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FishDish appeal to VeroBlue case questions bankruptcy procedure

Local aquaculture business filed bankruptcy in 2018

— Daily Freeman-Journal file photo Company vehicles stand outside the former Webster City VeroBlue Farms plant on north Des Moines St. The company filed for bankruptcy in 2018 and a group of investors has filed an appeal, questioning the bankruptcy procedures.

Long after the fish tanks were drained and the subsequent disappointment settled over this hopeful Iowa town, the minutia of the bankruptcy that brought VeroBlue Farms USA, Inc., to its knees has meandered through the courts, leaving behind it continued trickles of disappointments and a ruling that could change the way some future bankruptcy cases proceed.

The snag in this case is “equitable mootness.”

Loosely described, “equitable mootness” is a doctrine that allows judicial discretion when deciding the outcome of a bankruptcy.

It may have met its match in FishDish, LLC.

VeroBlue Farms USA, once the promising start-up that introduced aquaculture to Webster City and Hamilton County, filed for Chapter 11 bankruptcy in late 2018, disclosing more than $100 million debt, most of which was unsecured. VeroBlue, according to its bankruptcy petition, owed $98,943,246.22 in unsecured debt to its top 20 creditors.

Another $6 million in secured debt was assigned to Broadmoor Financial LP, of Wichita, Kansas, VeroBlue’s top creditor. VeroBlue owed more than $53 million to that firm alone.

So when the bankruptcy court agreed in April 2019 to a modified plan of Chapter 11 reorganization put forth by Alder Aqua Ltd., a major stockholder, and Broadmoor, it appeared that the case was closed.

But not for FishDish, which is another creditor.

According to its Appellant’s Brief filed Jan. 7, 2022, “(i)n the summer of 2016, to finance their growth, (VeroBlue) raised $63 million in debt and equity financing. Specifically, (it) raised $34 million in equity capital by selling preferred shares in VBF USA to Alder Aqua, Ltd. ($28 million) and FishDish ($6 million). Certain of the Debtors became borrowers under a credit facility in the original principal amount of $29 million from Amstar Group, LLC. … Amstar and Alder have common ownership and control – Dr. Otto Happel and his immediate family members. Happel then leveraged his ownership of Amstar and Alder to assert control over (VeroBlue) by installing his daughter onto its board and directing his other board appointees to dominate board decision making, even in the face of contrary board direction.”

The original 2016 business plan, the brief states, “involved reliance on local Iowa farmers as ‘designated growers’ to assist the aquaculture production at different points in the fish life cycle. … these local farmers and other individuals with ties to the local business community (were afforded) the opportunity to invest by purchasing common shares in the parent company ‘VBF Canada’ – a Canadian corporation originally formed as the sole shareholder of VBF USA. … Approximately 74 individuals or entities invested in this parent of (VeroBlue), many of them local Iowans …”

In 2016, VeroBlue refinanced its debt with both Alder and Amstar, and, eventually, VBF Canada became a minority interest shareholder of VeroBlue.

FishDish, with $6 million skin in the game, immediately appealed the chapter 11 reorganization plan proposed by Alder and Broadmoor. That October, its appeal was denied by the United States District Court of the Northern District of Iowa

Then FishDish appealed to the United States Court of Appeal for the Eighth Circuit. That court reversed a critical portion of the previous dismissal: “We reverse and remand for reconsideration the district court’s dismissal of FishDish’s appeal of the Plan Confirmation Order on the ground of equitable mootness.”

The Appellant’s Brief put it this way: “The Bankruptcy Court deprived FishDish of its rightful opportunity to meaningfully participate in the Bankruptcy Cases, thereby preventing it from taking the necessary steps to realize any recovery from its $6 million investment.”

The decision drew the attention of Wall Street Journal writer Andrew Scurria. “Federal judges shouldn’t be too quick to dispense with appeals that challenge the approval of a chapter 11 plan,’ a U.S. appeals court said.

“The U.S. Court of Appeals for the Eighth Circuit released a decision Thursday (Aug. 5, 2021) critiquing the application of ‘equitable mootness,’ a legal doctrine developed over years that shields many bankruptcy-court rulings from appellate review.

“While the standard varies among federal appeals courts, equitable mootness generally holds that certain aspects of chapter 11 proceedings are effectively unreviewable on appeal, because to reverse them would require unwinding transactions that have already occurred.”

In December 2020, NaturalShrimp, Inc., another aquaculture company, bought the former VeroBlue Farms assets from Alder Aqua.

Despite that sale, FishDish’s appeals have kept the case alive.

“… [T]he Eighth Circuit has articulated an olfactory standard for clearly erroneous as ‘a high one to meet;'” the Appellant’s Brief asserts. ” ‘To be clearly erroneous, a decision must strike us as more than just maybe or probably wrong; it must … strike us as wrong with the force of a five-week-old, unrefrigerated dead fish.'”

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