MOORHEAD, Minn. - Fallout from the insolvency of Stephen, Minn., farmer William "Bill" Sczepanski is resulting in an unusual auction beginning next week involving American Crystal Sugar Co.
More than $720,000 in "unit retains" - payments owed to Sczepanski by American Crystal of Moorhead, Minn. - once owed to insolvent farmer Sczepanski of Stephen, Minn. - will be auctioned off to the highest bidder. Bidders don't have to be beet growers or members of the co-op.
The unprecedented auction process at www.steffesgroup.com is overseen by the Steffes Group, Inc., of West Fargo, N.D. The timed sale starts June 18 at 8 a.m., and runs through June 27, at 10 a.m.
Erik Ahlgren, a Fergus Falls, Minn., lawyer is the Minnesota "Assignment for the Benefit of Creditors" in a case filed by farmer Sczepanski.
Ahlgren says the successful bidders in 11 groupings of payments must submit money into a trust fund. American Crystal's board of directors must approve individual buyers. The amount is expected to be less than the $720,000 because there are risks and time delays involved. Ahlgren has calculated expected discounts, but declines to say what he thinks that might be.
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"I'm selling them to the highest bidder but Choice Financial has the right to credit bid and can effectively set a minimum price," Ahlgren says.
Sczepanski went insolvent in early 2017, owing more than $7 million, including $4.4 million to GF Finance of Grand Forks, N.D., which separately filed bankruptcy, and $1.4 million to Farmers Elevator Company of Alvarado, Minn., which has since sold its elevator assets. An assignee has similar duties to a trustee in federal bankruptcy.
(Sczepanski has two sons who continue to farm separately. William "Bill" Sczepanski says he no longer farms but simply helps his sons.)
On April 9, 2018, District Judge Eric Schieferdecker at Warren, Minn., issued an order, agreeing to Ahlgren's request to sell the future payments that would have occurred to Sczepanski entities from 2016 to 2023. (An earlier group of $376,863 earlier and been distributed to creditors by Ahlgen.) About 3 percent would be withheld for administrative costs.
Without a court order, American Crystal historically only pays out unit retains to producers and their entities, except for a death. Ahlgren argued in court that Sczepanski's farm went through a business "death." GF Finance is continuing to argue for greater priority in the case.
In the sale, there are 11 blocks of shares, involving joint ventures and partnerships, each with originally scheduled payouts in separate timeframes from 2019 to 2023.
Here are highlights from a question-and-answer information sheet:
• What are unit retains? Beet cooperatives can retain a part of a beet payment as an interest-free loan. The retains "may" be returned to members if the board, "in its discretion" finds the retains "in excess of the amounts needed for operating the company's business and servicing its debts." Historically, Crystal pays out unit retains after seven years, with the oldest paid first.
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• Are the payments guaranteed? No. They represent "equity" in the company. While they are historically repaid in seven years, the company "could determine that the funds are required to fund an internal investment project." Ahlgren says. Company officials have informed him there is no "current plan" to change the practice, but notes "there is no guarantee" on that.
• Can the buyer subsequently transfer the right to receive payments? No. Payments go to "the original grower" or an "approved transferee" determined by the co-op board. Ahlgren can expect the board to approve the assignee's sale because a court has ordered it, but doesn't necessarily expect the board to approve a subsequent transfer.
• What are the terms of the sale? The purchaser-not necessarily a beet producer- would receive the "unit retains redemption payment" and would take them free and clear of liens.
• What is the income tax treatment? The transferee is responsible for income taxes due from the receipt of the payments, as per advice from a tax professional.
For details about the sale of the unit retains, Ahlgren refers people to Daniel Mott, American Crystal general counsel, dmott@fredlaw.com , 612-492-7322, or to Ahlgren himself at erik@ahlgrenlaw.net , 218-998-2775.
