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Dairy farmers asked to return Dean ‘preference’ payments

Progressive Dairy Editor Dave Natzke Published on 01 December 2020

Editor's note: This article has been updated to include comments from Dairy Farmers of America.

The legacy of the Dean Foods bankruptcy lives on, with some dairy farmers being asked to return a portion of the payments they received for milk delivered in late 2019.

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How we got here

Readers of Progressive Dairy are familiar with the Dean Foods bankruptcy saga. Dallas-based Dean initiated voluntary Chapter 11 bankruptcy reorganization proceedings on Nov. 12, 2019, in the U.S. District and Bankruptcy Court in the Southern District of Texas. About six months later, in early April 2020, U.S. Bankruptcy Court Judge David Jones approved the sale of virtually all of Dean assets.

(For a recap, read Dean Foods files Chapter 11 bankruptcy, negotiating with DFA and Bankruptcy judge to approve Dean sale.)

The sales of those assets, however, failed to provide adequate funds for ongoing bankruptcy costs, including administrative expenses that were incurred by Dean Foods during the bankruptcy proceeding. Appointed representatives of the bankruptcy estate are now seeking payments through a provision of U.S. bankruptcy law.

Under 11 US.C. § 547 of U.S. bankruptcy code, payments made by a company during the final 90 days prior to the filing of bankruptcy are considered “preference” payments. In this case, dairy farmers receiving payments for milk delivered for the period anytime up to 90 days prior to Dean Foods’ filing of Chapter 11 bankruptcy may be considered preference payments. That provision of the bankruptcy allows the estate to "claw back” those payments in an attempt to acquire necessary funds to pay remaining claims.

Beginning earlier this fall, ASK LLP, a law firm based in St. Paul, Minnesota, began sending demand letters to all companies receiving Dean payments during the 90-day preference period prior to filing for bankruptcy. According to court filings (docket 2898), ASK LLP was authorized to begin pursuing preference actions as of Sept. 1, 2020.

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ASK LLP, which specializing in preference actions, is poised to receive up to 27.5% of the money they collect.

According to Progressive Dairy sources, letters and packets of legal documents mailed to dairy farmers seek payback of varying amounts of payments received for milk delivered during the designated period. The letters also note failure to make payments by an established deadline could be followed by legal action. Such action is similar to any other lawsuit, except that it’s filed in bankruptcy court rather than federal district or state court.

Progressive Dairy contacted a half-dozen attorneys with backgrounds in agriculture, seeking information useful to dairy farmers receiving the preference action letters. Their advice: Get guidance from an attorney familiar with bankruptcy law.

Defenses described

The fact that some dairy farmers may have been identified as “critical vendors” early in the bankruptcy filing likely has no bearing in this situation, according to Attorney Justin Mertz, partner and bankruptcy subgroup leader with the Wisconsin-based law firm of Michael Best & Friedrich LLP. It is also uncertain whether Federal Milk Marketing Order (FMMO) rules have any relevance.

However, Mertz urged affected dairy farmers to seek legal representation and outlined three possible defenses to the preference demands. In all three defenses, the creditor (dairy farmer) has the ultimate burden of proof. They include (in no particular order):

1. The "substantially contemporaneous exchange" defense: In short, while the payment for milk went toward debt accumulated during the milk procurement and processing, the milk was delivered and payment was made for the value of that milk. If there was a contemporaneous exchange of value (milk for money), there may be a defense.

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2. The "subsequent new value" defense: In this defense, the creditor (farmer) needs to show that additional milk was supplied to Dean after one or more of the preference payments were made. For example, if the dairy farmer delivered milk 89 days prior to the filing of bankruptcy, payment for that milk would be considered open to preference action under the bankruptcy code. However, if the dairy farmer delivered milk 88 (and subsequent) days prior to the filing, it creates “new value,” which may offset the preference payment. ASK LLP typically provides a review of this defense as part of its preliminary analysis.

3. The “ordinary course of business” defense: Proving this defense requires an analysis of past invoices, due dates and payment dates to establish the parties’ ordinary business dealings. Any payments that are shown to have been made in the ordinary course of business (based on historical practices) need not be repaid.

The ordinary course of business defense may be the primary defense mechanism for dairy farmers. Payments for milk were made on terms that were: (1) consistent with the historical course of dealings between the debtor and creditor and (2) on terms that are customary in the industry.

Raising these defenses may help prevent a lawsuit altogether, or significantly reduce the claim settlement amount, Mertz said. In addition to the legal defenses listed above, settlement is frequently open to negotiation. Due to the cost of pursuing litigation, attorneys representing affected dairy producers may be able to negotiate a settlement that would avoid a catastrophic result. If you have received a preference demand letter it may be worthwhile to seek the input and advice of an attorney, especially if the demand is significant.

Members of Dairy Farmers of America (DFA), a major milk supplier to Dean Foods prior to the co-op’s purchase of Dean assets, did not receive the preference action demand letters, according to the organization. As part of the asset purchase agreement and a broad release of claims against each other, Dean Foods released DFA from the potential claims.

“We recently learned that as part of the bankruptcy process, the Dean Foods estate is reaching out to former vendors and suppliers requesting the recovery of funds paid within the 90-day period prior to its filing of bankruptcy,” DFA said in a statement. “DFA does not control the actions or decisions of Dean Foods in its bankruptcy liquidation and was not involved with the decision to pursue these claims.”

“Ultimately, we had no idea that the Dean estate was planning to make these claims against independent producers,” a DFA spokesperson said. “It’s disappointing that they would take this kind of aggressive action against hard-working dairy farm families who supplied them with milk prior to the filing.”

Pennsylvania conference call planned

Approximately 100 Pennsylvania dairy farmers were among those receiving the preference action letters, according to the Center for Dairy Excellence (CDE). The CDE is hosting a conference call, Dec. 10, noon-1 p.m. (Eastern time) to provide time-sensitive updates on how dairy farmers should address these claims. Rob Barley and Doug Eberly with the Pennsylvania Milk Marketing Board will provide updates on the Dean Foods bankruptcy and how dairy farmers should navigate any recent requests they have received for payments.

To join the free conference call, dial (978) 990-5000 and then enter access code 553371# when prompted. Text or call (717) 585-0766 to submit questions, or email Zach Myers.

FMMO update

One other unresolved issue relates to Dean payments – or rather failure to make payments – to FMMO pools in spring of 2020, prior to the transfer of Dean assets to new owners. (Read Dean Foods misses FMMO payments.)

At that time, administrators in nine of 11 FMMOs indicated Dean Foods failed to make producer settlement fund payments for milk pooled during April 2020. In addition, Dean owed monies to the FMMOs for producer marketing services, transportation credits and administrative services. No estimate of the payment total for individual or all FMMOs was available.

According to Toby Anekwe, public affairs specialist with the USDA's Ag Marketing Service, Dean Foods was fully regulated in all FMMOs except Arizona and the Pacific Northwest. FMMO administrators and the USDA were working with the U.S. Department of Justice (DOJ) in an attempt to recover money from Dean Foods.

Progressive Dairy reached out to the USDA to determine whether Dean had made delinquent FMMO payments and was referred to the DOJ at this article's deadline.  end mark

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