With the passage on October 31, 2010 of the 2 year statute of limitations, Iowa’s corn farmers have definitively rebuffed a threatened onslaught of preferential transfer avoidance actions by VeraSun Energy Corporation. The 198 defendants who were named in the VeraSun preference actions only can envy the result of the tenacity and resourcefulness of these Iowa farmers. And more than a few small business owners should eat an extra helping of corn at Thanksgiving in thanks for the corn farmers undoubted influence on VeraSun’s decision to set a $20,000 floor for bringing preference actions. The story behind the success of the Iowa Corn Farmers has an important lesson.
VeraSun Demands Farmers Return the Payments Made for the 2008 Harvest Corn Buys
VeraSun Energy Corporation filed for bankruptcy on October 31, 2008 This filing came shortly after VeraSun had bought tons of corn from Iowa farmers in order to make ethanol. So in August of 2010, with the 2 year statute of limitations for bringing preference actions approaching, VeraSun sent out bankruptcy preference demand letters to, among others, Iowa corn farmers. How many demand letters were sent out to Iowa farmers is unknown. Some reports but the number in the hundreds and one report said that thousands of demand letters had gone out. The reports are consistent in describing the demand letters, dated August 20, 2010:
counsel for the “reorganized debtors” has informed parties that sold corn to VeraSun in the 90-day time frame preceding the company’s bankruptcy filing that they have until September 30, 2010, to repay 80 percent of what VeraSun paid them for their corn.
The response was swift. Within days the Iowa State University Center for Agricultural Law and Taxation published an article “The VeraSun Bankruptcy – Can The Bankruptcy Trustee Recover Payments Made To Suppliers Within 90 Days of the Bankruptcy Filing?” The article provided a clear explanation of what the Iowa corn farmers were facing and outlined some practical steps they should take. The Iowa Corn Growers Association also published helpful materials including a “ A Guide to Responding to a Demand for Repayment of a Bankruptcy Preference Re: VeraSun” Most importantly, both Iowa State University and the Iowa Corn Growers Association encouraged the farmers not to ignore the demand letter… and they did not.
Don’t Mess with Iowa Corn Farmers … Especially at Harvest Time
On September 16, an “information meeting” organized by the Iowa State University Extension was held. Agri News reported that several farmers at the meeting “
asked if something could be done legislatively to require bankruptcy trustees to conduct more analysis before sending preference demand letters. Attorneys and farmers at the meeting said it appears that absolutely anyone who received a payment of any kind from VeraSun in the 90 days prior to the company filing for bankruptcy, received a preference demand letter.
Many farmers say that they believe that they can defend the payments as done in the ordinary course of business, but it will involve a lot of time and attorneys’ fees to do so. They said that the letters they received from one of two New York law firms came at the worst possible time with harvest just getting under way.
And When a U.S. Senator Speaks… Lets Look at those Preference Claim Again
Agri News reported that in mid September, Senator Chuck Grassley, an Iowa Republican, said ” he would be willing to look at U.S. bankruptcy laws to see if improvements are needed in light of the VeraSun preference demand letters many Midwestern farmers received in August.”
Cause and effect can only be speculated, but on October 1, 2010, Iowa State University – University Extension reported:
On Sept. 30, 2010, attorneys for the New-York based law firms, … notified several corn producers and their attorneys in Iowa and across the Midwest that they are withdrawing demands for preference claims against a number of producers in the VeraSun Bankruptcy proceeding… . Correspondence from these law firms on Sept. 30, indicated that the firms have received “sufficient information” to determine that the VeraSun estate will not pursue a claim for relief against corn producers and the demands are withdrawn.
And What About the Other Preference Claims
From October 20 through October 29, 2010, VeraSun filed 198 bankruptcy preference claims. For a detailed docket report of the VeraSun Energy Corporation preference claims click this link. An analysis of those preference claims is summarized in the following chart. All the preference claims are above $20,000 with the exception of one at $18,000. That is a refreshing change from most of the other mass bankruptcy preference actions filed in 2010.
What is not apparent, however, is whether the fundamental objection of the corn growers was taken to heart and anything more than a “payment in the 90 days” inquiry was performed. And the Iowa corn growers are dead on when they focus on the legislative scheme. Simply, the section of the Bankruptcy Code that lays out the relative burdens of the bankruptcy preference plaintiff and defendant does not require the plaintiff to consider whether the payments were made in the ordinary course, whether there was a contemporaneous exchange, whether there was subsequent new value or whether any of the some odd 32 other “defenses” might apply.
Add the “Iowa Corn Farmers” Defense to the List
What the Iowa corn growers and their support groups did deserves the label as the 33rd bankruptcy preference defense, but it should actually be the first defense that a preference target pursues. The Iowa corn growers defense has three elements: educate, understand and react.