Big farm insolvency plays out in state court
WARREN, Minn. — Bill Sczepanski's farm insolvency at Stephen, Minn., isn't as widely known as Ron McMartin Jr.'s, across the river at St. Thomas, N.D., but both have had their impacts.
The two large farms in the northern Red River Valley were 40 miles apart, both brought down by declining commodity prices and production challenges. Both had impacts on suppliers and associated businesses.
In the Sczepanski case, creditors fought successfully at the district court level to get the benefit of about $1 million in "unit retains," owed by a sugar beet cooperative.
Sczepanski, 56, of Stephen, Minn., didn't file a federal bankruptcy case like McMartin and his business, McM Inc. Instead, on Jan. 30, 2017, Sczepanski filed an "assignment for the benefit of creditors," in Marshall County District Court in Warren, Minn. The little-used state statute offers some of the same functions as a receivership, or bankruptcy trustee.
Sczepanski initially agreed to be interviewed by Agweek about the case but changed his mind, explaining that his problems occurred "three years ago," and he wanted to move forward. He noted his sons, Blake and Barrett, have been separately farming for about 10 years and that he has nothing to do with their businesses except to help out with equipment operation, "just like any father would do."
Erik Ahlgren, a Fergus Falls, Minn., lawyer, specializes in bankruptcy trustee cases. He is the "assignee" in the Sczepanski case, and coincidentally, the "trustee" in the McM Inc. farm bankruptcy. (A separate trustee is assigned to McMartin's personal bankruptcy.)
Court documents indicate the Sczepanski Farms LLC case involved $7 million to $8 million in debts. According to Ahlgren, about $1.4 million of Sczepanski's debt was owed to the Farmers Elevator Co. of Alvarado, Minn. That co-op quietly sold its assets — a 1.3 million bushel capacity elevator and 100-car loading facility — to Markit (sometimes "MarKit") County Grain LLC, based at Argyle, Minn., itself a joint venture of area co-ops in Marshall and Kittson counties.
The Alvarado site was sold Dec. 29, 2016, according to county records. A separate Oslo, Minn., site was sold separately to a private farmer.
Wayne W. Carlson, the Alvarado co-op's lawyer in Fargo, N.D., and a native of the Stephen area, declined to be interviewed. Ramsel Anderson, and secretary Leif Aakre, also declined to be interviewed. Anderson is a director of the Minnesota Grain and Feed Association. Aakre separately is board chairman of AgCountry Farm Credit Services. Bob Zelenka, MGFA executive, at the elevator association's annual meeting earlier this winter, said he understood that an unpaid account from a single large farmer played heavily into the Alvarado co-op's decision to sell assets. The organization featured several speakers on the topic, "because of the number of cases of farmers in lender mediation," Zelenka said. He said he couldn't confirm whether the the single account receivable was Sczepanski.
Sczepanski in 2014 was planting more than 27,000 acres — large but half of the size of the McM farm.
"He was kind of the biggest pusher up there, kind of like Ron was, and they're in the same area — opposite sides of the river," Ahlgren said.
Sczepanski produced sugar beets, as well as corn and other crops, and neighbors describe him as something of a come-back story. In the mid-1990s, Sczepanski ran a potato brokerage that declined amidst adverse marketing conditions. His father, Floyd Sczepanski, who died in 2014, had been a large farmer in the Stephen area, and had operations in Texas.
Sczepanski came back strong in the early 2000s as the farm economy was picking up. He quickly expanded sugar beet acres and then expanded into durum, edible beans and then corn and soybeans. He ran with six combines. He owned a large shop complex and competed aggressively in rents.
According to the court records, Sczepanski owned 35 shares of American Crystal Sugar stock and was a partner in 22 sugar beet entities. These are called limited liability partnerships, limited partnerships or joint ventures, where a separate individual was the share owner, also called a "contributing partner" or "limited partner."
Sczepanski owned more of his own land than McMartin, but much of what he farmed was rented. When things were going well, Ahlgren said Sczepanski told him banks were "literally chasing him down" to lend him money.
"The problem with that is, when you pull everything so tight, you miss a beat and everything collapses. I think that's what happened with Ron and that's what happened with Bill," Ahlgren says.
American Crystal Sugar Co., a closed co-op of beet producers, can withhold up to 10 percent of an annual gross per-ton payment as a kind of loan from the shareholder. The "retains" are paid out seven years later and — in effect — are interest-free subordinated loans, which save the co-op from borrowing operating money elsewhere.
District Judge Eric Schieferdecker at Warren on April 9 issued an order, agreeing to Ahlgren's request for a sale of $720,000 in future "unit retains" for Sczepanski-related entities. About $376,863 had been paid earlier and was being held pending the court's order.
According to the order, American Crystal will be required to pay the purchaser who bids for them in an auction that is not yet scheduled but likely will be held by an on-line specialist in bankruptcy assets in the next two months, Ahlgren said. The proceeds will be available to the secured creditors "free and clear of liens." Three percent will be withheld for administrative costs.
Ahlgren said an auction bidder would offer a lesser amount to the creditors in exchange for receiving the unit retains as they are paid out over time, but the figure isn't known. A secured creditor can "credit-bid" up to what they're owed, setting a price floor. Ahlgren said the issue for American Crystal is that they "don't want their shares to be considered 'securities' from a securities act perspective," Ahlgren says. By law, the co-op is only supposed to deal with beet producers, technically who live within 35 miles of the Red River.
In arguing for the auction approval, Ahlgren likened bankruptcy to a "legal death" and said many co-ops pay their full equity in the event of a member's actual death. Ahlgren said the auction will be online.
$4.4 M hit
In a March 22 hearing in Warren, lawyers for secured creditors argued their priority ranking for the unit retains. There was Kirstin Rowell, Minneapolis, a lawyer for GF Finance Inc., of Grand Forks, N.D., with its $4.4 million claim; Jeffrey Peterson, St. Cloud, for Choice Financial Group of Grand Forks, and its $488,000; and Seth Harrington, New Ulm, Minn., for John Deere Financial, with a figure that is not in any public document.
Schieferdecker determined that after each beet entity itself, John Deere had a second priority interest and GF Finance had a third priority interest. GF Finance had a first priority interest only in $27,636 unit retains payable directly to Sczepanski.
Sczepanski is only part of GF Finance's problems. On Sept. 7, 2016, GF Finance filed Chapter 11 bankruptcy. The company is now based in Phoenix, Ariz., and is owned by Stephen T. Hansen, 76, Scottsdale, Ariz. Hansen simultaneously filed personal reorganization the day his company filed.
GF Finance operated from 1325 Demers Ave., in Grand Forks, leasing farm equipment, over-the-road truck tractors, and other equipment. Next door, Hansen was in business successfully for more than 40 years. He also owned the city's Hertz car rental operation. GF Finance owed $31 million to secured lenders as of Nov. 29, 2015, he said, in court records. Hansen blamed a former general manager of negligence and mismanagement. Sczepanski's debt accounted for about 14 percent of that.