Whenever a farmer sells a crop to a purchaser of their product, they always need to be aware of what happens if that purchaser goes bankrupt. Any payments that the farmer receives within 90 days of bankruptcy can be considered preference payments and the farmer may have to pay some or all of these payments back to the bankruptcy court.
However, there are usually three key defenses that the farmer has:
- A contemporaneous exchange for new value - This is a legal term that means the crop was sold for cash by the farmer and not for a promise of a payment in the future. Essentially, the payment was directly related to the delivery of the crop, i.e., a cash sale.
- Ordinary course of business - To establish an ordinary course of business defense, a farmer will have to show that the debt was incurred in the ordinary course of business or financial affairs between the farmer and the buyer. The bankruptcy court will require documentation showing the transactions that support this contention. For example, if the farmer was delivering corn on a weekly basis for cash payment and has the invoices to prove it, then they should win on this basis.
- Subsequent new value - Essentially this means that the farmer received a payment from the supplier and then delivered the corn after receiving the payment.
With the announcement that the Verasun bankruptcy trustee is in the process of attempting to get back 80% of these payments made to farmers within 90 days of its bankruptcy, you need to review your records and do something now. If you think this will go away, you are wrong. I have been involved in a couple of bankruptcies where the trustee attempted to get preference payments from the company I was involved in and we probably would have failed all of the three tests shown above. However, we ended up succeeding since the bankruptcy court had signed off on an agreement between our company and the company involved.
The Center for Agricultural Law and Taxation has a very good article on the Verasun bankruptcyand I have seen several other good articles. If you sold corn to Verasun and have gotten a notice, take action. It may save you large amounts of money.
This is not a legal opinion. You must review this with an attorney and make sure you follow all of the steps. If you do, then you stand a good chance of not paying back these payments. If you do not, then this will cost you.