By Leisa Boley Hellwarth, a dairy farmer and attorney near Celina
It’s always about the money. Always.
Here’s a current example. In March of 2018, Dean Foods notified over 100 dairy farmers across 8 states that they were terminating their contracts, effective end of May, 2018. Dean Foods blamed an oversupply of raw milk, a decrease in fluid milk consumption and Walmart’s new 250,000-square-foot milk processing facility in Indiana. Sadly, some of these dairy farms went out of business when they were unable to locate a new processor.
In what seemed like karma, Dean Foods filed for bankruptcy under Chapter 11 on Nov. 12, 2019. When they sought bankruptcy protection, Dean Foods was the largest milk processor in the US. Dean Foods explained they intended to use the Chapter 11 proceedings to keep running the business and address debt and unfunded debt obligations as it sought to sell the company.
The 6 different bankruptcy options are as follows: Chapter 7 is liquidation. Chapter 9 is municipalities. Chapter 11 is reorganization. Chapter 12 is family farmers and family fishermen. Chapter 13 is wage earner plan. Chapter 15 is foreign debtors.
DFA (Dairy Farmers of America) bought the majority of Dean Foods’ assets in May of this year for $443 million, in a sale approved by the bankruptcy court. Chapter 11 may include sale of the debtor company.
In Chapter 11, an appointed bankruptcy trustee essentially becomes the CEO of the debtor, exercising such day-to-day control as he or she deems appropriate. A lawyer for the trustee for Dean Foods recently sent debt settlement letters to dairy farmers with Dean Food contracts that received payment from the company within 90 days of the bankruptcy filing. The producers were instructed to remit a certain amount by Dec. 19, 2020 or the full amount paid during the preference period would be sought. In one situation, a farmer was asked to pay $4,000 by Dec. 19, 2020 or the trustee would seek $14,000 from him.
A transaction that occurs within the 90 days prior to the bankruptcy filing can be voided. This is called a Trustee Avoidance Claim and provided for in 11 U.S.C. Sec. 547. There are, however, exceptions. The claim would fail if the transaction occurred in the normal course of business. Payment by a processor to a producer would fall within this exception. If a company engaged in a particular transaction (like purchasing raw milk from a dairy farm) many times before, it may be easy to conclude that doing so again is in the normal course of business.
Two other exceptions include payment made as part of a contemporaneous exchange for new value given and a transfer that creates a security interest in property. The trustee has the ability to sue farmers to avoid and recover any preference items by filing lawsuits against them. It is up to the farmer to obtain legal counsel who can argue and substantiate that the proposed Trustee Avoidance Claim fails due to the specified exemptions.
Roger McEowen, an agricultural lawyer at Washburn University opined that “these are extortion letters.” He advised anyone receiving such communication to obtain legal counsel experienced with bankruptcy law. In all likelihood, the farmer will prevail under the normal course of business exemption. In order to do so, an attorney will need to file timely paperwork and support the legal argument.
Payment received by a Chapter 11 bankruptcy trustee depends on the amount of the debtor’s disbursements during each quarter. The more money collected from producers means more money to pay Dean Foods Creditors and more compensation to the trustee.
It’s always about the money. Always.
On a less cynical note, let me offer Happy Holiday wishes to one and all!
Leisa Boley Hellwarth is a dairy farmer and an attorney. She represents farmers throughout Ohio from her office near Celina. Her office number is 419-586-1072.