Asoyia In Financial Trouble – What’s Next for Contract Growers?

December 24, 2009 | Roger McEowen

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Overview

Asoyia, an Iowa City business that processes 1 percent ulta-low linolenic soybeans to produce oil that is trans-fat free, has recently encountered financial difficulties.  According to the company’s website, Asoyia was formed in 2004 by 25 Iowa farmers and is a farmer and employee-owned company.  Asoyia is a corporation organized under Delaware law.  The company “specializes in advanced traits delivered through traditional genetics to provide high quality specialty soybean products.”  They pay a premium to their contract soybean growers.  Reports are that the company closed its doors on December 11, 2009 and has left its contract growers on approximately 80,000 acres wondering what will happen next.  The situation seems eerily similar to that of the Verasun bankruptcy in late 2008 that impact many contract suppliers in the Midwest.    However, Asoyia has not yet filed bankruptcy. But, what if they are forced into bankruptcy by their creditors?  Would that be a good move for Asoyia’s contract growers? 

Involuntary Bankruptcy

Certainly, the vast majority of bankruptcies are filed voluntarily by the debtor.  However, U.S. bankruptcy law provides also for involuntary bankruptcy by action of the creditors.

In general, creditors of an insolvent debtor may petition to have a debtor adjudged an involuntary bankrupt if the creditor’s claims total at least $13,475 more than the value of any security held by the creditors and the claim(s) is/are not subject to a bona fide dispute. 

Note:  A bona fide dispute exists where there is a genuine issue of material fact that bears upon the debtor’s liability for or the amount of the claim.  Thus, if a debtor can raise disputed factual issues concerning the underlying transactions, a court may find a bona fide dispute as to the existence of the debt.  

At least three creditors (who collectively hold unsecured claims aggregating at least $13,475 that are not contingent or the subject of a bona fide dispute) must join in the petition if the debtor has 12 or more creditors.  Involuntary bankruptcy proceedings are available only for liquidations (Chapter 7) and for Chapter 11 reorganizations.  Involuntary proceedings may not be commenced in the case of a Chapter 12 or Chapter 13 debtor rehabilitation plans.  In addition, involuntary petitions cannot be sustained against a “farmer.”

Upon the filing of an involuntary petition, the petitioning creditors must establish that the debtor is not paying its debts as the debts become due.  The standard is satisfied where the debtor regularly misses a significant number of payments to a creditor or regularly misses payments that are significant in amount in relation to the size of the debtor’s operations.  Once an involuntary petition is filed and served on the debtor, the debtor has 20 days to file an answer before the court enters the order for relief.  If no answer is filed, the debtor is adjudicated an involuntary debtor as of the date the involuntary bankruptcy petition was filed.  If an answer is filed, the court will set a hearing on the involuntary petition.  At the hearing, the alleged debtor will be given the opportunity to establish why the petition should be dismissed.  If some of the petitioning creditors are found not to qualify as petitioning creditors, the remaining petitioning creditors can seek to find additional creditors to join in the involuntary petition.

Note:   Under the 2005 Bankruptcy Act, an individual can only be a debtor upon completion of a “briefing” from a non-profit budget and credit counseling agency.  An individual who has not had a credit briefing cannot voluntarily or involuntarily be a debtor.  Typically, bankruptcy judges granting involuntary petitions also order credit counseling as a routine matter.

Impact of an Involuntary Bankruptcy

For the creditors, an involuntary petition can be advantageous  if there have been payments to insiders that should have gone to creditors.  It can also allow a trustee to examine and recover preferential transfers of assets to other unsecured creditors that allow those unsecured creditors to keep or receive more than they would have received had a chapter 7 bankruptcy been filed on the date of the transfer.  The look-back period for preferential transfers and avoidable transfers to insiders begins on the date of filing the involuntary petition.  Thus, the longer affected creditors wait to file an involuntary petition, the greater the possibility is that transfers that would have been preferences or otherwise voidable and recoverable for the benefit of unsecured creditors will no longer be recoverable as the look-back periods have expired.  The look-back period for preferential transfers to general creditors is 90 days while it is one year for insiders. 

When considering whether or not to file an involuntary petition against Asoyia, contract growers and its other creditors should carefully consider whether they have received a voidable preference or other transfer within the applicable look-back periods as they can expect the bankruptcy trustee to seek recovery of these transfers from them if the involuntary filing is sustained. 

Note:  This is precisely what happened to each of the three petitioning sale barns in the involuntary bankruptcy case filed by three of them against Honey Creek Cattle Company in the northern district of Iowa bankruptcy court in 2008.  

Unfortunately, there is absolutely no way for Asoyia’s creditors  to know whether there have been payments to insiders or preferential transfers made unless the involuntary case is filed.  Sometimes, involuntary petitions are filed and the trustee finds that there will be no recovery for unsecured creditors.

A potential downside to filing an involuntary bankruptcy can be the imposition of sanctions against the petitioning creditors, including the debtor’s attorney fees in disputing the involuntary bankruptcy petition and damages, should the bankruptcy court find that the involuntary petition was not filed in good faith.  In the case of Asoyia, this is unlikely since it closed on December 11th and surrendered its assets to its secured creditor Pilot Grove Savings Bank (to which it apparently owes $1 million).

Since Asoyia, Inc.  is a Delaware corporation, an involuntary bankruptcy could be filed in the state of Delaware as well as Iowa, the state of its primary place of business, as well as in any other state where it has substantial assets or conducted substantial business.  If the case were filed in Delaware, the affected creditors would be in a similar position to the creditors in Verasun where they have to have their rights adjudicated by a court in Delaware instead of Iowa.  For Midwest based creditors, a filing in Iowa would be quite advantageous.

Conclusion

At the present time, the nature and extent of Asoyia’s contractual relationships with soybean growers is not known.  However, it is believed that Asoyia has approximately 80,000 soybean acres under contract.  Disaffected growers would be wise to consult bankruptcy legal counsel and pay attention to any correspondence received from Asoyia pertaining to their contracts.