WHITE PLAINS, N.Y. — While debt and distribution costs at Hostess Brands Inc. are excessively high, production costs are “neither excessive nor out of line with the market,” say representatives of the Bakery, Confectionery, Tobacco and Grain Millers International Union.

In a Nov. 19 filing with the U.S. Bankruptcy Court, Southern District of New York, the B.C.T.G.M. says it has been focused on a single objective since the initial bankruptcy — “compelling the company to restructure itself in a manner that would provide a real, rather than an illusory or theoretical, likelihood of establishing a stable business with secure jobs for thousands of employees.”

In recent days a wide gap has appeared between positions of the B.C.T.G.M. and the International Brotherhood of Teamsters. The Teamsters said expert financial analysis confirmed the need for labor concessions and that a liquidation was imminent. The Teamsters also asked, without success, for the B.C.T.G.M. to end their strike.

Responding to criticisms that its strike triggered the liquidation, the B.C.T.G.M. vigorously disagreed.
“No one paid attention to the B.C.T.G.M.,” the union says. “Now everyone is. But blaming the B.C.T.G.M. for the company’s liquidation is no more credible than blaming an isolated gust of wind for blowing over a tree, when it was the tree’s shallow, rotted root structure that was actually responsible.”

Objecting to the company’s motions to wind down the company, the B.C.T.G.M. says it “desires to expeditiously put the company’s assets into the hands of true baking industry operators who will have a fighting chance of operating a baking business, rather than leave them with management and lenders whose intransigence and unwillingness to face directly the company’s real problems has driven it into bankruptcy twice.”

More specifically, the union says it is objecting because the Hostess plan does not include a “prompt 363 sales process,” one that would allow the sale of the business free and clear of liens.

The B.C.T.G.M. filing includes extensive background on how the union says it negotiated with Hostess in the years since the initial bankruptcy filing in 2004. The union cites Hostess filings in stating it engaged in “around-the-clock negotiations” to reach a “comprehensive labor deal” as part of emerging from the first bankruptcy.

As part of a February 2008 agreement, the B.C.T.G.M. agreed to changes in work rules and other concessions that were to give the company $20 million in savings the first year and $2 million each year thereafter.

With the labor concessions in hand, Hostess was able to confirm its plan to emerge from bankruptcy, which occurred in February 2009, the B.C.T.G.M. says.

“As part of the negotiations leading to the labor deal, the 2004 debtors said that they would reinvest the monies saved through the B.C.T.G.M.’s concessions in the company, specifically promising to focus on brand building, modernizing its plants and trucks, investing in new technology that other baking companies were employing and, importantly, developing new products to increase revenue in the face of a national trend away from sweet goods and bleached flour breads,” the B.C.T.G.M. says. “However, upon emergence, the debtors were burdened with $773 million in secured debt — in excess of $100 million more than the 2004 debtors had when the cases were initially filed. The B.C.T.G.M. told the debtors prior to emergence that this increased debt load — unheard of in a chapter 11 process — would make it impossible for the company to keep its promises and would inevitably result in a second bankruptcy. It was right; instead of reinvesting the money saved as a result of the B.C.T.G.M.’s concessions, plant machinery was not replaced, new technology was ignored, and new product development never occurred.”

With Hostess facing “the inevitable financial difficulties predicted by the B.C.T.G.M.,” management in 2011 sought concessions from the Teamsters union in a round of negotiations that ultimately proved unsuccessful.

“Notably, through that period, the company never approached the B.C.T.G.M.,” the union says.

In this narrative, the B.C.T.G.M. appears to be making the case that its members have been asked to make concessions that should have fallen upon the Teamsters. The filing says the company approached the B.C.T.G.M. with a presentation with a central point “everyone in the baking industry knew” — that distribution costs were $80 million to $130 million a year too high while production costs were not excessive.”

From the summer of 2011 until the second chapter 11 filing, the B.C.T.G.M. has been consistent in its message, the filing says:

“(Company representatives) were prepared to recommend to the B.C.T.G.M. leadership that it accept concessions if, but only if, the company (a) marked its distribution costs to market, (b) established a sustainable capital structure, (c) developed a plan for new revenue, and (d) gave meaningful successorship rights to the B.C.T.G.M.; and (2) it was the B.C.T.G.M. advisers’ view that if these conditions were not met, B.C.T.G.M. workers were likely to strike the company, because they had lost faith in it and believed that liquidation was preferable to the death spiral the company had created.”

“It is now clear beyond peradventure that the company did not believe the B.C.T.G.M. Throughout the negotiations, both prior to and after the chapter 11 filing, the company rejected every B.C.T.G.M. effort to persuade it to engage in a real restructuring that would bring fairness to the workforce and produce at least a reasonable possibility of long-term success. The company also, apparently, did not believe that workers would strike. Painfully, it miscalculated seriously.”

In a footnote, the B.C.T.G.M. accuses Hostess of “propagating the myth” that its members were falsely told a buy was “waiting in the wings” to acquire the company.

“Workers were told no such thing,” the B.C.T.G.M. says. “Instead, they were told — truthfully — that there were entities that had been following the case who continued to have interest in purchasing some or all of the company. They were also told that there were no assurances anyone would step up.”

Judge Robert D. Drain, president over the bankruptcy case, said in October “the evidence is crystal clear” no third party alternatives existed. The ruling was used as justification for the judge to allow Hostess to impose concessions on the B.C.T.G.M., even though more than 90% of its members voted to reject the Hostess plan.