Sept. 10, 2010

On October 11, 2008 the ethanol company VeraSun declared chapter 11 bankruptcy in Delaware. VeraSun operates ethanol plants in Nebraska and throughout the Midwest. In late August Nebraska farmers who sold corn to VeraSun received a letter informing them that they must refund 80% of what they received to the bankruptcy court. The following addresses questions related to this situation. (See Sept. 3, 2010 CropWatch story, Legal Counsel Recommended in Bioenergy Suit.)

So what is going on here? The farmers who sold corn to VeraSun and whose payments cleared VeraSun’s bank accounts on or after August 3, 2008, have received a letter requiring them to refund 80% of what they received on those corn sales.

Why is this happening? In bankruptcy proceedings, all payments by the debtor (VeraSun in this case) are pulled back into the bankruptcy proceeding so that all creditors get an equal share of the debtor’s assets.

What is the reason for this 90-day look-back requirement? Some debtors will engage in “bankruptcy pre-planning” to pay some bills but not others before they file bankruptcy. For example some debtors will pay debts to family members or business associates before filing bankruptcy. The look-back period for family and business associates is one year, but for our corn farmers it is 90 days. And under state law, paying some creditors but not others may be legal, depending on the circumstances.

This doesn’t seem fair, as is often the case in these situations, but one of the fundamental purposes of bankruptcy is to treat all creditors of the debtor fairly. I would guess that the VeraSun unsecured creditors are likely to get about 20 cents on the dollar of VeraSun debt. These Nebraska farmers are VeraSun creditors who got 100 cents on the dollar, so the bankruptcy trustee (the lawyer who administers the VeraSun case for the bankruptcy judge) is trying to collect as much money as the trustee can to pay out to all VeraSun’s creditors.

What should the Nebraska farmers do? Get a lawyer as soon as possible. A lawyer will represent you in the Delaware bankruptcy case and assert any defenses that would allow you to keep part or all of the money. If you don’t get a lawyer, you probably will have to refund all the VeraSun payments. It is OK to share a lawyer with other farmers.

What kind of defenses might be used? You might not have to give the money back if the sale was a cash sale and you were paid the same day you delivered the grain or if you had been dealing with VeraSun before. However, you will need a lawyer to assemble the documentation to qualify you for a defense and to present that information to the trustee.

How could this have been avoided? Only with a very accurate crystal ball. You would have had to know that VeraSun was going to file bankruptcy, when that was going to happen, and then not sell them any corn within 90 days of when the bankruptcy was going to be filed. Short of perfect knowledge of the future, I guess the takeaway message is that it is risky dealing with someone in financial difficulty.

Is there any way to handle this without a lawyer? No. Trying to do it yourself or ignoring the bankruptcy letter will cost you more money in the end. If you have any questions regarding this, contract an attorney.

J. David Aiken
Extension Agricultural Law Specialist