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Published September 21, 2010, 08:42 AM

VeraSun trustee plays rough on ‘preferential’ grain payments

FARGO, N.D. — Joe Breker has a warning for farmers who did business with VeraSun Energy: Read and heed any mail you might get, as the company is coming after you for your payment. Call a qualified lawyer if the letters tell you may owe money.

By: Mikkel Pates, Agweek

FARGO, N.D. — Joe Breker has a warning for farmers who did business with VeraSun Energy: Read and heed any mail you might get, as the company is coming after you for your payment. Call a qualified lawyer if the letters tell you may owe money.

The eastern South Dakota ethanol conglomerate filed Chapter 11 bankruptcy reorganization Oct. 31, 2008, after getting on the wrong side of volatile corn markets. Many of the company’s assets, including ethanol plants in Hankinson, N.D., and elsewhere, eventually were sold off. But the bankruptcy remains in play.

The current issue is if a farmer was paid within 90 days before the bankruptcy filing on that Oct. 31. The letter puts the responsibility on the farmer to show it wasn’t some sort of “preferential” payment, putting them at some unfair advantage among other creditors. It’s another tool the debtor estate has to reach out and accumulate cash.

Now the trustee, a New York law firm, working for all creditors — lenders and other large, secure creditors in the main — seems to be doing the unthinkable — coming after farmers who received some payment for grain, just before bankruptcy. The statute of limitations on the case is Oct. 31, 2010 — hence the letters. While the trustee isn’t saying, the case involves hundreds of farmers in the three-state area. There were 298 plants in several states.

“They just want the money,” says Breker, whose letter says he owes $26,800 but could settle for about $22,000. “I can’t believe they can do that, after I’ve delivered the corn, they’ve made it into ethanol, and sold the ethanol. I’m in disbelief. How could they think they could get it back? Does this mean I can get my corn back?”

A corn farmer from Havana and Rutland areas, Breker is a member of the North Dakota Corn Growers board of directors. He is one of one of an untold number of farmers who have received letters from the VeraSun bankruptcy trustee.

In late August, farmers like Breker, as well as grain elevators and others have been sent letters, telling them they must pay back the money.

“Honestly, it looked like junk mail to me,” Breker says. “But my curiosity got the best of me and I opened it — such-and-such a law firm on the East Coast. Lo and behold, they wanted money that had been paid to me 90 days before the bankruptcy.”

This letter issue is a double-whammy of sorts, adding an expensive insult to injury, Breker says.

He’d done a lot of business with the company, as the Hankinson delivery point is only about 35 miles from his farm. He lost marketing opportunities in 2008 when the contracts he had with the Hankinson plant evaporated when the company declared bankruptcy in the first place.

“It was a sizable amount for me, a year’s production,” Breker says. “All of that marketing plan for that year went to the birds.”

And now the letters.

Acknowledge the letters

Breker first went to his hometown lawyer, who referred him to Lowell Bottrell of Fargo, N.D., who is one of a small cadre of lawyers in the region who have spent a lot of time in corporate bankruptcy matters — often on both sides of the table.

“The first thing people need to do is respond,” Bottrell says. “If you hire a lawyer, or don’t, you need to tell the trustee what the factors are, such as, ‘I sold corn to the company and they paid for it.’

“If you let the letters go by the wayside, for sure you’re going to get sued. If you don’t respond, they could default you, and the court enters a default judgment against you — the amount the trustee alleges you owe. ”

In late August, Bottrell started getting calls first from clients — elevators, farmers, railroads, even hometown hardware stores — telling him of these letters. He has up to 35 clients involved with the case up to this point. He’s been e-mailing with lawyers across the country, to possibly a coordinated case.

In the letters, the bankruptcy trustee simply states the calculated payments made during the three-month period, demands repayment of the entire amount, but says they will settle for 80 percent of the total, or they’ll sue.

“For one elevator, they demanded $2.5 million,” Bottrell says. “An individual farmer told us they owe $250,000.”

No preferential treatment

Steve Strege, executive director of the North Dakota Grain Dealers Association, says the preferential payment laws seem to be set up to prevent a company going bankrupt from giving “preferential” treatment and payments to close friends, rather than the money going to all creditors.

“Anybody who’d sold grain during the last 90 days prior to a bankruptcy might have gotten some special treatment — golfing buddies, fishing buddies. If they knew their business was going bankrupt, they might make sure you got paid.”

“I think the chances of these elevators are very good, but they have to take the bull by the horns,” Strege says. “You’re sort of presumed guilty until you prove yourself innocent.”

Bottrell says that without a timely response and effective justification for the payments during the 90-day window, the farmer or other company risks being sued on a more or less open-and-shut case. It’s called “prima facie,” meaning on-the-face-of-it.

That doesn’t mean the farmer or business should owe the money back, however, because there are a few effective “defenses.”

“My guess is 95 percent of these people have absolute defenses to these trustee actions — 95 percent or better,” Bottrell says.

He says he hasn’t seen “one yet” that is vulnerable — unless they don’t respond.

Here are those defenses:

n “Ordinary course of business” — Here, the issue is how did the farmer and VeraSun do business outside of this 90-day window? If the farmer historically delivered on a Monday, for example, and got paid on Wednesdays, for example, and the same held true in the 90-day window, then that’s a defense.

“What they’re looking for is something extraordinary,” Bottrell says. “Did something extraordinary happen?”

If not, the farmer is probably safe. If, all of a sudden, the farmer didn’t get paid for three weeks or a month, that might be outside the ordinary course of business.

“It’s a gray area in law,” Bottrell says, but to be vulnerable to payback, the “transaction has to be idiosyncratic” or out of the ordinary.

n “Contemporaneous exchange of value” — This is related to the first defense, but slightly different. Here, if a farmer delivered corn in the morning and received a check in the afternoon, for example, or even within two or 11 days, the law says that farmer doesn’t have to pay it back.

“Technically, the law says it has to be ‘substantially’ contemporaneous,” he says. “It boils down to how the transactions between the parties have looked before. Intention of the parties was that it would be contemporaneous: the farmer had an understanding they were going to deliver grain and be paid. The elevator has to understand — no harm, no foul — that the estate was enhanced by corn received, and in fact, they paid for it.”

n “New value” defense — A hypothetical example of “new value” defense is where a farmer had delivered corn in May but had not been paid for it yet by July 30. Here, the facility, may have told the farmer they needed more corn, despite the unpaid bill.

“The farmer says, I’d be glad to deliver more corn if you first pay me for May,” Bottrell says. “They pay them for the earlier delivery, but the next day, the farmer delivers another load of corn. They never pay you for the second load of corn. If you delivered ‘new’ corn and never got paid for it, you may have a ‘new value’ defense.”

Those are the basic defenses, but there’s also a forward-contracting statute, which may apply. A settlement payment based on a forward contract may not be recovered by the trustee. The law section deals with margin contracts and settlement payments: A lot of it is for brokers, but if you look at the definition of forward-contract merchant and the commodities contracts, you can make a good argument that grain sales fall into this statute.”

Also, anybody who delivered corn from Oct. 11 to Oct. 31 — within 20 days of the filing — received an administrative claim.

“Those people would have an absolute defense,” he says, but he doubts those situations would be involved the letters.

Good, bad news

Bottrell says he’s disgusted by the trustee in this case, but what they’re doing is technically legal. There is no way in the system to assess the trustees for any legal expenses unfairly incurred by farmers and others. He says the situation smacks of extortion, in a way, because the trustee is simply bringing a blanket action against people they know have defenses but may pay decide to pay $5,000 or $10,000 to make the problem go away.”

They’re simply forcing farmers and elevators to prove themselves innocent, he says, and perhaps cynically assuming they farmer or business person simply will settle for some partial payment in order to avoid fees and headaches.

“They didn’t need to go this ‘rough,’” Bottrell says of the trustee. “It appears they just took the accounts payable list and started sending letters to everybody, threatening to bring action unless they pay 80 percent of the claims.”

At a minimum, the farmer may need to hire a lawyer to defend themselves on something when they shouldn’t have ever had to. Second, they may need to contract with a lawyer licensed in Delaware, where the bankruptcy was filed, to protect their interest.

Breker says that as ridiculous and unfair as it seems, it’s an “educational process” for Corn Growers Association members and farmers in general. The association has been working hard to get out the word. They’ve been holding conference calls with the North Dakota Department of Agriculture, the North Dakota Public Service Commission, elevators and many counterparts in South Dakota and Minnesota.

One thing that worries Breker is how many farmers simply filed or tossed the letters, not realizing their importance or potential peril.

“We don’t know if we have growers who are uninformed, misinformed or frustrated,” Breker says.

What about people who didn’t get the letter because of mail? Or threw their letter away?

Their next notice might be a judgment against them, Bottrell says.

Bottrell isn’t certain what the Hankinson plant was doing when, but he knows there were farmers who were asked to deliver on contracts after the filling.

“The farmers wanted to deliver on the $7 to $8 levels, but VeraSun said no — they wanted to reject all of the high-priced contracts and buy it on the market,” Bottrell says.