

Financial issues

Simplot claims Pasco Processing’s income is insufficient to meet the terms of its loans.

The Pasco operation has a term loan of $141 million from Northwest Farm Credit Services, as well as a $50 million revolving line of credit, akin to a credit card. Pasco reportedly reached the limit of the $50 million loan, and the outstanding balance on the two loans is $137.4 million.

A business may be current on payments, but if its income is insufficient it could face foreclosure of its loan for defaulting on its credit terms such as having too little cash on hand relative to its debt.

The lender met with Tiegs on Oct. 6 to discuss the situation. On Oct. 24, Tiegs requested $6 million from Simplot and $3 million from Washington Potato, in an apparent bid to satisfy the lender’s cash requirements.

While Pasco struggled with its financial covenants, Gem State’s annual earnings have gone from a $9 million profit in 2013 to a $5 million loss this year, Simplot alleges in its suit.

Rotten potatoes, peas with glass

Simplot highlights a series of issues associated with crops that Gem State and Pasco Group purchased from producers connected to Tiegs, saying it shows a pattern of requiring them to act against their own interests.

In June, Simplot alleges Tiegs required Gem State to buy “unsellable rotten potatoes after they were rejected by (another) customer.”

In another incident, Tiegs required National Frozen Foods to buy a pea crop supplied by one of his companies after he had been notified the crop was contaminated with glass.

The plant’s staffers kept the contaminated peas off the market, and Simplot said it learned of the incident later from an employee.

The suit says the insurance settlement associated with the contaminated peas was “dramatically reduced” because Tiegs failed to follow the proper protocols. It noted the insurer discovered the company that grew the tainted pea crop was “falsely certifying the peas as organic, without the proper certification to make the claims.”

Also, Tiegs directed the Pasco company in October to buy a large amount of green peppers grown by one of his related companies, according to the suit. The Pasco plant was already under severe delays and was unable to complete the processing.

Tiegs allegedly directed that the partially processed peppers be shipped to National Frozen Foods, which does not normally process peppers. They were unrefrigerated for three days and became moldy.

When an employee refused to process the moldy peppers, Tiegs “directed the totes of green peppers be transported back to Pasco’s facility for processing.”

Van Leuven said the incidents are taken out of the context. The companies process hundreds of thousands of tons of food annually, and safely.

“We do everything that companies do to make products safely,” he said.

Safety issues

Simplot’s lengthy case against the companies and Tiegs also touches on a pattern of previously publicized workplace safety violations.

The Washington Department of Labor and Industries and the U.S. Occupational Safety and Health Administration both have cited and fined Pasco Processing for safety violations that put workers at risk.

In May, the state agency categorized it as a “severe” violator and issued a $213,000 fine for repeated safety violations, which it has appealed.

Simplot maintains a pattern of mismanagement poses “an immediate and existential threat to the businesses and their 2,000 or more employees.”

Van Leuven said that’s untrue.

“This is not a situation where we’re looking at a financial collapse like they try to portray in the complaint,” he said.

This story was originally published December 20, 2016 at 2:41 PM with the headline "Simplot alleges partners mismanaging Northwest food processors."