December 1, 2020In the News

Partner Justin Mertz quoted in Progressive Dairy article, “Dairy Farmers Asked to Return Dean ‘Preference’ Payments”

Progressive Dairy

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.

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 final 90 days prior to the bankruptcy filing. 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.

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.

  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.

To read the full article, click here.

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