About 500 independent former Dean milk suppliers have received letters and packets of legal documents seeking payback of varying amounts received for milk delivered during the final 90 days – beginning about Aug. 14, 2019, and prior to Dean Foods’ bankruptcy filing on Nov. 12, 2019. ASK LLP, a law firm based in St. Paul, Minnesota, was authorized to begin pursuing preference actions as of Sept. 1, 2020. The letters also note failure to make payments by an established deadline could be followed by legal action.
AFBF, PMMB preparing responses
A growing number of organizations and legal advisers are urging affected dairy farmers not to overreact – or take any action – for the time being.
The American Farm Bureau Federation (AFBF) is throwing its weight behind affected dairy farmers, according to chief economist John Newton. Speaking at the Iowa State Dairy Association (IDSA) annual meeting, Dec. 4, Newton said AFBF was preparing a letter to ASK LLP, seeking withdrawal of claims against dairy farmers.
While stopping short of legal advice, Newton said, “What they did to these family farmers is wrong, and they shouldn’t have done it.”
Approximately 100 Pennsylvania dairy farmers and milk haulers were among those receiving the preference action letters. Leaders of the Pennsylvania Milk Marketing Board (PMMB) advised farmers not to pay the claims and were also working with the Pennsylvania attorney general’s office and ASK LLP to resolve the situation.
Pennsylvania state government and dairy officials expect to provide specific guidance to those affected prior to an upcoming dairy industry conference call, sponsored by the Center for Dairy Excellence (CDE).
“We would love to provide more detailed information at this time, but are still working out language for our guidance,” said PMMB board Secretary Carol Hardbarger. Hardbarger echoed board Chair Rob Barley’s comments to “be patient, don’t sign anything and don’t write any checks.”
The CDE conference call is set for Dec. 10, noon-1 p.m. (Eastern time). To join the free conference call, dial (978) 990-5000 and then enter access code 553371# when prompted. Text or call (717) 585-0766 to submit questions, or email Zach Myers.
Peggy Hall, associate professor and director with Ohio State University’s Agricultural & Resource Law Program, said dairy producers likely have “ordinary course of business” protection against the claims. She advised that producers should not make payments, but rather wait until further information becomes available from the bankruptcy court. Those producers nervous about waiting could have an attorney review their individual situation, she said.
Roger McEowen, a professor of agricultural law and taxation at Washburn University School of Law in Topeka, Kansas, addressed “Bankruptcy and the Preferential Payment Rule” in an Agricultural Law and Taxation Blog entry on Dec. 3. He was joined by Joe Peiffer of Ag and Legal Business Legal Strategies of Cedar Rapids, Iowa.
In many instances, demands for the return of payments made to farmers are made without any consideration about whether a defense is applicable, they noted.
“The parties demanding return of the preferences are banking on the willingness of the farmer to purchase a release rather than consider defenses and respond to the preference demand so they can avoid the cost of defense of the preference action,” they wrote.
Depending on what transpires in the upcoming days prior, dairy producers may still have to contact ASK LLP regarding the claim letters. Failure to respond by the deadline will generally mean that the dairy farmer could be sued by the liquidation trust in bankruptcy court.
Developing a defense
If preference claims or other legal action continues, attorney Michael Fielding, a partner with the law firm of Husch Blackwell, based in Kansas City, Missouri, advises affected dairy producers to contact an attorney familiar with preference claims. While law practitioners serving many rural areas may be familiar with legal issues related to bankruptcy, preferential transfer claims require more specific experience, he warned.
Affected producers can also get additional time. Many letters received by dairy farmers have a mid-December deadline, but those deadlines are primarily made to spur action and can be easily moved, Fielding said. The statute of limitations doesn’t expire until November 2021.
“If you contact ASK LLP and say ‘we are analyzing this, and a settlement proposal is coming’ then they will likely work with you and not initiate a lawsuit,” he said. To get further short-term peace of mind he also advises that “you should confirm with ASK LLP that it will hold off on taking any further legal action pending the outcome of your settlement discussions.”
Fielding, who has extensive experience in dealing with bankruptcy avoidance actions and agricultural insolvency related issues, said that when it comes to defending preferential transfer claims, the key is to minimize the total cash outlay of two key components: (1) the settlement amount, plus (2) attorney’s fees incurred to get to the settlement amount.
Fielding said he has developed a software tool for use when defending against these claims, incorporating payment history and running analytics to develop a defense strategy to resolve the case quickly while minimizing total cash outlay.
In a previous article in Progressive Dairy (Dairy farmers asked to return Dean ‘preference’ payments), attorney Justin Mertz, partner and bankruptcy subgroup leader with the Wisconsin-based law firm of Michael Best & Friedrich LLP, outlined three defense strategies:
- The "substantially contemporaneous exchange" defense
- The "subsequent new value" defense
- The “ordinary course of business” defense
The demand letters that ASK LLP typically sends includes “new value” analysis. That figure may not necessarily be accurate if some payment history is missed, Fielding warned. That is why it is critical for the producer to compile accurate documents and work with an experienced attorney to develop their own analysis.
Fielding said other defense strategies can help minimize a dairy producer’s exposure to these claims. For example, under section 546 of the Bankruptcy Code, there is a complete defense if the sale of the product was under a forward contract.
Another defense deals with unpaid post-petition invoices. For example, if the producer sold milk to Dean Foods after the company filed for bankruptcy, then there is case law that would allow the producer to offset those unpaid post-petition invoices against the preference claim.
There are also third-party sources, such as the Risk Management Association, a not-for-profit, professional association serving the financial services industry that publish data regarding standard industry payments. The database is accessible for a subscription fee and can be used in defending preference claims by identifying payment ranges within the industry. According to Fielding, this data can be very helpful in further establishing an ordinary course defense.
Fielding identifies several key documents and records to establish a defense strategy. They include:
- Payment history, covering at least the 15-month period leading up to the Dean bankruptcy petition date (Nov. 12, 2019) and longer if it can easily be generated: The payment history needs to include the invoice numbers, invoice dates, invoice amounts, payment dates, payment detail if available (e.g., check number or wire number) and the payment amount if different than the invoice amount. Also, if there were any unpaid invoices, then the payment history should identify or flag in some way the unpaid invoices.
- Invoice term statements
- Copies of any contracts that were in effect with the debtor at the time of the bankruptcy and whether the contract was assumed or rejected during the bankruptcy proceeding
- Claims against the debtor: Any proof of claim that may have been filed. If a copy is not readily available, additional online digging may be necessary.
- A North American Industry Classification System (NAICS) number: The NAICS is used by federal statistical agencies in classifying business establishments for the purpose of collecting, analyzing and publishing statistical data related to the U.S. business economy. The NAICS number is not strictly needed for the initial preference report, but it opens the door to a better ordinary course defense based on payments for the industry in question.
Progressive Dairy will continue to provide updates and dairy producer action recommendations as they develop.
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- Email Dave Natzke