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Delaware Bankruptcy Litigation Information on Corporate Bankruptcy Proceedings in Delaware and Throughout the United States

Thin Margins and “Pink Slime” Are Among Some of the Factors Leading to AFA Foods’ Filing for Bankruptcy in Delaware

Posted in Bankruptcy Case Summaries

Introduction

On April 2, 2012, AFA Foods, Inc., and certain of its affiliates (collectively, "AFA"), filed petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  AFA is a Delaware company with operations based out of King of Prussia, Pennsylvania.  According to a court filing of the company’s CEO (the "Declaration" or "Decl."), AFA operates meat processing facilities in California, Georgia, New York, Pennsylvania and Texas.  Decl. at *3.  AFA does not purchase or raise cattle.  Instead, it purchases meat from third parties and produces various ground beef products which it sells to the fast food and retail food markets.  Id.  

AFA’s Operations

AFA’s revenues for 2011 totaled approximately $958 million.  Going in to bankruptcy, the company listed $219 million in assets against $197 million in liabilities.  Decl. at *4.  AFA consists of nine companies – AFA Investment, Inc.; American Foodservice Corporation; American Fresh Foods, Inc.;  American Fresh Foods, L.P.; AFA Foods, Inc.; American Fresh Foods, LLC; Fairbank Reconstruction Company; American Foodservice Investment Company, LLC; and United Food Group, LLC.  Id.  AFA Investment, Inc., serves as the parent company and is owned by Yucaipa Corporate Initiatives Fund II, LLC.  Decl. at *5. 

 

 

Events Leading to Bankruptcy

The meat processing industry, according to AFA, is a "highly competitive industry, marked by growing overcapacity."  Decl. at *9.  Despite having a good safety record and high quality products, AFA contends it has still struggled to achieve earnings over the last two years.  The company competes against larger meat processors and smaller, independent processors as well.  Id.  The prices for AFA’s products are based on USDA pricing indexes.  The spread between product costs and  indexed prices results in a thin profit margin which requires a "consistent level of output" to remain viable.  Id. 

Over the last couple of years, AFA has had trouble maintaining profitability due to decreased demand, increased costs and lower sales in certain retail food outlets.  Decl. at *10.  To respond to these pressures, the company began expanding its sales to retail customers, focusing on creating a broader customer base.  According to AFA, its strategy was succeeding until controversy arose over its use of boneless lean beef trimmings ("BLBT").   Id.

BLBT is produced by separating lean meat from fat, resulting in a "beef product that is 93% lean."  Decl. at *12.  Part of the preparation process for BLBT requires that it be exposed to ammonium hydroxide gas.  The ammonium hydroxide kills e-coli and other bacteria in the meat.  Recent media reports drew attention to the use of BLBT in food products and referred to the product as "pink slime."  Id.  Because of the negative publicity associated with BLBT, AFA saw sales drop and costs increase as it was required to transition to products that did not contain BLBT.  Decl. at *13.  

Commencement of Bankruptcy

AFA soon found itself low on cash and unable to pay vendors.  Through bankruptcy, AFA is able to seek postpetition financing and explore a sale of its assets under section 363 of the Bankruptcy Code.  The AFA bankruptcy proceeding is before the Honorable Mary F. Walrath.  Judge Walrath previously served as Chief Judge of the Delaware Bankruptcy Court.  AFA is represented by the law firms Jones Day and Pachulski Stang Ziehl & Jones LLP.  The case is proceeding under case no. 12-11127(MFW).  

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Jason Cornell is a bankruptcy attorney with the law firm Fox Rothschild LLP.  Jason practices before the United States Bankruptcy Court for the District of Delaware and the United States Bankruptcy Court for the Southern District of Florida.  You can reach Jason at (561) 804-4415, or jcornell@foxrothschild.com.