In re Pilgrim's Pride Corp.

• Decision Date: 22 April 2009
• Docket Number: No. 08-45664 (DML).,08-45664 (DML).
• Citation: 403 B.R. 413
• Parties: In re PILGRIM'S PRIDE CORPORATION, et al., Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Texas

403 B.R. 413

In re PILGRIM'S PRIDE CORPORATION, et al., Debtors.

No. 08-45664 (DML).

United States Bankruptcy Court, N.D. Texas, Fort Worth Division.

April 22, 2009.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Stephen Youngman, Vance Beagles, Martin Sosland, Yvette Ostolaza, Weil Gotshal & Manges, Dallas, TX, Melanie Gray, Weil Gotshal & Manges, Houston, TX, Clayton Bailey, Alexander Brauer, Baker & McKenzie, Dallas, TX, for Debtor.

Jason S. Brookner, Jason Thelen, Andrews Kurth LLP, Dallas, TX, Paul Silverstein, Jonathan Levine, Andrews Kurth LLP, New York, NY, for Committee.

Debra Deitsch-Perez, Robert Pfeffer, Lackey Hershman, LLP, Dallas, TX, for Live Oak Chicken Growers.

MEMORANDUM OPINION

DENNIS MICHAEL LYNN, Bankruptcy Judge.

Before the court is Debtors' Motion Pursuant to Section 365(a) of the Bankruptcy Code and Bankruptcy Rules 6006 and 9014 Authorizing [sic] the Debtors to Reject Certain Executory Contracts and Certain Unexpired Leases of Nonresidential Real Property (the "Motion"). Certain contract parties of Debtors (the "Growers")¹ responded with the Live Oak Chicken Growers' Objection to Debtors' Motion to Reject Certain Executory Contracts and Certain Unexpired Leases of Nonresidential Real Property (the "Objection"). On January 20, 2009, on the Growers' motion to continue the hearing on the Motion, the court conducted a telephonic hearing during which it determined that its consideration of the Motion and Objection should be bifurcated² between a hearing to determine what standard should be applied in deciding the Motion and an evidentiary hearing. The court then set February 24, 2009, to hear argument respecting the standard to be applied and March 10, 2009, for the evidentiary hearing.³

In anticipation of the February 24 hearing, the Growers, Debtors and the Official Unsecured Creditors' Committee (the "Committee") filed briefs in support of or opposed to application of the business judgment rule in deciding the Motion. At the February 24 hearing, the court received argument from those parties. Following that hearing, the court orally ruled as discussed below respecting the standard to be applied in deciding the Motion.

Prior to the March 10 hearing,⁴ each of the parties filed a trial brief with the court, and subsequently, before the conclusion of the evidentiary hearing on the Motion, Debtors filed a brief addressing the Growers' allegations of discrimination. Following the evidentiary hearing, at the court's invitation, and in lieu of closing argument, each party filed a final brief with the court.

On March 10, March 13, March 31 and April 1, 2009, the court conducted an evidentiary hearing on the Motion. During that hearing the parties presented evidence in support of or opposed to the Motion. During the evidentiary hearing the court heard testimony from Dr. Donald Jackson, Debtors' chief executive officer ("Jackson"), Randy Stroud, Debtors' senior vice-president of live technical services ("Stroud"), Dr. Robert Taylor, the Growers' expert in agricultural economics ("Taylor"), Alberto Brito ("Brito"), Roman Vasallo ("Vasallo"), Moises Rodriguez ("Rodriguez"), Walter Starling ("Starling"), Loyce Roberts ("Roberts"), Jesus Martinez ("Martinez"), and Bruno Lazero Garcia ("Garcia") (the latter seven being owners or operators of chicken farms). In addition, Debtors, the Committee and the Growers designated and submitted portions of the depositions of Ramon Angeles ("Angeles"), Ofelia Angeles and Roland Buchanan. The court also received into evidence exhibits identified as necessary below.

On April 14, 2009, the Growers filed a motion seeking to reopen the record respecting this contested matter. The Growers contended that they had evidence that Stroud had testified incorrectly (as discussed below) during the evidentiary hearing. The Growers' motion was resolved by agreed order, pursuant to which the Growers submitted for inclusion in the record declarations under penalty of perjury made by three individuals engaged in the chicken growing business in the vicinity of Siler City, North Carolina: Gracie Freeman, Dwayne Parrish and Timothy Patterson (collectively the "Siler City Growers"). Pursuant to the same order, Debtors submitted for inclusion in the record declarations under penalty of perjury made by Dale Hulsey, Live Production Manager at one of the Debtors' North Carolina plants ("Hulsey"), and Stroud.

Also, as permitted by the same agreed order, Debtors filed a letter brief on April 20, 2009. The Growers responded in kind the following day. Debtors' letter brief and the Growers' response were limited to addressing the significance of the declarations of the Siler City Growers, Hulsey, and Stroud.

The court exercises core jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(A) and (O). This memorandum opinion constitutes the court's findings of fact and conclusions of law. Fed. R. Bankr.P. 7052 and 9014.

I. Background

A. General

Debtors are in the business of producing chicken and selling their product on the wholesale market (including, as mentioned below, the commodity market).⁵ They are one of the largest producers of chicken products in the United States. Debtors operate 32 plants⁶ for processing and packaging chicken products throughout the continental United States and Puerto Rico.

On December 1, 2008, Debtors commenced chapter 11 cases in this court. Debtors remain in possession of their property and continue to operate their business as debtors in possession. On December 7, 2008, the United States Trustee appointed the Committee;⁷ no examiner or trustee has been appointed in Debtors' cases.

In connection with their business Debtors have entered into contracts with a number of entities (growers) including the Growers⁸ by which such entities receive from Debtors baby chicks which those entities then care for until, at maturity, the chickens, ready for processing, are returned to Debtors.⁹ At all times in the process the birds remain the property of Debtors. Debtors also provide to their contract counterparties the feed and any necessary medication for the chickens. Most of the counterparties, including the Growers, are compensated on a "tournament" basis,¹⁰ by which their profit depends on the comparable, vis-à-vis other growers, quality and cost to Debtors of the mature chickens.

Debtors' counterparties, including the Growers, have had to invest substantial capital in facilities used to house and care for the chickens during their growth. Because, at least in the case of the Growers, Debtors' counterparties tend to be geographically concentrated in proximity to one of Debtors' plants, Debtors are often an important, if not critical, player in the local economy. In the case at bar, the Growers contend that their local economy is likely to suffer difficulties if the Growers' contracts with Debtors are rejected.

Aside from the dispute now before the court, other of Debtors' counterparties have sued Debtors in the United States District Court for the Eastern District of Texas, alleging that Debtors have discriminated against them in violation of the Packers and Stockyards Act (the "PSA"). See White, et al. v. Pilgrim's Pride Corp., et al, 2:07-CV522-TJW (E.D.Tex.2007); 7 U.S.C. § 192(a) and (b). The Growers have intimated that they have (and have asserted) similar claims.

By the Motion, Debtors seek to reject their contracts with the Growers. In the Objection the Growers argue that Debtors selected their contracts for rejection in retaliation for pursuing claims like those raised in the litigation mentioned above.¹¹ The Growers also assert in the Objection that Debtors disproportionately selected for rejection contracts with Hispanics. Finally, in the Objection the Growers maintain that their geographic area was improperly singled out by Debtors and that rejection of their contracts should not be permitted because of the economic impact it will have on their community. The Growers contend that, for all these reasons, rejection of their contracts is inappropriate and contrary to the PSA.¹²

B. Debtors' Rejection Methodology

Debtors, however, presented uncontested evidence¹³ that they used essentially the same tournament system that is used for calculating payment of growers to identify the least efficient growers serving the Live Oak, Florida plant, and it was the 26 least efficient growers¹⁴ whose contracts were selected for rejection.

The tournament system essentially calculates for each grower supplying a production facility the cost per pound of produced chicken. Using standard costs for feed, medicine and other items supplied by Debtors, Debtors factor in the total chicks supplied to the grower, mature chickens delivered back to Debtors and the number of chickens lost through, e.g., condemnation. The result computed for each grower is ranked with the results for other growers serving the same facility and raising a time-comparable flock (a "flock" being the chicks delivered to a grower for raising at a particular time),¹⁵ and a grower is then paid by Debtors based on its results relative to the other growers in its tournament.

In determining which contracts they would reject, Debtors took the most recent five flocks raised by each of the growers serving the Live Oak plant (see Debtors' Exhibit 3, Growers' Exhibits R and S).¹⁶ Debtors then calculated how, over those five flocks, each grower compared to an average determined for all growers serving the plant.¹⁷ Those growers that were most below average for that five flock range were the ones whose contracts were chosen for rejection. While Debtors would make allowance for a grower that received a sick flock, Debtors did not adjust the calculations to allow for other aberrational results. Debtors insist, however, and that insistence is supported not only by the testimony of Jackson and Stroud, but also by that of Taylor, that their use of the tournament system...