Two Bakersfield-based ag marketing organizations are locked in a dispute over how to cover more than $20 million in losses stemming from their ill-fated joint venture into the cotton fields of West Texas.
Calcot Ltd., a major cotton exporter representing some 1,200 western growers, has filed suit accusing White Gold Cotton LLC principal Mark Costa of hiding his personal assets to avoid paying his share of the losses when 2010's West Texas cotton crop came up short of expectations.
Costa's attorney said in an interview Thursday that the lawsuit, filed Nov. 1 in Kings County Superior Court, overstates White Gold's share of the losses. He further asserted that Costa's asset transfers were unrelated to the venture's failure, and that Calcot itself mishandled aspects of the now defunct partnership.
While the lawsuit remains in limbo as the parties try to negotiate a settlement, its court file sheds light on how a previously successful local business partnership got caught up in an unusually volatile cotton harvest that has become the subject of lawsuits around the country.
Calcot, founded in 1927, has long done business with growers in California and Arizona. But Calcot's attorney said the nonprofit cooperative had never done business in West Texas until Costa approached the cooperative in about 2007 with the idea of forming a partnership. Under the joint venture, Costa, a former Calcot employee with business ties to West Texas cotton farmers, was to arrange purchase agreements and issue contracts to sell the cotton to Calcot.
Calcot's role was to handle the trading end and arrange market mechanisms such as futures contracts to minimize financial risk.
In 2008-09, the first year of the partnership, Calcot and White Gold split a total of $2.8 million earned buying and selling cotton from West Texas, according to the lawsuit. The following year their venture netted $1.6 million. In 2010-11, however, the partnership lost nearly $21.6 million.
Both sides said the loss was primarily a result of some West Texas farmers failing to deliver all the cotton they had earlier pledged to sell the partnership.
Costa's Bakersfield attorney, Barry Goldner, said some farmers opted to sell to a higher bidder rather than honor their commitments to sell to White Gold during a sharp run-up in cotton prices in 2010 and 2011.
"It created an issue in the market with regard to cotton that was sold more than once," he said.
Regardless, an attorney for Calcot in Hanford, Robert Dowd, said the company believes White Gold failed to a offer a "complete view" of what cotton was available for production and delivery.
Observers of West Texas' cotton industry said many merchants got burned in the 2010-11 crop year when deliveries failed to live up to government estimates. That same crop year, prices shot up from about 70 cents per pound to more than $2 amid a panic in the international textile industry.
John Robinson, an agricultural economist at Texas A&M University's AgriLife Extension Service, said many traders were left holding the bag when the cotton they were counting on never materialized.
This, he said, led to merchant allegations-- and now a raft of lawsuits -- claiming that some farmers broke their sales commitments and instead sold to the highest bidder.
Robinson said there's another side to the story.
"The grower is saying, 'Uh, too bad if you (overestimated) the number of bales that come off this farm. I gave you everything that came off this farm,'" he said.
White Gold has not been served with the lawsuit, and so it has not filed a formal response. But Goldner, Costa's attorney, said the company will file a cross-complaint against Calcot if White Gold is served with the lawsuit.
Goldner said White Gold has concerns about the way Calcot hedged the trades behind the partnership's losses.
"There are also other charges that Calcot has imposed on the joint account which we believe were inappropriately charged to the joint account," he said. "There are further issues and claims because of Calcot's failure to provide funding for the cotton purchases."
Dowd, Calcot's attorney, said the charges to the joint account were accurate.
"We believe that the losses from the venture have been divided 50-50 as they should have per the agreement," he said.
One of the lawsuit's main contentions is that Costa, White Gold's primary owner, transferred his personal property to other entities -- MJC Land Co. LLC and Costa Land Co. LLC -- to shield them from his financial obligations under the partnership. He said Costa created both entities after the losses came to light, and that he controls them both.
"We believe that (the corporate entities) are all intertwined," he said.
Goldner disputed that conclusion.
"Those real estate holdings had absolutely nothing to do with White Gold Cotton's business," he said.