The Limits of FDIC Insurance and Iowa’s Grain Indemnity Fund
Where’s Your Wealth Stored and How Safe Is It? Banks and grain elevators are the pillars of many rural communities. It can seem like they’ve always been there and will always be there. Some grain farmers might have more money in grain at the elevator than they do in the bank. Regardless, the failure of either of those institutions could devastate a family farmer. The protections available to wealth stored in banks and grain elevators vary, and few farmers have experience with either. Silicon Valley Bank Closure and FDIC Insurance The Federal Deposit Insurance Corporation, or FDIC, closed Silicon Valley Bank (SVB) in March 2023. While this closure may have been a passing headline for many Iowa farmers, it had significant implications for people with deposits there. Many of SVB’s customers had deposits that greatly exceeded the FDIC’s $250,000 deposit insurance limit. There were concerns that these depositors’ losses might cause knock-on effects throughout the financial system, disrupting or devastating businesses’ finances. To address this, the FDIC announced it would insure all of SVB’s deposits, even those above the $250,000 limit. To replenish the FDIC’s deposit insurance fund after this and other recent bank failures, the FDIC has announced a special assessment on banks, with larger banks paying more. Even though the FDIC bailed SVB’s uninsured depositors, there’s no guarantee it will do so again. Recent bank failures like SVB, First Republic Bank, and Signature Bank, and concerns about future insurance, have increased interest in managing deposit risk. Many Iowa banks help their customers manage this risk by titling accounts in different names to maximize FDIC insurance coverage. These banks help their customers understand their options, make informed decisions, define their strategies, and mitigate their risks. Global Processing, Inc. Bankruptcy and the Iowa Grain Indemnity Fund Global Processing, Inc. filed bankruptcy in October 2022 and surrendered its grain dealer licenses. While this may have been a passing headline for most of the country, it had significant implications for farmers in Iowa, Illinois, Nebraska, and Minnesota who had sold soybeans to it. Unlike how the FDIC insures banks, there is no nationwide insurance scheme to protect unpaid farmers who sold grain to failed elevators. Instead, in 1986 Iowa created its grain indemnity fund to help protect farmers who lose money from grain dealer failures. Farmers who sold to Global Processing submitted $3.6 million in indemnity claims; however, this fund comes with some significant limitations: The indemnity fund rejected $1.5 million in Global Processing claims. One farmer submitted $800,000 in claims, but only received $60,000. Farmers who took losses are not completely out of luck, but like uninsured depositors of a failed bank, they must wait for the elevator’s assets to be liquidated before they can recover on their remaining claims. Usually those recoveries are 50% or less. The indemnity fund paid farmers $2.1 million for Global Processing claims. This depleted the indemnity fund, like bank payouts depleted the FDIC’s deposit insurance fund. The indemnity fund statute, though, doesn’t allow for the cost of replenishing this fund to be weighted toward the bigger dealers or producers. Funding for the indemnity program comes from assessments on grain dealers. These assessments are levied when the fund drops below a prescribed level, and no assessments have been levied since 1989. The fund now has only ~$250,000 — far below that threshold — so next year, dealers will pay a 0.014¢/bu fee on all purchased grain (this cannot be passed on to sellers), a 0.025¢/bu fee on purchased grain (this may be passed on to sellers), and a warehouse operator fee. These fees aren’t enormous, but they apply across the board, from large grain dealers to small, and even though elevators cannot directly pass the 0.014¢ fee on to sellers (and might not choose to directly pass on the 0.025¢ fee), ultimately farmers or elevator owners will bear these increased operating costs. The Iowa Capital Dispatch has reported the fee is being reinstated on September 1 this year and that the fund has a balance of approximately $380,000. You can read more details of this news story here: https://iowacapitaldispatch.com/2023/08/30/state-grain-fees-will-resume-this-week-to-replenish-indemnity-fund/ Takeaways for Farmers to Protect their Wealth While no financial loss is convenient, significant losses can greatly impact a farmer’s lifestyle, whether they are from a failed bank or a failed grain elevator. Here are some key points farmers should consider to protect their wealth: At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help you create and execute that business plan, and, if necessary, assist you with the legal, tax, and practical aspects of debt restructuring or bankruptcy. Don’t wait for the problems to become insurmountable. Connect with someone you can trust today, not tomorrow. Contact us here!
Defending Against Preference Repayment Demands
Taking a break from the morning’s work, you stop by the mailbox only to find an unfamiliar envelope from some law firm. The letter inside is notification that the XYZ Grain Elevator has filed for Chapter 11 bankruptcy reorganization, and as part of this, you might have to turn over to the court a good chunk of the $50,000 soybean check you received two months ago! Are you legally obligated to return your payment so XYZ’s other creditors can be paid? What are your options, and can you effectively defend your right to keep what you were owed? What is bankruptcy preference? In bankruptcy parlance, a “preference” is receipt of payment or other transfer of assets from a debtor to a creditor that takes place during or shortly in advance of the debtor filing for bankruptcy protection. It’s called that because it appears the debtor (XYZ Grain Elevator) is showing preference to this particular creditor (you) by paying them while leaving other creditors unpaid. It means you are potentially receiving a better payment than the court would be able to distribute among XYZ’s other creditors after liquidation of its assets through the bankruptcy process. A preference, therefore, enhances the preferred creditor’s recovery at the expense of similarly situated creditors. Let’s consider Bill, who decides he’s going to pay half the $50,000 he owes on a used tractor, to get the dealer, ABC Equipment, to stop haranguing him for payment. If Bill pays $25,000 and files for bankruptcy shortly thereafter, ABC Equipment has received 50 cents on the dollar of what it is owed, when the bankruptcy court might later determine all creditors will only be paid 10 cents on the dollar. That is a preferential payment, and the bankruptcy trustee could send ABC a letter demanding it return most of Bill’s $25,000 payment to the court, to be split among other unpaid creditors. Preference recoveries allow the bankruptcy court to “level the playing field” so all creditors get a fair shot at their percentage share of the debtor’s liquidated assets as repayment. Time limits on preference There is a “lookback period” to define what is a preferential payment. For general creditors, it’s within 90 days before the filing for bankruptcy. If Bill pays ABC Equipment $25,000 on June 30 and files on September 10, the trustee could send ABC a demand letter. But it’s not just what day the check was issued. If Bill doesn’t file for bankruptcy until October 30 but ABC waited until August 10 to deposit his check, ABC could still be subject to a demand letter. The 90-day lookback period is extended to one full year for creditors considered to be “insiders,” such as family members up to three degrees removed (up to a third cousin) or partner in a business. Consider the situation with Bill above. Let’s change the situation so that his first cousin, Tom, is actually a co-owner in ABC Equipment. In this case, the bankruptcy trustee could look all the way back to October 30 the previous year for any possible preferential payments. Congress believed “blood is thicker than water,” and that chances are high a debtor will pay their relatives before general unsecured creditors. One additional note on preferential payments: These are not just checks or cash payments, but any transfer of assets to satisfy a debt. For example, if a debtor transfers title to their vacation home to a creditor within the lookback period, the trustee and court could view that as a preferential payment. Mounting a defense No matter what kind of bankruptcy a debtor files—Chapter 7, 11, 12, or 13—the same federal code applies with respect to preferential payments. If you receive a demand letter as a creditor, it is important that you determine whether you have a valid defense against preference repayment. The best course is to consult with an attorney who knows the Bankruptcy Code and how to deal with preference demand. We have represented clients on both sides of preference letters. There are four types of defense a creditor may use against a preference letter. Don’t fear being paid Farmers selling grain or livestock do have some federal and state regulatory protections. The federal Packers & Stockyards Act regulates how quickly livestock and poultry producers must be paid, which is often a solid defense against preference repayment demands. State licensing requirements and grain indemnity funds are typically in place to cover grain elevator defaults. A farmer with these protections might still receive a preference demand letter, but these regulatory protections can help mount a defense. Ag & Business Legal Strategies recommends keeping records on your sales & purchases for your farm or business and tracking when you are paid & if you are not getting paid on time. If you are owed money, keep pursuing payment from a debtor—don’t let the prospect of a preference letter later on keep you from accepting payment. Remember, getting paid for certain with only a possibility of having to pay part of the money back is better than having your whole accounts receivable sitting out there and getting cents on the dollar in a hypothetical bankruptcy. If you receive a preference demand letter from a debtor or trustee, be proactive and reach out to us. Don’t wait—do it right away! At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help you create and execute that business plan, and, if necessary, assist you with the legal, tax, and practical aspects of debt restructuring or bankruptcy. Don’t wait for the problems to become insurmountable. Connect with someone you can trust today, not tomorrow.
Purdue Pharma Bankruptcy: A Battle Over Much More Than Dollars and Cents
In 2019, opioid manufacturer Purdue Pharma filed bankruptcy in the Southern District of New York. A large portion of the debt listed on its bankruptcy schedules came from judgments and potential lawsuits against it for its role in the opioid epidemic. Purdue’s owners, the Sackler family, were named in many of those lawsuits and would likely have been named in many more. Within Purdue’s bankruptcy the Sackler family obtained protection from lawsuits against its members for claims related to Purdue Pharma while the bankruptcy was pending, protection that they continue to enjoy to this day. However, this was only the beginning of the protections the Sacklers sought through Purdue’s bankruptcy. As part of a settlement agreement the Sacklers sought releases from liability for any lawsuits related to Purdue Pharma, even after the bankruptcy concluded. The Sacklers wanted what are known as nonconsensual third-party releases—releases from liability for non-debtors (since none of the Sacklers have filed for bankruptcy) on claims by creditors of the bankruptcy debtor without those creditors’ consent. In exchange for their third-party releases the Sacklers agreed to pay billions of dollars into Purdue Pharma’s reorganization plan. Indeed, Purdue Pharma’s reorganization plan was built around the Sacklers’ payments and liability release. Multiple creditors objected to the reorganization plan as it was proposed to the court, but after careful consideration Judge Robert Drain confirmed the plan over those objections in September of 2021. Judge Drain noted that approving the proposed plan, with nonconsensual third-party releases for the Sackler family, seemed to address the needs of all creditors, including the personal injury claimants, as thoroughly as possible considering the financial status of the company. After Judge Drain’s ruling it appeared that any future claimant seeking to recover damages in relation to the opioid epidemic would not have the option to file suit against the Sacklers directly. On Appeal It didn’t take long for confirmation of Purdue’s Chapter 11 plan to be appealed, and in December of 2021, District Court Judge Colleen McMahon pointed a fresh set of eyes at the situation. In her opinion, she lingered on the fact that members of the Sackler family withdrew upwards of $11 billion from Purdue Pharma in advance of the bankruptcy filing and that these same members knew of the pending wave of litigation headed their way. Then, in exchange for paying $4.35 billion into the bankruptcy settlement, the Sackler family and other “Shareholder Released Parties” received the assurance that all future personal injury claims against them would be channeled through the trusts created by the plan. Though on the surface that seemed like a fair treatment, further examination revealed that the trusts created under the plan would not permit payment to parties with claims against any of the Shareholder Released Parties, so those claims were essentially extinguished without any recourse for the claimants. Though the glaring unfairness made the confirmed plan problematic, Judge McMahon’s decision to vacate Judge Drain’s ruling boiled down to whether the bankruptcy court had the statutory authority to grant the non-debtor release in the first place. With respect to that issue, she held that the Bankruptcy Code did not authorize such third-party releases in any way, so regardless of how well Judge Drain thought the reorganization plan would have handled claims, the bankruptcy court could not legally confirm it. Despite having already spent almost three years embroiled in the bankruptcy process, Purdue Pharma and the Sacklers were sent back to the drawing board to find an acceptable reorganization plan that the court could and would confirm. Unintended Consequences Though vacating Judge Drain’s confirmation order seems to avoid allowing responsible parties to evade liability, determining whether this was a net positive is difficult. While waiting for their appeal to be heard in the 2nd Circuit Court of Appeals, Purdue Pharma and members of the Sackler family have been actively engaged in mediation with the objecting creditors to find a settlement that would help to alleviate the opioid crisis. In the meantime, personal injury claimants are playing a different waiting game. The previously confirmed reorganization plan would have allowed victims of the opioid epidemic to start receiving payments from the newly established trusts as early as 2022. However, because the trusts will not be established until a plan is confirmed, those payments will, at the very least, be significantly delayed, if they happen at all. If the parties are ultimately unable to reach a settlement that creates an avenue for claimants to receive payment, victims of the opioid crisis that wish to recover directly from the Sackler family and other Purdue shareholders will be left to fight that battle in the court system. The Sackler family has not filed for bankruptcy. This is one of the complaints about the nonconsensual third-party releases they wanted—they granted the Sacklers protection like they would have received through a bankruptcy (indeed, perhaps even broader than they could have received in a bankruptcy) without subjecting them to the scrutiny bankruptcy entails. However, this is a double-edge sword. Since the Sacklers have not filed bankruptcy they still have ample resources to hire the best and brightest attorneys to litigate the claims against them. Every dollar the Sacklers spend on attorneys is one dollar less that could be paid to opioid victims. Not only would getting a judgment for a personal injury claim against any of the Sacklers be an uphill battle, but enforcing that judgment would be difficult, as the Sacklers have many assets that are not subject to easy collection—for example, the assets are overseas. A judgment without means to enforce it is worth about as much as the paper on which it is printed. The unpleasant reality is that securing the Sacklers’ participation through Purdue Pharma’s bankruptcy reorganization may be the most efficient way to get funds to the families and individuals that have suffered harm as a result of the aggressive marketing of dangerously addictive opioids. A Dangerous Precedent No matter what the final outcome of the Sackler appeal is, it will have
Joe Peiffer on The Big Show re: Dean Foods
Joe Peiffer had the opportunity to chat with Andy Petersen of WHO’s The Big Show regarding the Dean Foods preference recovery efforts. The host aired the interview in two parts, on December 7, 2020 and December 8, 2020. The audio is embedded below and also transcribed: December 7, 2020 Dean Foods Interview Andy Petersen: Well, some concerning letters showing up to people who sold milk to Dean Foods before they declared bankruptcy, which was maybe about a year ago or so. You’ll get more into that here, and what your options are. There are options, it sounds like, but not responding is not one of them, if I can throw some more negatives in there for you. Joe Peiffer is here. He’s the founder of Ag and Business Legal Strategies in Cedar Rapids, and a good buddy of The Big Show and one of our legal experts that we turn to in times like this. And, Joe, what’s going on? Joe Peiffer: Well, what’s going on is what happens in a lot of bankruptcies: literally, that at some point in the case, somebody will make a demand to recover what are known as preferences. A preference is a payment that’s been made to a creditor within 90 days of filing a bankruptcy. The idea here, and when Congress set the Bankruptcy Code back in 1978, was to say, well, gee, if people got paid within 90 days, they might have gotten more than their fair share. So, they give the bankruptcy the power to chase those preferences, and pull the money back into the bankruptcy estate and to share it with everybody. It sort of reminds me of Robin Hood, if you will. Nonetheless, preferences have been very frustrating for many, many years. People do not like them. They say, “I got paid fair and square. Why do I have to give the money back?” Part of the idea here is to equalize distribution among different groups of creditors. But there are defenses, and the Dean Foods letters remind me of what happened in the VeraSun ethanol bankruptcy in Delaware back in 2010. In that case, lawyers from Delaware and in New York sent letters out to thousands of farmers all across the Midwest, demanding that any payments that cleared their bank within 90 days of filing bankruptcy be returned. That’s what appears to be happening in the Dean Foods bankruptcies. Dean Foods and 43 affiliates filed a bankruptcy in Houston, Texas, on November 12th, 2019. Now demands are being put out by a law firm out of Saint Paul, Minnesota, demanding money, all the payments within 90 days. Not just the dairy farmers, but other creditors, too. We’re going to focus on the defenses the dairy farmers have, and they’ll be similar to some others. But dairy farmers typically have what I think is going to be a very strong defense, called “ordinary course of business”, or course of dealing. Provided that Dean Foods was paying them a couple of times a month, and either by check or by EFT … If that was happening, deliver milk, get paid; deliver milk, get paid; deliver milk, get paid, that’s an ordinary course of business defense. It should be golden. But what these letters say is, you’ve got a given period of time to pay us a certain amount of money, and I think it’s approximately 25% of the amount, or they’re going to sue the farmer. They’re going to sue the farmer in bankruptcy court in Houston, Texas. Now, I don’t know, but I think most of the Midwestern farmers don’t have bankruptcy lawyers on tap in Houston, Texas. For the most part, they’d just as soon never touch a bankruptcy lawyer’s office, but this is one of those times where you might need to talk with a bankruptcy expert to help you migrate and respond to these letters. If you do not respond, you’re going to be sued. If you do respond, and you provide the documentation to prove a defense, chances are they won’t do anything. But most of my farm clients aren’t used to assembling documentation in a fashion that a bankruptcy lawyer is used to looking at. So, in order to help people, next week on December 9th I’m going to hold a free Zoom meeting. Anybody that wants to jump in can jump in, and we’ll talk about it. And if people can’t make it on the 9th, we’ll have a follow-up meeting on the 14th. They’ll both be at one o’clock. The key thing you want to do: get your information, showing the payments you got and the deliveries of milk when they happened. If they happened like when my father was dairying back in the ’70’s, deliver milk, get paid; deliver milk, get paid, I see no way that the Dean Foods people can possibly win. If they were not paying on time, and they were delinquent in paying you, that’s a different story. Then we have to see if there are other defenses that can be used. AP: This is something that, when you and I talked earlier, you compared it, I believe, to extortion. JP: Correct. It reminds me of extortion, because they’re threatening to sue you in a court, a long ways away, and saying, “If you’ll pay me something, we won’t sue you.” In my mind, if you have no right to something, to threaten to do something which you shouldn’t do in the first place because you haven’t done your homework, is extortion. Or, blackmail is another term that comes to mind. This may be a situation where paying a few bucks to somebody to help you organize your answer beats the heck out of paying them the price they want to say for freedom. AP: Joe Peiffer, there. He is the founder of Ag and Business Legal Strategies in Cedar Rapids, a good friend of the Big Show. You can read more on this subject. He