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VeraSun
Bankruptcy
Trustee Attempts to Recover Payments Made to Suppliers
Posted 7 September 2010
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).
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 here.
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