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Costco Played Major Role in Bankruptcy of Nation’s Largest Organic Peanut Butter Maker

Federal court records show that the Oct. 8 bankruptcy filing by the nation’s largest organic peanut butter processor was sparked by Issaquah, WA-based Costco, a membership-based warehouse club, when it unilaterally terminated a deal it had with Portales, NM-based Sunland, Inc.

It’s left a side dispute for the U.S. Bankruptcy Court for New Mexico to figure out. Costco wants to take possession of $20 million worth of peanuts currently in storage at Sunland, and Sunland wants Costco to pay it $4 million for previously delivered shelled and bagged peanuts and for finished peanut butter, also in storage.

U.S. Bankruptcy Court Judge David Thuma has scheduled a Dec. 23 hearing to resolve the dispute. If Costco gets to take possession of the peanuts, it would reduce Sunland’s assets available to be divided up by other creditors, including employees who were stiffed when Sunland shut down.

Costco’s role in turning Sunland’s plans for a Chapter 11 (reorganization) bankruptcy filing into a Chapter 7 (liquidation) is found in the court filings. Sunland began planning as early as April 2012 for a possible reorganization, which would have allowed it to continue operations like airlines often do.

In 2012, an outbreak of Salmonella Bredeney infections of 42 people in 20 states was linked to peanut butter manufactured by Sunland. The U.S Food and Drug Administration (FDA) temporarily suspended Sunland’s federal registration, forcing it to cease operations for about four months in late 2012 and early 2013.

It was during the FDA-induced shutdown that Costco agreed to front Sunland the cash to continue buying peanuts under a Dec. 4, 2012, deal between the two companies. But about 10 months later, on Oct. 4, 2013, Costco pulled out, and, just four days later, Sunland filed for Chapter 7 liquidation.

Before it pulled out of the deal, however, Costco put up $7.5 million in December and another $12.5 million in February, funding a total of about 29 million pounds of peanuts and keeping the market going for raw, unshelled Valencia peanuts. Money was deposited into escrow accounts that apparently could be tapped by growers as the peanuts were processed.

Costco, often seen as a corporate leader in food safety, remains among Sunland’s top three creditors. The other two are CoBank and the Production Credit Association, both part of the federal farm credit system. Cobank participated in the Costco peanut purchases by taking a secondary position in the deal.

The complete meltdown of the nation’s largest organic peanut processor initially caught the Portales community by surprise, even to employees who shut the doors without getting their last paycheck. Surprise turned to anger when they learned the bankruptcy had been in the works since April, and the company even took $150,000 from a local economic development fund after it decided to file for bankruptcy.

Sunland’s officers never mentioned bankruptcy as a possibility in their discussions with the Portales economic development program. The Portales City Council is looking into how the town might get its money back.

Costco cash was used to purchased peanuts last December and February, in part to keep payments flowing to Valencia peanut growers along the West Texas/New Mexico border region.

About 75 Sunland employees went without a final paycheck in amounts ranging from $100 to about $1,000 each. Employee payments typically are considered as priority claims against the assets of a business being liquidated.

Thuma has granted the bankruptcy trustee, Clarke Coil, the power to reopen Sunland’s Portales plant if it is needed to process peanuts, some of which are not held long-term in cold storage. Any reopening would be on a limited basis for the purpose of preserving assets. Some workers might get called back for temporary duty.

Sunland’s problems began with the recall of Trader Joe’s Organic Valencia Peanut Butter, which was produced by the New Mexico company and found to be contaminated. With the outbreak, the recall expanded to include dozens of its other brands.

Also the largest organic peanut butter exporter in the U.S., Sunland was the largest private-sector employee in Portales, an eastern New Mexico community of about 20,000.

© Food Safety News
  • Oginikwe

    What kind of headline is this? The only one who played a major role in Sunland’s bankruptcy is Sunland and their reprehensible behavior. Sunland symbolizes many things wrong with our food system but primarily a callous disregard for the people who were eating their products. And, they apparently really screwed over Portales. That this predatory company should now be eaten alive is poetic justice. The only thing that would make this bankruptcy better is civil lawsuits against management and the CEO.

    Peanut Butter Salmonella Recall: Sunland Knowingly Sold Possibly Contaminated Products For Years (Huff Po) 11/15/2012: http://www.huffingtonpost.com/2012/11/15/peanut-butter-recall-sunland_n_2136816.html?utm_hp_ref=food

    More Products With Sunland Ingredients Recalled (Food Safety News) 10/10/2012: http://www.foodsafetynews.com/2012/10/more-products-with-sunland-ingredients-recalled/

    Long History of Violations at Peanut Plant Linked to Salmonella Outbreak (Food Safety News) 11/14/2012: http://www.foodsafetynews.com/2012/11/long-history-of-health-violations-at-peanut-co-linked-to-salmonella-outbreak/

    Sunland Peanut Butter Recall Goes International (Food Safety News) 11/26/2012: http://www.foodsafetynews.com/2012/11/sunland-recall-goes-international/

  • crs

    So potentially contaminated peanuts are in storage? Glad I don’t buy Costco pb. Sure won’t start now.

    • Shannon

      Crs — i assume that you ask the question of contaminated peanuts in storage because you have no clue as to organic peanut production? it’s NOT the peanuts. it was the processing. please reach out if you would like some education regarding the lengths my family goes through for organic certification. or remain ignorant.

  • naksuthin

    I shop almost exclusively at
    Costco. Their return policy, their customer service, their pro consumer
    policies and their low prices have made me a Costco Loyalist.

    I trust their own Kirkwood label above well known brands because I believe they adhere to a higher standard.

    One time I was buying frozen chicken and notice that the Foster Farms
    brand was actually cheaper than the Kirkwood brand. It wasn’t until I
    read the ingredients label that I realized that the Foster Farms brand
    had a much higher water content than Kirkwood. That’s right. You were
    paying good money to buy a lot more H2O with Foster Farms.
    Another
    time my doctor recommended I get my Lovastatin prescription filled at
    Target because Target was giving a discount. After a few months of
    ‘Target” shopping for my medication, I just happened to ask at the
    Costco pharmacy. Not only did they carry Lovastatin but it was less than
    1/2 the price.
    Needless to say that only confirmed my faith in Costco.

    I live abroad most of the year and I chuckle whenever I see “copycat”
    stores using the same Red and Blue logo and calling themselves “Cost
    Go” or “Costo”.

    It’s really a compliment to Costco’s great success.

  • Shannon

    JT – To provide you with insight and education, the take home message is that the peanuts in and of themselves are NOT contaminated. The processing of the peanuts is where the contamination occurred. Perhaps the CEO of Sunland should have heeded the warning(s) of the FDA starting back in 2009. Perhaps diligence should have been taken in making sure that, after the facility worker evacuated their bowels, their hands were properly sanitized before your jars of PB were sealed. The blame lies wholly with the CEO of Sunland. He had an operational and fiduciary responsibility to numerous producers and consumers (my family consumed the PB as well). FYI – I am from one of the largest ORGANIC Certified Valencia producing families in the area. Give me a shout back if you would like a sack.

    • J T

      Shannon, to my knowledge they never identified the specific source of the contamination, although the processing certainly takes at least some of the blame. The processing comingles millions of peanuts together, and a few contaminated peanuts can cross-contaminate the entire batch. So, who is to say that the initial contamination didn’t ride in on some peanuts and then get spread around the plant during processing?

  • kptexas

    I am one of the organic peanut farmers that sold to Sunland, Inc. in 2012. Our peanuts were not part of the government investigation. After Sunland filed bankruptcy we were forced to sell Costco our good Valencia peanuts at a major loss from the original contracted prices, forced to pay additional hauling costs to get the peanuts to Costco’s destination, only to have Costco destroy those peanuts. Growers/farmers joined the New Mexico bankruptcy suit against Sunland as creditors. Just before the sale to Golden Boy Foods, Ltd. we were offered 1% pittance of what was owed us. Sunland, Inc. was sold to Golden Boy Foods, Ltd. for 26 million. It is my understanding Costco has filed suit trying to receive the farmer’s portion of the contracts that has not been paid. We were told when the company sold/sale was completed we would be paid the amount of our loss with interest. Farmers will not want to grow, much less sell to companies they cannot trust. No peanuts, no peanut butter. Costco has just opened a brand new store Lubbock. I for one will not do business with a company that cheats it’s farmers out of their hard earned living. So Costco, save your mailings, I won’t shop at your stores.