8/9/2019 Hypothetical: Sting of a Sweet Deal 2010

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7215223v1Copyright © Jeffer Mangels Butler & Mitchell LLP 2010. All Rights Reserved.

HYPOTHETICAL:

THE STING OF A SWEET DEAL

Mary and Frank went into the honey business in 1965. They owned HoneyBear 

Corporation. HoneyBear bought honey from producers, packed it in "Honey Bear" containers,and distributed the product to grocers throughout the West. Mary and Frank owned theHoneyBear plant free and clear and leased it to the corporation. Their son, Sam, grew upworking in the business, and when it came time for Mary and Frank to retire in 1995, Sam took over and gradually, Mary and Frank gave their shares in HoneyBear to Sam and his sister, Daisy,who was never active in the business. The rent paid by HoneyBear provided for Mary and Frank until they passed away in 2006, leaving the plant to Sam and Daisy.

Sam wanted to expand HoneyBear and to modernize its plant. In 2007, Mountain Bank agreed to make a $3 million working capital revolving line of credit to the company, secured bya blanket lien on HoneyBear's assets. The borrowing base for the line of credit was 80% of 

eligible accounts and 50% of inventory, with typical exceptions and a $500,000 reserve for  producer's liens. Borrowing base certificates were required only monthly, because of HoneyBear's 40-plus year history of success.

Mountain Bank also made a $5 million term loan to finance the modernization andexpansion of the plan. Daisy's only connection with HoneyBear was to spend her share of therent money. When Sam told her about the expansion, Daisy joined Sam in guaranteeing theloans, secured by a deed of trust on the plant they owned. The plant and equipment wereappraised at $8 million, after the work was completed.

Once work was completed, Sam bought more honey, and soon, the plant's workers were busy as bees bottling and shipping "Honey Bears."

But Sam's expansion plans ran into unexpected problems. The grocery chains demanded payments from HoneyBear in exchange for more shelf space. Raw honey prices increased. The plant had an ant infestation and some bulk honey was contaminated. Sam increased prices tocompensate, but as the recession hit, consumers decided honey tasted just as good out of a lesscostly jar.

HoneyBear maxed out its credit line as revenues fell, so Sam skipped property tax payments due under the triple net lease and failed to pay payroll taxes. Truckers threatened to put HoneyBear on COD, and the honey producers were ready to tell Sam to buzz off. Sam beganto divert some receipts to an account at Wild West Bank, from which he made the lease

 payments on his Beemer and his country club dues.

Sam kept making payments to Mountain Bank on time as long as he could, and theinexperienced loan officer never looked at the monthly borrowing base certificates, which Samhad started to fudge. So it came as a surprise to the Bank's Chief Credit Officer when the loanswent 60 days past due, and a shock when a few days later, IRS recorded a lien for nonpayment of  payroll taxes.

1900 Avenue of the Stars, 7th Floor Los Angeles, California 90067

310.203.8080—(fax) 310.203.0567

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