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Published July 15, 2013, 03:31 PM

Off track

An organic shipper in South Dakota is fighting on, despite numerous setbacks.

By: Mikkel Pates, Agweek

ROSHOLT, S.D. — A decade ago, Heartland Organic Foods Inc. was a busy, regional player in the organic grain export market. Today, the company is defunct, its equipment standing topsy-turvy along a rail spur on a county road that runs through the small village of Victor, S.D.

Gene Paulson, 77, the company’s founder and owner, has had a varied, colorful career in agriculture that crossed several pages in the region’s agriculture and business history. A year ago, Paulson represented himself in numerous legal proceedings, filing bankruptcy in Sioux Falls in an attempt to get his constitutional legal issues into a federal court.

He has lost a series of legal conflicts with a railroad and South Dakota’s Roberts County. It’s all in a spectacular heap on the south side of the tracks. It’s unclear how the mess will ever get cleaned up.

“I should have just picked up and left,” Paulson says. “I shouldn’t have had anything to do with the state of South Dakota again.”

A varied career

Paulson was born in 1936, the only son and the oldest of four children. He graduated in 1954 with honors from West Central School of Agriculture and Experiment Station (now the University of Minnesota, Morris). He married Beverly Zeimer of Browns Valley, S.D., in 1955.

In 1961, he leased a gravel pit east of Sisseton, hoping to use it for construction of Interstate 29. He attempted to charge a premium for gravel when Interstate 29 was built, but he got aced out by bigger players based in Sioux Falls, who brought in aggregate from elsewhere. In the end, the Small Business Administration called Paulson’s business loan and he was unable to pay it, as requested. That effectively ended his construction business.

“I’ve had my share of getting involved with people I didn’t know I was getting involved with,” Paulson recalls.

He turned to other businesses — first to trucking. He rented some land from a local Native American tribe, but that ended prematurely.

In 1981, he managed Empire Bean Co., an edible bean processing company, operated from an old co-op elevator in Victor. The edible bean company went “belly-up” and Paulson ended up owning the elevator — a 20,000-bushel wooden structure on the old Soo Line spur that went through town and hooked up with the Canadian Pacific Railway in the Fairmount, N.D., area.

In October 1991, he formed Heartland Organic Foods Inc. and started an organic processing business. It was funded in part by a U.S. Department of Agriculture development grant. It operated somewhat like a farmer-owned cooperative. About 25 shareholders owned 10,000 shares of common stock, at $100 each. Only members who paid a modest one-time fee could market grain through the company. In this way, the company avoided the need to acquire a grain-buyer’s license and bond because it was selling its own product.

Turning conservative

Not wanting to repeat his SBA experience, Paulson became financially conservative. “I made up my mind that I would never ever, ever go into debt,” he says. He says he put “a couple of hundred thousand” into equipping the business. Paulson’s elevators never looked pretty. In the 1990s, he’d brought in grain hopper bottom cars and suspended them from the side of one elevator, to load trucks.

“We cleaned everything we shipped,” he says. “Everything was food-grade — two semi-loads a day of product.” Primarily, the company processed soybeans.

“The first year (1996), we did $200,000 in business, but we added $1 million every year after that for about three years,” Paulson says. “In three years, we were up over $3 million.”

Heartland Organic enjoyed a good reputation among some in the organic industry. At one time, Paulson says, the company marketed production from 50,000 acres of organic grain. He says the company employed up to 15 people.

Two elevators stood next to each other on the property Paulson had purchased. The other was still on railroad property. Heartland Organic got a grant and attempted to raise walleyes on organic feed. That effort got start-up grants, but wasn’t approved for bigger grants that he says could have made it succeed.

“We primarily shipped soybeans but a lot of other stuff, too,” Paulson says. “We handled a lot of wheat and shipped it to Europe. We shipped a lot of soybeans to Japan. We contracted with an outfit in Iowa that was owned by the Japanese.” The company operated five over-the-road trucks. One truck went constantly back and forth to British Columbia, to deliver manufactured soybean meal to a chicken producer.

Organic opportunities

Paulson had enough credibility in the industry to serve on the board of the Northern Plains Sustainable Agriculture Association. That fledgling organization started in the late 1970s and was part of an emerging organic industry that initially was largely an export market.

Terry Jacobson, an organic farmer from Wales, N.D., who served as executive director of the NPSAS, remembers that Paulson wasn’t exactly a pioneer in the business, but many of those companies failed because they were undercapitalized.

“Gene was a person who got things done, very straight-forward,” Jacobson recalls. Jacobson says hardly anyone who has been in the organic business for any length of time has gone through a career without someone failing to pay.

“He was a person of good reputation,” Jacobson remembers. “Anything that I saw was very respectable. I remember that they took organic certification very seriously.” Heartland Organic always paid a fair price, he says.

In fact, Jacobson tried to merge a group of growers called Prairie Organic Marketing Cooperative with Heartland Organic Foods. That failed when the Prairie Organic group lost a lot of money on a shipment of grain to Europe that was rejected as organic because someone in the group had fumigated their stored grain.

And Paulson had problems of his own.

A Sunflour blossoms

On July 19, 2000, Sunflour Railroad Inc. purchased 26.3 miles of trackage in Roberts and Marshall counties. Thomas Z. Mars was listed as president and CEO. SRI would be “under common control” with Denver Rock Island Railroad of Littleton, Colo., which Mars also owned. Denver Rock Island does switching for railroads, among other things. SRI connects with the Canadian Pacific Railway at Rosholt. The line originally was constructed in 1913, and later operated as a branch line by the Soo Line. The Soo Line had requested permission to abandon the branch beyond Rosholt, but Sunflour bought it.

In 2000, Mars came into the Heartland Organic office and introduced himself as the new railroad owner. The company would make money primarily by storing cars for other railroads.

“I thought, that’s okay; we never did use it,” Paulson recalls. Paulson had been paying $300 a year in rent to the Soo Line for the elevator he owned on its property.

For a time, things went fine. Mars spent the first winter living in a mobile home that was part of the elevator office.

About that time, a representative of the Geneva Companies wanted to broker the sale of Heartland Organic. Paulson declined, partly because he thought it would mean paying for an expensive accounting audit. He says the sale might have meant millions. “I should have sold,” Paulson says.

Getting radical

In 2004, Paulson bought a three-acre parcel from the Soo Line that SRI had not purchased in the initial 2000 transaction.

SRI then asked for $500 in rent for the property where Paulson’s elevator stood, which SRI did own, as per the original transaction. Mars went to court to sue for it, and won. Paulson represented himself and contended that some of Mars’ tracks were on the property Paulson had purchased. He tried to charge Mars rent for that, to offset the rent, but that didn’t work.

Gary Ehlers of Wheaton, Minn., one of the former shareholders of Heartland Organic Foods, says he’d admired how Paulson had built the equipment and run it profitably with little investment. But Ehlers says the company was running into a few marketing challenges and shareholders voted to dissolve it in November 2002.

Among other things, Paulson went to the Victor Township board, to ask that it “vacate the streets,” allowing Paulson to control buildings that had been built 50 years earlier on “streets.” The township board (which included one of Paulson’s relatives), declined. Paulson says the township historically had said roads belonged to the people who lived there and had taken care of them. Paulson, when he was in the gravel business, had graveled all of the streets in Victor.

“The townships said that from that time forward, they’re your streets, take care of them,” he says. “They’d said that over and over again.”

Paulson stopped using the disputed elevator in 2004. Mars got a court to agree that Paulson needed to remove it from his land. Paulson refused. He tried to move his business to Moorhead, Minn., but that didn’t work either.

Faced with the loss of his 20,000-bushel elevator, Paulson started bringing in new elevator cars to replace it. He put them on his own property but they went 10 feet onto the street. They were there three or four years.

“I asked for a building permit and the local states attorney grabbed the permit from the assessor, and said, ‘I’ll take care of that,’” Paulson says. “I never saw no building permit.”

Kay Nikolas, who was the Roberts County State’s Attorney at the time, declined comment on Paulson. She had advised Roberts County commissioners they could control the streets in Victor.

In October 2006, several county officials and road crews came and shoved Paulson’s property off of the street.

In September 2007, Mars removed one elevator and sent Paulson a bill for $20,000. Paulson refused to pay. The case went to district court and Mars got a judgment against Paulson, which Paulson hasn’t paid. South Dakota Secretary of State declared Heartland Organic Foods Inc., inactive on June 5, 2007.

Topsy turvey

Mars did not return phone messages from Agweek left at his various business numbers.

Roberts County State’s Attorney Kerry Cameron, Nikolas’ old boss, who was defeated by her in 2000 but was re-elected in 2008, says he’s mystified as to why the county got involved in moving Paulson’s equipment. “I don’t know what interest the county would have had in going up there and tearing down buildings that belonged to Paulson’s company,” he says.

Cameron acknowledges Paulson’s credibility was hurt by representing himself in court, by suing people and by being preoccupied with conspiracy theories.

Paulson continues to slug away. He’s filed something he describes as a “Seventh Amendment Jury” against the railroad and his attorneys, citing constitutional law. He’s filed roughly 40 actions. The latest has been pending in the 8th Circuit Court of Appeals for four months. To make his points, he’s filed his own Chapter 13 bankruptcy case in Sioux Falls.

Meanwhile, the Paulsons live on their Social Security checks. Gene suffered a stroke last December, but it’s only affected his ability to get around.

“It costs money to get somebody else,” he says of the legal work. “I might as well represent myself. Besides, I don’t have anything else to do.”

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