Family claims Walz Energy partners lied about project’s financing

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By Audrey Posten, North Iowa Times

Members of the Walz family are suing their Walz Energy partners, claiming they lied about having financing for the 10,000-head cattle feedlot and biogas operation under construction outside Monona.

The lawsuit filed by Michael, Dean and Jared Walz accuses Feeder Creek Group and its managing members, Heath Kellogg and Jon Haman, of theft, misrepresentation and breach of contract.

The Walzes said they were first approached by Kellogg and Haman in December 2016 regarding the development of a large cattle feeding facility with anaerobic digesters that would combine the manure from the cattle with feed waste to produce natural gas.

Initially, Kellogg and Haman requested that the Walzes provide a site for the facility and supply silage for the operation. In exchange, the family would own 50 percent of the entity, while Kellogg and Haman would manage it and own the other half. However, according to the lawsuit, that initial proposal changed, eventually asking the Walzes to also provide $10 million for construction of the cattle facility. Kellogg and Haman were to provide $15 million to construct the anaerobic digesters.

“From the inception of their discussions with Mike, Dean and Jared, Kellogg and Haman represented they had secured the necessary financing to construct the anaerobic digesters,” the lawsuit stated.

In early 2017, the Walzes conveyed land to Walz Energy, and, in July of that year, received a $10 million loan from Peoples State Bank in Prairie du Chien, Wis. At the time, Kellogg and Haman assured the bank they had additional financing for the project. In the coming months, Kellogg authorized the transfer of over $6 million of that amount from Peoples State Bank to a “Feeder Creek Energy” account at Iowa State Bank in Clarksville for “construction draw,” stated the lawsuit. 

Six open front cattle barns, to go with an additional barn already in existence, were eventually constructed on the site, but Walz Energy faced backlash. Many local residents opposed the project, citing its proximity to Bloody Run Creek, an Outstanding Iowa Water, as well as potential contamination of the groundwater in the area’s porous karst topography. 

In March 2018, the Iowa Department of Natural Resources issued a consent order to Walz Energy for three separate violations that occurred during construction, including illegal discharges to Bloody Run. In May of that year, continued violations prompted the DNR to seek judicial enforcement. Officials said the main problem was that few-or inadequate-stabilization or erosion control measures had been taken at the site, an assessment Haman disputed. The Iowa Environmental Protection Commission later chose not to refer the facility to the state attorney general’s office.

According to the lawsuit, it was during this period that financial problems began to arise. In February 2018, the first of multiple mechanics liens was filed on the Walz Energy property, including one from the general contractor for an outstanding balance of over $2 million. The Walzes eventually had to borrow an additional $3 million and mortgage additional property to pay off the amounts due to contractors. They also made several cash advances to Walz Energy, which were never repaid.

A month later, Kellogg and Haman informed the Walzes they did not have funding for the anaerobic digesters.

By Oct. 1, 2018, the Walz family could not pay the over $13 million in principal and interest due to Peoples State Bank because the feeder cattle operation was not up and running and generating income.

Pressure from the DNR to stabilize the site and deal with stormwater issues was also mounting. Even after paying a $10,000 penalty in August and agreeing to address violations, Walz Energy was slapped with four additional notices of violation through the end of the year.

Peoples State Bank began foreclosure proceedings against Walz Energy and the Walzes in April 2019. According to court filings, the bank is asking for $11,034,444.44, “plus per diem interest in the amount of $5,000 from and after March 29, 2019, until paid in full, the costs of this action, attorneys fees and other costs and expenses provided by law.”

Now, the Walzes are seeking redress from their partners, including the $14.1 million they said they’ve invested in the operation. To date, they noted, Feeder Creek Group, which Kellogg and Haman are part of, has not made any monetary investment in Walz Energy.

According to the lawsuit, the Walzes allege Kellogg and Haman mismanaged Walz Energy and Feeder Creek Group, breached contract and “co-mingled Walz Energy’s funds with the funds of Feeder Creek Group and their individual accounts...Haman’s and Kellogg’s conduct constitutes embezzlement and theft from Walz Energy.”

The Walzes said they, nor the bank, would have financed the project knowing Kellogg and Haman did not have $15 million in funding for the anaerobic digesters.

In their response to the lawsuit, Kellogg and Haman accused the Walzes of interfering with the operation. They remain confident the project will still come to fruition once litigation is resolved.

This spring, Jared Walz became the point of contact with the DNR, taking over for Haman. Another notice of violation came in June and, in September, the DNR issued a second administrative consent order to Walz Energy, including another $10,000 penalty. 

According to a recent report from the DNR, Walz Energy has agreed to pay the administrative penalty, and, “in the interest of avoiding litigation, the parties have agreed to resolve the violations alleged herein through entry of this order.” Failure to comply with any parts of the administrative consent order “may result in the imposition of further administrative penalties or referral to the Attorney General.”

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