Prudent dairy operators should heed the fact that creditors aren't going to walk away.
By Riley Walter, attorney
Thankfully, at long last, California dairymen appear to be getting a bit of a break. It seems that there finally may be a little extra money left over out of milk checks.
This raises the question of how this "extra money" should be used. Should you use it to attend to deferred maintenance? Should you use it to upgrade the herd? Should you use it to pay creditors who have been mounding up over time due to the dairy crisis?
Whatever you do with the extra money needs to be based on strategic considerations that put you in a better position. Don’t just sprinkle it around. Be thoughtful.
In recent weeks, we have had several meetings with dairy operators. They are coming in to talk about the fact that they have barely survived the crisis, and now that things are looking better, they want to know what they can expect. Many of them have a significant amount of accrued unpaid payroll taxes. Almost all of them have a very large mound of unsecured creditors in the form of feed suppliers, veterinarians, vet suppliers, fuel distributors, etc.
In these meetings, we often explain that there are debts that do not get wiped out by bankruptcy and there are debts that do get wiped out by bankruptcy. Generally speaking, tax obligations are a kind of debt that does not get wiped out by bankruptcy, so if the dairyman has a choice between paying on a non-dischargeable tax or a payment on a dischargeable vendor bill, the answer should be pretty easy.
However, this still leaves hanging the looming question about what to do about the piles of trade debt.
As you might guess, most of these clients ask if we think the creditors are going to "walk away" and leave the dairymen alone and not seek any recovery. We explain that the trade creditor community is already starting to gear up and file numerous collection lawsuits. As creditors perceive that there might be some "extra money," they are filing lawsuits trying to get ahead of the other people in the pile.
At some near point, these lawsuits are going to reach the point where there are judgments, and creditors will begin to attach milk checks or pursue recoveries on judgments by levies or other means.
We also explain that while many of the trade creditors will be, and have been, patient and willing to "take payments," others will not simply because they want to get ahead of the rest of the herd to be first in line. This makes us anticipate that there will be numerous operators who will have to reconsider using Chapter 11 or Chapter 12 as a mechanism for reorganizing their finances. For a host of reasons, this probably will have to be done through official court action so that these operators can shed unsecured debt and fix their balance sheets.
The point of all of this is that just because it now appears that there might be a little "extra money," prudent operators should not let their guard down. They need to be facing the fact that they have balance sheets that are way out of whack and they are going to have to get them in order so that they can go forward and live decent lives without looking over their shoulders.
Riley Walter is an attorney and founder of the Central Valley-based Walter & Wilhelm Law Group, a law firm specializing in agribusiness, reorganization and bankruptcy. Contact him at 559-435-9800 orRileyWalter@W2LG.com.