AMES, Iowa — Producers and cooperatives that received letters from VeraSun requesting repayment for corn they sold to the company should contact an attorney familiar with the Bankruptcy Code before they respond, suggests the Iowa State University Center for Agricultural Law and Taxation.
CALT staff attorney Erin C. Herbold explained that VeraSun Energy Corporation and its 24 subsidiaries filed for Chapter 11 bankruptcy protection on Oct. 31, 2008.
Producers and cooperatives that sold corn to VeraSun within 90 days of the bankruptcy filing were informed by VeraSun’s counsel via letter that they have until Sept. 30, 2010, to repay 80 percent of what VeraSun paid them for their corn during this time.
These payments are known as preferential payments, Herbold said. A preference is a payment made to the creditor within the specified look-back period before a bankruptcy filing. Under state law, a debtor can ordinarily “prefer” one creditor by paying that creditor, while choosing not to pay anything to a second creditor. Thus, some creditors are paid in full and some receive nothing.
The preferential payment rule seeks to level the playing field by recovering payments received by creditors during that time. Unfortunately, this leaves suppliers, who did nothing wrong, being asked to refund those payments, Herbold said.
Thus, the corn that was sold may never be retrieved by the supplier, but the cash received may have to be repaid. There are two important defenses to these preference claims, Herbold said.
One is the contemporaneous exchange for new value. In other words, the transaction is a cash sale in which delivery of the corn is conditioned on contemporaneous cash payment and not a promise of payment in the future. This defense encourages creditors to do business with troubled debtors.
The second important defense is if the transaction occurred during the ordinary course of business between the debtor and the creditor. To establish this defense, a VeraSun supplier must show a consistent pattern of previous transfers between the parties.
Suppliers of VeraSun who received these letters should contact an attorney familiar with the Bankruptcy Code right away to formulate a response to debtor’s counsel, Herbold said.
For more information, please see the Center for Agricultural Law and Taxation’s in-depth legal article on this subject at www.calt.iastate.edu/verasunbank.html.
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