VeraSun Energy Bankruptcy Poses Perils for Farmers and Elevators

October 1, 2010

On Sept. 30, 2010, attorneys for the New-York based law firms, Kelley Drye & Warren and Silverman Acampora, 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. In August, these law firms sent letters to producers who received payment for corn or other services from VeraSun Energy within 90 days of the company’s filing of Ch. 11 bankruptcy. These letters notified producers that payments received within the 90-day timeframe were preference claims under the U.S. Bankruptcy Code that should be returned to the bankruptcy estate and offered to settle with producers for 80% of the amount paid. The law firms requested that farmers respond to their settlement offer by Sept. 30, 2010.

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to determine that the VeraSun estate will not pursue a claim for relief against corn producers and the demands are withdrawn. The law firms indicated that they would compile and issue a list of corn producers against whom demands are withdrawn at a later date. The firms indicated that this should be relatively soon.

At this time, it appears that the law firms are still pursuing claims against normal preference defendants. It is not known whether the law firms have withdrawn their demand against cooperatives and private grain dealers.
After a preliminary reading of the situation, it is a good idea for corn producers to keep the documentation they have gathered together until they receive actual notice that they have been released from these claims. If you are a corn producer who proceeded without an attorney on this matter and sent money to these law firms, please contact us at the Center or consult with an attorney. It is not known, at this time, how the law firms will deal with producers who sent money. Staff at the Center for Agricultural Law and Taxation continue to monitor this situation and will provide updates at www.calt.iastate.edu when they become available.

VeraSun Corn Suppliers Must Respond to Preference Demand Letter by Sept. 30

September 20, 2010

Iowa State University Extension held the Charles City meeting and one in Fort Dodge a week earlier to help farmers better understand the legal issues and the required response associated with the letters. For the convenience of those unable to attend either of the meetings, ISU Extension videotaped the Charles City session. The videotape is available for viewing on the ISU Extension video website.

Erin Herbold, CALT's staff attorney, outlined the suppliers’ legal options and discussed the defenses suppliers have. “Suppliers who did nothing wrong are being asked to provide information to the trustee to establish their defenses,” said Herbold. “Some will have strong defenses and the trustee may cease further inquiry; some suppliers will have partial defenses that may provide room for negotiation for a lower settlement; and some will have no defense.”

Click here to view press release.

New updated article - August 31, 2010

Verasun Bankrupty - Attempts Being Made To Recover Amounts From Corn Suppliers

Legal counsel for the "reorganized debtors" has sent letters to parties who supplied corn to Verasun within 90 days of the bankruptcy filing offering to settle preference claims. We've got what it means.

VeraSun Energy Bankruptcy Poses Perils for Farmers and Elevators

- by Roger McEowen

Updated November 18, 2008

An Update

On Nov. 14, VeraSun filed a motion to establish a procedure for assumption or rejection of contracts. Unfortunately, it does not set any date certain by which VeraSun would have to assume or reject contracts. Thus, if the court approves VeraSun's motion, contract suppliers would not be able to invoke the bankruptcy procedure to establish a certain time. Consequently, in order to have input in the process, contract suppliers have until Nov. 21 to file an objection. For corn contracts that have not been rejected, the contracts remain executory. However, for farmers that have not cashed a VeraSun check containing a restrictive endorsement which ties the supplier to market price for future deliveries, it appears that VeraSun must pay the contract price for corn that is delivered.

November 6, 2008

VeraSun Energy and its 24 subsidiaries filed Chapter 11 bankruptcy on October 31, 2008 in the United States Bankruptcy Court in Delaware. The bankruptcy filing raises numerous questions for farmers and grain elevators that have legal relationships with VeraSun.

VeraSun operates 17 ethanol plants eight states:

Indiana	Iowa	Michigan	Minnesota	Nebraska	North Dakota	Ohio	South Dakota
Linden Reynolds	Albert City Charles City Dyersville Fort Dodge Hartley	Woodbury	Janesville Welcome	Albion Central City Ord	Hankinson	Bloomingburg	Aurora Marion

The bankruptcy filing raises numerous questions for farmers who have contracted to deliver grain to VeraSun and also for elevators. Here’s a rundown of the most important questions:

Will farmers and elevators be paid for corn delivered before filing?

VeraSun will treat claims of corn suppliers that supplied corn to it at different times differently as is required by the bankruptcy code. VeraSun will treat all corn suppliers that supplied corn to its plants before October 11, 2008 as unsecured creditors that may share in a dividend at some time, many months in the future. However, VeraSun has received confirmation from the Delaware Bankruptcy Court that corn suppliers who supplied corn from October 11 through October 31 will be treated as priority creditors that can be paid in full from VeraSun’s cash provided they agree to continue supplying corn at prevailing market prices, not contracted prices. VeraSun’s attorneys drafted the following language that is found in the Bankruptcy Court’s Order Affirming the Administrative Expense Status of the Claims of Creditor that provided goods (corn) within 20 days of the bankruptcy filing:

In return for receiving prompt payment on account of obligations arising with respect to any 20-Day Goods, the Vendors, through the endorsement of any check for payment or other written acknowledgment in respect of such 20-Day Goods, shall be deemed to have agreed to continue supplying Goods to the Debtors at prevailing market prices in accordance with the most favorable terms and conditions (including payment terms) pursuant to historical practices in effect between such Vendor and the Debtors in the twelve months prior to the Petition Date, or such other terms and conditions as are agreed to by the Debtors and the applicable Vendor.

This language appears to trump any obligations that the VeraSun Debtors have to pay the contract prices they agreed to pay farmers and elevators while requiring the farmers and elevators to continue selling corn at current market prices. This interpretation is further supported by the language in the Corn Suppliers Letter from VeraSun dated November 4th that provides the following:

We have also requested specific authority from the Court to pay those trade partners from whom we have received corn on or after October 11, 2008 in the ordinary course. We have been granted authority by the Court to make these payments. However, if you already received a check but have not yet cashed it, we need to re-issue you a check. Also, to get authority from the Court to pay for corn delivered before the filing date, we will need an acknowledgment from you that you will continue to do business with us on normal terms. This acknowledgment will be on the back of the check to pay for the corn and will be accepted by your endorsement.

Farmers and elevators that sign the checks in order to get prompt payment for the corn that VeraSun purchased within 20 days of filing appear to have agreed to continue supplying corn at prevailing market prices.

Warning: Farmers and elevators that receive checks from VeraSun for grain delivered between October 11 to October 31st should show the checks to their attorneys to determine the what signing the check will contractually obligate to perform in the future. They could be agreeing to deliver corn at the prevailing market price with payment on the most favorable terms provided within the past 12 months.

Will VeraSun honor its contracts?

The bankruptcy code allows a debtor to decide whether to accept or reject contracts like grain supply contracts through the date of confirmation of the plan. Thus, if a farmer or elevator has a contract to sell grain to VeraSun for $5.25 per bushel and the prevailing market price increases to $6.00 per bushel VeraSun has the option to enforce the contract by accepting the contract.

At this time, VeraSun appears to have the upper hand as it can wait until plan confirmation to decide whether to accept or reject corn contracts while the farmers and elevators that have agreed to sell to VeraSun are required to honor those contracts until VeraSun decides whether to accept them.

Do Farmers and Elevators Need to Honor Their Contractual Commitments to VeraSun?

VeraSun can enforce the terms of delivery contracts it has with farmers and elevators. Until VeraSun rejects a contract, the farmer or elevator is still bound by the terms of the contract. If the farmer or elevator sells the corn elsewhere, and the price increases VeraSun could require the farmer or elevator to fulfill the contract even if the cost of corn is considerably higher than the farmer or elevator will receive from VeraSun.

Note: Contract Holders can Seek Limit on Time for VeraSun to Accept or Reject Contracts.

The bankruptcy code makes provision for those burdened by contracts to request that the Bankruptcy Court enter an order requiring that the Debtors accept or reject the contracts by a date certain. If such a motion were filed and a date was set for VeraSun to accept or reject contracts, VeraSun would be required to determine which contracts to accept or reject. If the contract was rejected, the farmer or elevator would be free to sell the corn to whomever it chose. Farmers and elevators should consider hiring a bankruptcy lawyer to collectively represent them in the VeraSun bankruptcy as their interests appear to be identical. By hiring one attorney, the farmers and elevators can have their interests properly represented when none of them could afford proper representation alone.

What Happens if Vera Sun Rejects a Corn Delivery Contract?

If a corn supply contract is rejected the rejection is treated as if VeraSun rejected the contract on the day before it filed bankruptcy. The farmer or elevator whose contract is rejected will need to market its corn previously covered by the contract, then it can file a claim in the VeraSun bankruptcy that will be treated as an unsecured claim that canshare in the dividend paid to unsecured creditors many months later. There is no guarantee that any payment will be made to unsecured creditors.

Dec. 15, 2008 - VeraSun Bankruptcy Opens Some Opportunities for Corn Suppliers of the Former US Bio Plants

Dec. 5, 2008 - Peril Continues for VeraSun Corn Suppliers

Nov. 21, 2008 - VeraSun Bankruptcy Update – Farmers Punch Back

Resources:

Consumer Bankruptcy Attorneys and Legal articles