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Remember last April when Valero bought bankrupt ethanol producer Verasun and then reneged on contracts with local farmers?
It gets worse. Now the New York lawyers tying up Verasun's bankruptcy are telling farmers who did business with Verasun right before it went belly up to pony up. If you did business with Verasun ninety days before their bankruptcy, the lawyers want you to pay that money back.
Verasun filed for bankruptcy on Halloween, 2008. That means the lawyers want farmers to cough up cash they got from Verasun a far back as August 3, 2008. Quick check: how many of you readers still have cash on hand from transactions from summer 2008? How many of you would have $50,000 handy to hand back to a bankrupt entity, as one Minnesota farmer is being asked to do?
The South Dakota Corn Growers Association is understandably torqued at this "bankruptcy preference claim." They are urging farmers to fight back... as am I. You did business with Verasun, you got paid for your product or service, that money's yours.
But it's not entirely that cut and dried. The idea behind "preference claims," says Iowa State University ag law expert Roger McEowen, is fairness. For every farmer or contractor whom Verasun managed to pay in the run-up to bankruptcy, there might be another entity who delivered a good or service to Verasun on, say, October 15, who didn't get a check before Verasun called it quits. Instead of seeing some business partners made whole and others wholly hosed, preference claims seek to spread out the hosing to everyone unlucky enough to deal with Verasun.
Still, possession is nine-tenths of the law. If Verasun paid you and didn't pay someone else, you're still entitled to fight for your cash. Consult SDCGA's resource page, consult your local lawyer, and tell the Verasun vultures to buzz off.
By the way, Verasun's purchaser Valero is profitable again after a rough 2009. Maybe the stiffed creditors and New York lawyers should be turning to the parent company for restitution first.
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Update 20:41 CDT: Eager commenter Barry Smith provides a link to Dr. McEowen's really useful brief on bankruptcy law and the defenses farmers and other suppliers can mount against the preference claim. Read carefully, get your receipts, and call your lawyer. Note also that the letters are asking for 80% of the amounts paid back in 2008. As Dr. McEowen notes, that isn't a final number: if you can't wage a successful defense, you may at least be able to dicker.
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2 days ago
These laws need to be changed.These farmers delivered a commodity and were paid for the delivery, Period! They did not take a risk and issue credit to Verasun. I understand that there may be some that did not get paid at the end, but the bankruptcy laws should be changed so that these farmers are paid by the new owners. Creditors took a risk by issuing credit, they should be the last to be paid. The farmers should not even have to be dealing with this.
ReplyDeleteBarry,
ReplyDeleteHere is the point of the federal bankruptcy preference policy.
Company pays me all it owes me right before it files bankruptcy. But, pays you nothing. I got paid because they like me better or want a date with my daughter or any other good or bad reason.
Is this fair? Because in these situations, companies tend to pay the big and powerful before they file bankruptcy (big companies have the power to sue and expunge while the little guy doesn't) and stiff the little guy who can't afford the legal fees, the 90 day preference policy is really a little guy protection policy.
You want it changed, you are for the big and powerful. While some want it to be shorter (esp. for smaller bankruptcies as it reduces bankruptcy costs), consumer credit groups, big banks, small banks, small business, individual groups, liberals, conservatives, Republicans and Democrats all like the 90 day preference period. Only big business advocates something different.
The reason for this broad consensus is all these groups want fairness. If they lose with assurance all creditors in each class were treated fairly, they accept it. What they don't like is being screwed.
But, hey, I guess someone needs to be against fairness for the little guy. Barry you are it.
Cory,
I think you did a good job of trying to introduce fairness by getting McEowen's comments. And, I think it wholly appropriate for farmers to fight they weren't paid in preference as advised by the SDCGA. Because it is not my area of expertise, I'm not fully versed on it but I believe there are certain "preference" protections to farmers delivering commodities.
I think (definitely not sure) what will in the end might happen is all creditors in certain class (ala farmers) will have all proceeds put in a pool and they pro rata redistributed. In other words, those paid in full will lose some proceeds and those not get some.
Besides being equitable (anyone against equity?) it has the additional benefit of ensuring nobody got all their money because of relationship, size, money or threat of lawsuit.
Troy . You sure make a lot of assumptions on what I would like to change about the law.. If Patrick Grover is correct ( since I am not an attorney , just a commenter , I am assuming that he knows what he is talking about) then the farmers have an" ordinary course of business defense", wouldn't it be wise to write this into the law so that the farmers did not have to defend against it but rather were protected , it sure seems like that would simplify things and make for less litigation (I know that means less money for lawyers)and no one would have to come up with $50000 that they were paid 2 years ago. I am sure that you don't believe that it is fair that a farmer delivering a commodity should have the same risk of loss as a creditor.
ReplyDeleteThe 90 day preference period insures all are treated equally according the law and it is a policy with very, very broad concensus.
ReplyDeleteRather than demanding the law be changed without suggestions and hinting one doesn't have a clue on how bankruptcy works to the benefit of creditors (esp. trade creditors which these farmers are) which would lead one to make such assumptions, go ahead and devise the changes you think would work and see if Herseth would even introduce them.
The 90 day preference period is the best protection devised with nearly universal support who is an expert in the area on all sides of the fence has ever come up with to protect the guy with the least resources to protect themself in bankruptcy.
I'm curious, Troy: are preference claims a form of socialist redistribution of wealth?
ReplyDeleteLOL. No they aren't.
ReplyDeleteHere is a simple description of the principal.
In the 90 days prior to the filing, all transactions are reviewed to insure creditors are treated fairly.
Did the banker say "Pay me X dollars and I'll release the mortgage on your house."
Did one supplier who knew of the problems take advantage of those suppliers who didn't by demanding an outsized payment to continue shipping diminishing what others would have gotten.
I don't mean to imply all or most of the transactions are nefarious. For instance, the company knew if its insurance was cancelled it would be immediately shut down so it paid its premiums. And, the policy called for the entire year paid up front. If this was paid during the preference period, the insuror would be required to expunge his premium payment.
Or in this case (this may or not ahve happened), Verasun agrees to pay certain critical suppliers within three days of delivery. Maybe they had the sophistication to understand the challenges of Verasun. At the same time, the unsuspecting farmer thought getting paid in 15 days was ok.
The system does properly reward people who act on superior information to protect themselves but the preference period places a limit on what they can do.
Like it or not, the preference rule by a wide preponderance more often protects the smaller guy. And contrary to what you might believe (and I think you are trying to imply Cory :) ), Republicans are more main street than wall street (look no further than the Wall Street "reform" Obama passed which is so big bank friendly and anti-small bank and small business it is a tragedy).
Troy I am just a commentor on Cory's blog, I don't have the education for lengthy dissertation on hardly any subject, but Cory still is gracious enough to let me post and for that I thank him. My point in posting is maybe just maybe one of my simple posts will help to start a disscusssion. I apologize if my short posts disturb you and cause false assumptions, in fact in posting I would hope that someone like you would have some ideas for improvements on these laws, but I reject the idea that there is no room for improvement. It seems clear to me that there is a problem here and from reading Cory's links I am in good company there, my post is simply an expression of my own realization, and I hope that Cory keeps permiting me to post even though I dont have all the answers.
ReplyDelete[Comments long and short are welcome from all named speakers, Barry!]
ReplyDeleteTroy, I appreciate the idea of fairness lying behind the "preferential claim" concept. I would be interested in seeing a breakdown of the farmers and other businesses receiving these letters from the bankruptcy lawyers. Are they predominantly big players? Did VeraSun favor its biggest partners in the weeks leading up to its bankruptcy filing? Are there any small fry being caught up in this net? (I'm afraid that's investigative journalism above my pay grade at the moment!)
Now I hadn't even broken out the partisan stick on this issue, Troy. I can certainly see how this bankruptcy rule would tend to protect smaller players who lack leverage, inside info, etc. But I see an element of this rule that defies Tea-flavored rugged individualism and hearkens to Bailey-Savings-and-Loan communitarianism, if not socialism. If I were a lucky corn grower who got paid in full by VeraSun on September 15, 2008, I could easily see myself saying, "Hey, if VeraSun didn't pay some other guy, that's their problem. I sold my corn fair and square. What's mine is mine." Accepting the preferential claim rule means accepting that I have an obligation to share my fortune with my neighbors, doesn't it?
I am curious: is there any case-by-case investigation of each payout for undue favoritism? Or will the class be whittled down no farther than "farmers", and all members will be hit, regardless of individual circumstances?
This reminds me of the Bernie Madoff scandal and the question of whether investors who got dividends should be required to hand over their "earnings" for redistribution to all of Madoff's clients.
Cory,
ReplyDeleteBankruptcy is the rules of the game under which commerce depends. Even the rugged individualist wants the rules defined and fair. :)
To your questions the best I can although not an expert.
"is there any case-by-case investigation of each payout for undue favoritism?" Essentially yes. Now small transactions may be missed but in concept every transaction during the 90 day period will be looked at.
"Or will the class be whittled own no farther than "farmers" Every class will be treated the same based on their standing. Wages are first priority, I think taxes are second, secured creditors are next (taxes might be after secured creditors), and unsecured creditors are last. It is my understanding those selling commodities have special standing relative to other unsecured creditors. But I don't know how that works.
"and all members will be hit, regardless of individual circumstances?" Yes. In each class all will be treated equally.
"This reminds me of the Bernie Madoff scandal and the question of whether investors who got dividends should be required to hand over their "earnings" for redistribution to all of Madoff's clients." While not perfectly analogous, there is some relation here. Madoff investors paid a profit with others money when there was no profit, will lose their profit and it returned to those fleeced.
I wonder since fuel and electricity are needed to produce ethanol, will the utility's be required to payback the money they received back 90 days as well? or are they protected by law?
ReplyDeleteHere is a pertinent link where the ordinary course of business defense is explained in detail.
ReplyDeleteHere is a link to the preferential payment rule
ReplyDeleteFarmers and folks receiving a letter need to pay heed. Ignore it and IT WON'T GO AWAY. As noted in the Cory's post and on the KELO web site - waiting for the second, harsher notice likely may cost you -- BIG TIME. If one waits until the second notice to reply then one will likely HAVE to hire an east coast attorney.
ReplyDeleteHere's a crude bench mark for NYC attorney costs. The NYC attorneys for the Microsoft anti-trust action (yes, it extended to SD), commanded $1000 per hour - that was 6 years ago.
This is not legal advice. For legal advice you are encouraged to consult your attorney.
Farmers and folks receiving a letter need to pay heed. Ignore it and IT WON'T GO AWAY. As noted in the Cory's post and on the KELO web site - waiting for the second, harsher notice likely may cost you -- BIG TIME. If one waits until the second notice to reply then one will likely HAVE to hire an east coast attorney.
ReplyDeleteHere's a crude bench mark for NYC attorney costs. The NYC attorneys for the Microsoft anti-trust action (yes, it extended to SD), commanded $1000 per hour - that was 6 years ago.
This is not legal advice. For legal advice you are encouraged to consult your attorney.
Barry,
ReplyDeleteThe course of dealing defense will likely ultimately work to the benefit of most farmers (minimize expungement from paid in full and maximize those delayed/denied payment). All of which is a consideration under the preference rule.
John Kelly,
You bring up a good point. When notified by the court to provide something, the best response is to respond. Ignoring it is the worst. And, most importantly they should all consult an attorney on the best response. This might be something the SDCGA can do on behalf of its members (hire a good attorney who devises the best response for the group).
Troy . Got a question for you. You posted " Every class will be treated the same based on their standing. Wages are first priority, I think taxes are second, secured creditors are next (taxes might be after secured creditors), and unsecured creditors are last. It is my understanding those selling commodities have special standing relative to other unsecured creditors." My question is: Can money collected from repayment from the farmers then be reallocated to a secured creditor because of this priority? Thank you for you patience.
ReplyDeleteBarry,
ReplyDeletePossibly if there was an conversion of assets which improperly benefitted a farmer. This is where the course of business protection will likely protect the farmer unless there is fraud etc.