Sunday, May 27, 2001

Going nuts -- Lawsuit could change scope of mac nut production
When the Shansby Group bought
Mauna Loa Macadamia Nut Corp., it got
more than it bargained for -- a million pounds
more mac nuts. Now a suit seeking
payment for the nuts illustrates
changes to an insider's industry.

By Russ Lynch

When the Shansby Group bought Hawaii's biggest processor and marketer of macadamia nuts last fall, it thought it was a good deal.

Now the San Francisco investment partnership says it was cheated in its acquisition of Mauna Loa Macadamia Nut Corp. because it wasn't told it had to buy and pay for junk -- unusable nuts.

"Poppycock," responds the nut seller, publicly held partnership ML Macadamia Orchards, in one of many state Circuit Court filings as part of a lawsuit it filed against Mauna Loa, its exclusive purchaser of macadamia nuts. The suit seeks $1 million ML Macadamia says Mauna Loa failed to pay as part of its contractual agreement to buy all provided nuts.

Prior to buying Mauna Loa, Shansby Group performed a huge amount of due diligence, with more lawyers and accountants going through the books than is usually the case in the sale of a company, ML Macadamia says. The group knew how pricing had been done for some 19 years and knowingly inherited that structure.

What's more, ML Macadamia says in the suit, the new owners of Mauna Loa had an ulterior motive in refusing to pay for nuts they deemed unusable.

One of ML Macadamia's claims is that Shansby deliberately set out to cut into ML Macadamia's earnings, which would force it to cut the dividend it pays to owners of Class A Units, the partnership shares that are traded on the New York Stock Exchange. That, in turn, ML Macadamia argued, would cause the shares to drop.

ML Macadamia claims in court papers that Shansby told some macadamia nut growers it intended to harm ML Macadamia's share price so Shansby could grab the company at a low price and end up owning both the growing and marketing operations.

Judge Greg K. Nakamura, handling the case in Circuit Court in Hilo, dismissed that claim. According to ML Macadamia's attorney, James H. Case, the judge ruled that ML Macadamia couldn't bring a case for punitive damages as part of what is a straightforward breach-of-contract dispute.

If ML Macadamia's claims are true, Shansby's plan came close to working. In the final quarter of last year, ML Macadamia reported a $1.5 million loss and cut its dividend to 5 cents a share from 12.5 cents, largely because Mauna Loa refused to pay for about 1 million of the 9 million pounds of nuts it received. ML Macadamia's share price fell to about $3 from $4.50.

In a hearing set for June 4 in Hilo, ML Macadamia will argue for a summary judgment to what it says is a simple contract case that doesn't need to go before a jury.

In the court documents, ML Macadamia, which grows macadamia on more than 4,000 acres on the Big Island and farms for a number of independent orchard owners, says it was always clear that Mauna Loa would buy all nuts ML Macadamia produces. The contract language is clear, the partnership says, and the contracts have been operated that way for nearly 20 years.

Mauna Loa, as the sole buyer of the nuts, will argue that differences between the parties are serious enough and the claims and counterclaims strong enough that the case should go to a jury.

The fight, in the biggest agricultural industry on the Big Island, between the largest grower and marketer of macadamia nuts, is an outgrowth of one of Hawaii's oldest companies, C. Brewer & Co.

In 1982, Brewer, founded in 1826 and one of the pioneers of macadamia in Hawaii, began selling some of its nut orchards to outside investors.

Brewer signed contracts with the orchard buyers agreeing its Mauna Loa Macadamia Nut Corp. subsidiary would buy all of the nuts they produced. The price would be figured from a combination of a U.S. Department of Agriculture announced price for all Big Island-produced macadamia and from the performance of Mauna Loa itself in the sales of the nuts.

Contracts were signed with growers in 1982, 1983 and 1986, the year Brewer decided to spin off its orchard business into a new publicly held partnership, now called ML Macadamia Orchards.

ML Macadamia argues that all the contracts were essentially the same, requiring each grower to sell all its nuts to Mauna Loa and requiring Mauna Loa to buy all of them, regardless of condition.

The price would be only partly based on a net price calculated by the USDA, which allows for unusable nuts and therefore is higher than the price for uninspected raw nuts still in their husk and nut shell.

Mac nuts

Contract dispute lands mac-nut grower in the red

ML Macadamia Orchards LP
(Known as Mauna Loa Macadamia Partners LP before October 1998)

Year Revenues Net profit
in millions
of pounds
Price per
in cents
1995 $10.6 mil $1.2 mil 18.8 56.3
1996 $13.2 mil $3 mill 22.1 59.8
1997 $12.2 mil $15.6 mil 20.3 59.7
1998 $12.4 mil $963,000 19.5 63.8
1999 $16 mil $4.6 mil 25.6 62.4
2000 $13.8 mil ($398,000) 19.2 51.3

Source: SEC filings

"Mauna Loa now claims for 17 years it mistakenly purchased all of MLP's nuts (from what is now ML Macadamia Orchards) using the USDA net price to calculate the nut price," says one of the filings by ML Macadamia. "Factually, that is poppycock."

One argument is that the contracts were too friendly to Brewer because the company, as the grower before the orchards were spun off, and as the buying company, Mauna Loa, were both headed by one man, Brewer Chairman J.W.A. "Doc" Buyers.

ML Macadamia in effect is agreeing that is the truth. Brewer could have decided to make its profit at the processing end, by buying only the best nuts and scrapping the unusables, or at the growing end, by getting the best price, requiring Mauna Loa buy all the nuts.

That was Brewer's choice, and since it owned both sides prior to the orchard sales that started in 1982, it didn't matter which way it went. The decision to favor the growers was intended to make the orchards a good buy for outside investors, who would know they would get a good price for all the nuts they produced and, for a percentage fee if they wanted, get an expert company in Brewer to farm their nuts for them.

"The nut contracts were written to help promote the sale of the nut orchards in 1982 and 1983, and the orchards that were in the partnership in 1986," said Greg Sprecher, chief executive of ML Macadamia.

"They were structured so the buyers of the orchards or the buyers in the partnership (at the creation of ML Macadamia) would not have to worry about marketing and sales," said Sprecher.

The Shansby Group, the new owners of Mauna Loa Macadamia, say they deliberately were not told that they would have to pay for all the nuts delivered by ML Macadamia and that the price they would have to pay would be based in part on a USDA "net" that accounts for unusable nuts and is therefore higher than the price for presorted, pre-inspection nuts.

"After the purchase and during the reorganization of Mauna Loa it came to the attention of the new ownership that the pricing practices under the three contracts (for orchards are Keaau near Hilo) incorrectly and unfairly failed to account for unusables," Mauna Loa said in a filing by its Honolulu attorneys, Watanabe, Ing & Kawashima.

In October, Shansby-owned Mauna Loa unilaterally adjusted the prices, insisting it would pay the net price only for "net" nuts, those that were 100 percent usable.

"MLP reacted immediately," says Mauna Loa's filing. "It had enjoyed years of overpayments and did not want to lose its windfall."

The general partner of ML Macadamia, the business that actually runs it, is a wholly owned subsidiary of C. Brewer & Co. and therefore, until last September, both the buyer and the seller of the nuts were controlled by Brewer, Mauna Loa says in court filings.

Together, the companies applied a "strange and incorrect interpretation" to the nut-purchase contracts to determine the price Mauna Loa paid, the company said. The new owners, Shansby, are now refusing to go along with what they see as an improper price structure.

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