Claims lodged by the largest Hispanic grocery store chain in Texas that a business partner seemingly has committed felonies in the running of a related business will be resolved outside of public view after a Harris County district judge recently kicked the case to arbitration.
The dispute pits ERR Investments, the parent company of La Michoacana Meat Market, which operates about 140 stores, and its owner and founder, Rafael Ortega, against the company that supplies its meats, Amigos Meat Distributors.
ERR Investments and Ortega filed suit against Amigos in Harris County District Court May 5. ERR and Ortega are 50 percent owners of Amigos and sued to get access to the company’s books and records to investigate “potentially serious violations of law at Amigos, including possible violations of tax laws, immigration and employment laws, and compliance with food safety obligations.”
AEA LLC, the general partner and a member of Amigos, asked for permission to intervene in the action May 26, calling the petition for writ of mandamus filed by ERR and Ortega in the district court “a complete sham” that was “concocted to circumvent the authority of the arbitration” proceeding “that includes Ortega’s already-pending books and records claim.”
“This is nothing but harassment,” AEA told the court. “Thousands of documents Ortega claims he has not received have already been provided to him. Intervenors’ counsel has spent more than 1,000 man-hours collecting, reviewing, and producing Amigos documents to Ortega. Intervenors are not withholding any documents he is entitled to under the books and records statutes, and believe nearly all, or potentially all, of those documents have already been produced.”
A hearing on that request in the arbitration is set for February, according to court records.
ERR and Ortega told the court that access to the books and records was necessary because they are potentially exposed to criminal and civil liability if their suspicions about how Amigos is operating are confirmed.
While AEA had characterized the request for access to Amigos’ records as an act of “bad faith,” ERR and Ortega pushed back on that assertion in court documents, detailing the “serious concerns” regarding Amigos’ business operations. Some of the potential violations of law ERR said it needs to look into include:
- Amigos’ alleged failure to report to the Internal Revenue Service at least 1,500 cash transactions that each totaled more than $10,000, a practice that ERR and Ortega told the court is “commonly associated with other violations of law, including under-reporting of tax obligations, cash skimming, and money laundering.”
- Amigos’ alleged structuring of some cash transactions, via invoice splitting, so they don’t appear to exceed $10,000.
- Amigos’ alleged hiring of undocumented workers.
- Amigos’ employment of Atilio “Al” Graniello, who has a conviction for misbranding expired meat products and was hired by Amigos in a food safety role following his release from prison.
ERR and Ortega told the court that AEA’s attempts to block access to records on these issues “should only heighten the Court’s concern that something at Amigos is seriously amiss, which requires investigation without further delay.”
The allegations, and AEA’s responses, were aired at a hearing Aug. 25 before Harris County District Judge Tanya Garrison.
Counsel for ERR and Ortega, David M.J. Rein of Sullivan & Cromwell, began by telling the court his client was concerned about Ortega’s potential criminal exposure based on “a number of practices … that are very troubling.”
Those practices include what he called a “very suspicious $50 million reclassification of inventory,” large cash distributions that were unexplained to family members of Amigos management, employing undocumented workers and hiring a “convicted felon” to handle some of the company’s accounting.
“The concerns have become heightened,” he said, through the continued investigation.
He repeated other allegations outlined in court filings, including the alleged failure to report transactions over $10,000 to the IRS for a decade.
“People do go to prison for that,” he said. “It’s commonly associated with money laundering, the hiring of unauthorized workers, theft. [Amigos] seems to have directed employees to split invoices so they don’t hit the $10,000 mark,” he said, noting that, too, is a crime.
The reason ERR and Ortega need access to the books and records via the district court proceeding, he said, is because the arbitration proceeding “is not about [determining whether there] has been misconduct that puts the entire company at risk.”
“The goal here,” he said, “is to investigate wrongdoing.”
AEA’s counsel, Jacqueline M. Furlow of Beck Redden, told the court this boils down to a “bitter” and “very personal dispute between two families,” the Ortegas who run La Michoacana and the Moreno family that runs Amigos.
AEA’s need to intervene in this action, Furlow argued, is apparent.
“They’re lobbing pretty serious criminal accusations … to think they’re not entitled to be part of this … their interests are inherent,” she said.
Another AEA attorney, Mary Kate Raffetto of Beck Redden reiterated that ERR has a pending books and records request in the arbitration and said her client already has produced more than two million requested documents in the arbitration.
“What they want is a second forum that allows them to fight a straw man and not the intervenor,” she said.
Judge Garrison told the parties at the August hearing that she had “400 questions” but one stood alone at the top of her list.
“What are we doing here?” she asked. “Because there are 10 lawyers here in this room right now … and I feel like this is a fight between my kids in the backseat. ‘He touched me first.’ And they’re saying ‘nuh-uh.’”
She asked why the parties were “wasting time and money” fighting over getting the documents through the court proceeding if they’ve already been produced in the arbitration.
“I just don’t feel like we’re being productive with any of this.”
At the hearing Rein told Judge Garrison that if she sent this dispute to arbitration it would be the first case in the country, based on his research, where a trial court compelled to arbitration a request for books and records.
On Sept. 1 Judge Garrison signed an order sending the dispute to arbitration.
AEA’s attorneys issued a statement to The Lawbook Wednesday that they “look forward to addressing the merits of the dispute” in arbitration and believe Judge Garrison was correct to compel arbitration.
“We dispute the Ortegas’ allegations and believe the evidence will establish that the Ortegas benefited greatly from the decades of hard work the Morenos put into building Amigos into a very successful company,” the statement reads.
Counsel for ERR and Ortega declined to comment.
Amigos Meat Distributors is represented by Jeremy Doyle of Reynolds Frizzell.
The case number is 2023-28216.