In 1999, Agriprocessors entered into a loan agreement with First Bank Business Capital (FBBC) â€“ a subsidiary of St. Louis-based First Bank â€“ for a revolving note amount of $22,000,000. FBBC conducted thorough due diligence before agreeing to become Agriprocessorsâ€™ asset-based lender.
Judy Meyer handled customer accounts until her death in the summer of 2007. She worked with Toby Bensasson who designed the practice of inflating accounts receivables. Sholom had little involvement in the inflation until Judy Meyerâ€™s death. After her death, Sholom became Tobyâ€™s liaison with Darlis Hendry.
It is significant that the FBBC line of credit is considered to be a loan with higher risk and higher profit potential. These types of loans are commonly made to corporations in dire financial straits. Indeed, FBBCâ€™s internal documents characterize such asset-based loans as â€œevergreen loansâ€ meaning that the principal is never expected to be repaid in full. The anticipated end is either to sell the loan or default. FBBCâ€™s loan to Agriprocessors was akin to sub-prime loans. FBBCâ€™s asset based line of credit involved a revolving credit limit that fluctuated based on the actual accounts receivable and physical inventory balances that the company had.
Agriprocessors was always undercapitalized and FBBC was cognizant of this condition. Throughout the term of the loan, FBBC also knew that Agriprocessors was frequently â€œout-of-covenantâ€ on the debt to net worth covenant. Over the term of the loan, Sholom had very little contact with FBBC. FBBC communicated nearly daily with Toby Bensasson.
Agriprocessors borrowed against the FBBC line of credit each business day. In the morning, Bensasson would sign and send to FBBC a statement showing the total value of inventory and accounts receivable and calculating what Agriprocessors could draw against the cap that day. FBBC would verify the statements and wire the requested funds to Agriprocessorsâ€™ main account at Citizens State Bank. As Agriprocessors received payments from customers against accounts receivable, those payments were directed to a bank account known as the â€œsweepâ€ or â€œdepositoryâ€ account, held at Decorah Bank in trust for FBBC. Agriprocessors paid interest on the draws it had made on the loan on a regular basis. They never missed an interest payment.
FBBC never demanded audited financial statements from Agriprocessors. Instead, its agents conducted periodic â€œfield examinations.â€ At least twice each year, FBBC conducted field exams at Agriprocessors. During these exams, FBBC personnel were given access to whatever financial data they desired to look at. FBBCâ€™s inspection of the financial data and accounting information was woefully inadequate â€“ by FBBC design. In fact, during these field exams, the actual physical inventory of product kept in warehouses was never audited for accuracy. At any given time during the term of the loan, Agriprocessors reported to FBBC and calculated for borrowing base purposes over $10,000,000 in inventory value. There were times that Agriprocessors learned that they actually had more inventory than they were reporting to FBBC. FBBC knew that a large percentage of this frozen inventory was aging, yet FBBC accepted the inventory â€œvalueâ€ at all times through October of 2008. The filing of bankruptcy did not proximately cause any diminution of value of the pre-petition physical inventory.
In 2007 and 2008, FBBC told Agriprocessors to sell large blocks of its â€œinventory.â€ Heshy and Sholom solicited promises to supply large blocks of inventory from various customers. Some of the claimed â€œfake invoicesâ€ were documentation supporting promises to buy large block quantities in the future. The name for this type of transaction was â€œbill and hold.â€
Other so-called â€œfakeâ€ invoices resulted from product being shipped without being scanned. Agriprocessors had the warehouse ship product directly to the customer and Darlis created a corresponding invoice. This practice created a gap between the Order and the Invoice.
FBBC also knew that Agriprocessors supplemented their daily financial needs and expansion projects by obtaining monies from outside private loans and investments. Prior to May 12, 2008, FBBC never directly asked to see such third-party loan information or nor did it inquire how Agriprocessors was accounting for and repaying such loans.
The company also survived on loans from the Jewish community. Outside monies came to Agriprocessors directly or through Aaron Rubashkin or Sholom. Even though the monies were intended for Agriprocessors, the providers of these monies may have considered the transactions to be between themselves and Aaron Rubashkin or Sholom. Some loans came from purchasers of Agriprocessors products, while other investors provided loans to Agriprocessors under terms of Heter Iska.
Agriprocessorsâ€™ sole theoretical source of income was its â€œaccounts receivablesâ€ â€“ monies paid to Agriprocessors from customers for its products. Under the terms of the loan agreement, Agriprocessors was required to remit to FBBC all accounts receivables for deposit into the account at the Decorah Bank. FBBC would then daily â€œsweepâ€œ monies from this account and apply the payments to the principal and interest on loan. Since customer payments were their only real source of income and the amounts borrowed daily were insufficient to cover daily costs, FBBC had to know that Agriprocessors was delaying deposit of â€œARâ€ into the sweep account.
Evidence at trial established that the total interest paid to FBBC on the loan during its life was at least $13.5 million, and may have been as much as $21 million. FBBC claims they are unable to calculate the amount of interest they received during the life of the loan period. But, FBBC likely received more money than it was entitled to, because Agriprocessors also paid interest on the inflated accounts receivables that it carried on its accounting books.