Venue Reform & Effects for Farmers
From February 25-27 Joe Peiffer and Mark Kuhn (one of the farmers affected by the VeraSun bankruptcy in Delaware) were in Washington DC for the Commercial Law League of America‘s Hill Day to talk with lawmakers about bankruptcy venue reform. While they were there they spoke with Doug Cooper on The Big Show about their efforts. Here are the interviews:
Doug’s interview with Joe:
Doug Cooper: Joe Peiffer is an agricultural lawyer from Cedar Rapids. He is with Ag & Business Legal Strategies, and he has been working on a potential bill called the Bankruptcy Venue Reform Act of 2018. I caught up with him in the nation’s capital.
Joe Peiffer: Doug, I’m out in Washington, D.C. and I’m out here with the Commercial Law League of America, and we are having Hill Day. The prime issue that I’m here to work on behalf of farmers in general is the Bankruptcy Venue Reform Act of 2018.
DC: And that is what?
JP: The Bankruptcy Venue Reform Act is S.2282. It was introduced on January 8 by Senator Cornyn, a Republican from Texas, and Senator Warren, a Democrat from Massachusetts, and it will reform where bankruptcies can be filed. Currently, bankruptcies can be filed wherever a company is organized or wherever an affiliate, which is another company in the same group of companies, may file a bankruptcy, or wherever significant assets of a company are located. That’s been a problem for Iowa farmers and farmers in the Midwest in general, as illustrated by the VeraSun bankruptcy in 2008.
DC: Remind us what happened there.
JP: In VeraSun, the bankruptcy was filed on October 31, 2008 in Delaware. VeraSun was the world’s largest producer of ethanol at the time, had 23 plants in 6 states, and filed bankruptcy in Delaware. I checked: Delaware had no ethanol plants and still has no ethanol plants. The farmers had contracted to sell grain to VeraSun, and the market had dropped out and VeraSun had agreed to pay in many instances $7 or upwards of $8/bushel for grain, and it had not protected itself on the other side in the options market. It ran out of cash, so all the sudden it’s got all these contracts due, it files bankruptcy so it has the right to terminate those contracts, and by terminating, the farmer would be free to sell their grain wherever. Unfortunately, they don’t have to assume or reject those contracts until after a plan is confirmed. That could be many months later. In 2008, you’ll probably recall that in the fall, we had grain in the neighborhood of $5/bushel and it was dropping. The farmers were faced with a terrible problem. If they sold their grain to minimize their loss, that was good. They could at least get $5/bushel for their corn, but their concern was what if the market turns and it goes back to $7? So the contract was at $7 and they sold for $5, now that covered their loss, but then if it goes back to $7, VeraSun could’ve required them to cover the difference between what they sold it for and what the market had returned to on the contract. For example, if the farmer who had a contract to sell with VeraSun for $7 and ended up selling at $5 after the bankruptcy, and then it went back to $7, he could have to pay $2/bushel, which means he effectively got $3/bushel for his corn.
DC: What kind of reaction have you received in Washington, D.C., and what is the current status of this bill?
JP: I’ll start with the current status. The current status of the bill is that it’s in the Senate Judiciary Committee. We are building support, and in fact, I just came out of a meeting with the National Association of Attorneys General, who happen to be having their annual convention here. And we’re hopeful that that group will support it. We’re getting support from many different factors, or many different groups, the Iowa Bankers Association signed on right away, and what we’re hoping to do is to keep building that support. One of the things you need to think about right now is that Ted Cruz is railing against renewable fuel standards. He’s pointing out the Pennsylvania Energy Company bankruptcy, which is a refinery that filed bankruptcy in Delaware recently, saying the employees there are in trouble because of the renewable fuel standards, which is part of the basis of the ethanol plant. If he’s successful, there could be ethanol plant bankruptcies coming up, and under the current bankruptcy laws, I can virtually guarantee they’re going to be filed in either the Southern District of New York or Delaware. If we don’t want that to happen, now’s the time to act. People out here are generally receptive to the idea, with the exception of folk from Delaware or New York, who are getting the bulk of the cases. I was out here in 2008 with Mark Kuhn, and we went to Delaware in the VeraSun bankruptcy, and Mark pointed out he was the only one in the room with blue jeans on. Everybody else had blue suits on. And we could not get the judge to agree that VeraSun should be required to assume or reject the contracts quickly. In fact, all of the farmers that had VeraSun contracts were invited to come to Delaware to seek relief. How many farmers A) can afford to make it to Delaware, B) can afford to hire Delaware counsel, and C) should have to go that far to protect their interests?
DC: Joe, it’s early, but what’s your gut feeling?
JP: Gut feeling is momentum is building, but it’s a marathon. It’s not a sprint, and we need the support of people who are affected. Not just farmers – it’s other businesspeople that dealt with these companies as well. Because the next one that happens will affect anybody that’s doing business with the companies.
DC: On the surface, it seems like common sense, but then again it also appears that New York and Delaware have some cottage bankruptcy industries going.
JP: You are correct. Delaware and the Southern District of New York are set up that way, Delaware especially. Because Delaware is a much smaller state than Iowa, it has one representative, yet it gets of the good-sized bankruptcy cases, it gets probably 75-80% of the bigger bankruptcy cases throughout the country. And it gets a lot of smaller cases, where the assets might only be $10 or $15 million. They have law firms that are set up just to handle questions like preferences, like did the farmer get paid money within 90 days of filing the bankruptcy? Happened in VeraSun. All the farmers got letters demanding they give back all the money that they’d paid for their grain within 90 days, and we formed the VeraSun preference defense coalition. Got about 60 lawyers together and examined the issues and put together a, basically a stock letter, and they backed off. But it will happen again and there’s no reason that we shouldn’t have local judges deciding local issues. We shouldn’t defer to Delaware and New York.
Doug’s interview with Mark:
Doug Cooper: The bill is called the Bankruptcy Venue Reform Act of 2018. Many bankruptcies in this country tend to be filed in Delaware or southern New York State. Mark Kuhn is a farmer from Charles City, Iowa. When VeraSun plants in the Midwest went bankrupt, the judges on the East Coast are not familiar with agricultural economics.
Mark Kuhn: In October of 2008, my two sons and I were pretty excited, like all of the farmers who had contracted corn that year. We’d contracted corn for fall delivery to the VeraSun ethanol plant in Charles City for between $6.00 and $7.00 a bushel. My sons were making their second installment on their land contract and things looked pretty rosy. They both held farm jobs, but they had to make the debt service. So, like a lot of my constituents, I happened to be serving in the state legislature at the time. They were all left wondering what was gonna happen next. Literally my phone started ringing off the hook and what are we gonna do? And so I actually helped organize about 125 farmers in primarily Iowa, Minnesota and Nebraska. We all threw $300.00 in a pot and we hired a bankruptcy attorney from Cedar Rapids named Joe Peiffer. Then we found out that the Bankruptcy Court that we had to plead our case in was in Wilmington, Delaware, and that’s the issue here. It’s called venue. And so in order to fight the VeraSun motion, one of us, or more of us, had to travel to Wilmington, Delaware. So representing the group of farmers which now totalled 200, I travelled to Wilmington, Delaware with Cedar Rapids bankruptcy attorney Joe Peiffer and we filed a motion that objected to VeraSun – we were unsecured creditors with our contracts. They really were worth less than the paper they were written on, but our problem was more than that because we couldn’t sell our corn. The corn was worth as high as $7.00 a bushel. After the VeraSun bankruptcy it fell to below $5.00, but VeraSun had the right to exercise those contracts. We didn’t have the right to sell the corn, so we were really left in the lurch. And so our motion was to require VeraSun to tell us within ten days what they were gonna do with those contracts we had. And when we got there, to no one’s surprise, I was the only one in blue jeans. I met a lot of blue suited Delaware bankruptcy attorneys who, once they found out I’d organized almost 200 farmers, they handed me a lot of their business cards. But we left Delaware with the feeling that Judge Brendan Shannon really didn’t understand 1) our situation and 2) how the ag economy really works. Farmers, grain farmers in particular, live on our credit until fall and then we sell our grain and pay our debts and buy tractors and everything else that we do, we invest back in the farm. So we had no real opportunity to do that. Imagine the case of my sons Mason and Alex who now, facing their second debt service on their new property, couldn’t sell their corn and were faced with the prospect that VeraSun might even be able to require us to deliver that corn at a future date, and we didn’t know.
DC: Mark Kuhn says the timing of the VeraSun bankruptcy came at a very bad time for farmers.
MK: On October 31st of 2008, VeraSun had filed for bankruptcy. We were stunned and we were just beginning to learn the consequences of them filing in Delaware Bankruptcy Court. 1) We had to hire an attorney. Joe Peiffer was charging us $300.00 an hour, but then we had to hire a bankruptcy attorney in Delaware who represented us at $700.00 an hour. But the bigger problem was Judge Brendan Shannon really didn’t understand how agriculture works. He didn’t understand that farmers live on their credit until fall and then we deliver our grain, we cash our checks. He didn’t understand that. Didn’t even understand that we had the option to seal our grain at the FSA office, but we really couldn’t do that because we didn’t know when and if VeraSun would call our contracts. They were called executory contracts. What happened is the judge allowed VeraSun months to determine that, and we were left in the lurch. Had it been filed in the home state of VeraSun, which was South Dakota, a distance of only a couple hundred miles to the Bankruptcy Court in South Dakota, we would have filled that courtroom with farmers and we probably would have had a judge that understood agriculture a lot more than Judge Brendan Shannon did in Delaware. What happened is the Vallero Energy Corporation took over VeraSun the following year, they paid about $0.20 on the dollar for the assets of VeraSun and they came in and took over those plants. In the meantime, the whole farm economy, and imagine that there were over 6,000 producers in Iowa that had contracts. There were seven plants.
DC: What did Judge Shannon decide?
MK: Well, it took months, and that was the first problem. We soon learned that we had no standing, really. These were executory contracts and they did not have to honor them. That took a period of months. During that time and the next year until Vallero became the owner of the VeraSun plants, we didn’t know what was gonna happen. Imagine trying to figure out a balance sheet in the spring of 2009 with your banker when you couldn’t tell him what you were gonna do with the 2008 crop, or what its value was. It just created a lot of uncertainty. Eventually, once Vallero assumed VeraSun, there were all kinds of negotiations and most all of them individually about those contracts and farmers had to kind of cut a deal for themselves with the new ethanol company, Vallero. It was a real time of uncertainty.
DC: Mark Kuhn from Charles City in Washington, DC with bankruptcy lawyer Joe Peiffer. They continue to lobby for support of the Bankruptcy Venue Reform Act of 2018. I’m Doug Cooper on the Big Show.