As the Southern Foods Group / Deans Foods Estate winds up its affairs in their Chapter 11 Bankruptcy proceedings, a lingering question had been “were the obligations to Producer Settlement Funds ever paid, and how would they be resolved?”
An Order entered on January 15th, 2021 at the US Bankruptcy Court for the Southern District of Texas, Houston Division, provides at least a portion of that answer. This payment will not cover pre-petition obligations (obligations incurred before the Nov. 12, 2019 filing date) of approximately $16 Million, which USDA indicates it will continue to pursue.
On January 15, 2021, the Honorable Chief Judge David R. Jones, of the United States Bankruptcy Court for the Southern District of Texas, signed and entered a Stipulation and Agreed Order (Order) between the U.S. Department of Justice (DOJ), which is serving as legal counsel of record for the United States Department of Agriculture (USDA), and Dean Foods.
The Order requires Dean Foods to pay within 30 days $29,082,182.26, which is 90 percent of its obligations to the USDA for milk marketed in April 2020 and May 2020.
On November 12, 2019, Southern Foods Group, LLC, et al., (Dean Foods) filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. At that time, Dean Foods had 43 plants regulated by the federal milk marketing order (FMMO) system. Subsequent to the filing date, Dean Foods, as the Debtor-in-Possession (Dean DIP), failed to make payments to USDA for milk marketed from April 1, 2020, through May 4, 2020, totaling $32,313,535.84. The missed payments included monies owed to the FMMO program, the National Dairy Research and Promotion Program and the National Fluid Milk Processor Promotion Program.
Upon receipt of payment, USDA will remit monies owed to FMMO-regulated handlers and the Dairy and Fluid Milk Promotion Boards. Once handlers receive payments from USDA, FMMO regulations require that the money be promptly remitted to producers.
Procedures for handler payments to producers will be communicated through the respective FMMO Market Administrators.
Dean Foods’ $16 million pre-petition debt owed to USDA is not covered by this Stipulation and Agreed Order. USDA filed timely Proofs of Claim for these pre-petition obligations and will continue to pursue payment of those claims through the bankruptcy proceeding.
Two Weeks of Furious Activity Sets Farmers, Haulers on Paths to Resolution with a Team Effort
The Background: During the week of and prior to Wednesday, November 25, former Dean Foods independent producers and milk haulers began to receive “Demand” letters from ASK, LLP, a law firm specializing in recovery of ‘preferential payments.’ In a concise definition, ‘Preferential Payments’ are often made by entities filing bankruptcy in the 90 days prior to the filing, and in bankruptcy law, it is perfectly legal for attempts to be made to recoup those monies for other purposes in bankruptcy proceedings.
NOTE: This blog post is providing information about legal events, but should not be taken as legal advice. The author is not an attorney.Qualified attorneys are cited and referenced.
When producers began receiving these letters, reactions ranged from dismay, agony, and horror, to disbelief, to scoffs such as “that money came to me as a regular payment – I’m not paying it back!,” to “We have a situation, what should we do?” With deadlines of December 19th and December 24th in those letters, the truth, the legalities, and appropriate responses had to be sorted out in a very short time frame, to make sure producers met legal requirements.
Several dairy industry and agriculture advocacy groups have, since late Wednesday, Nov. 27th, and early morning on Friday, November 27th, worked furiously and tirelessly to challenge the ASK letters, and to keep the monies where they rightfully belonged – in the hands of dairy producers and local farm communities. Through email networks, phone calls, messages via email and text, news stories, podcasts, blog posts, letters from dairy organizations, and conference calls, it has been an ‘all hands on deck’ effort to assist producers and milk haulers in a ‘defense’ to those letters. Here is a summary:
Earlier this week: Newsletters from AgriVoice (excerpts)
ACTIONS by organizations regarding ASK Letters (per Dean Estate) to Producers trying to get ‘payback’ monies from farmers, others; Resolution seems to be approaching
Over the past 10 days, a number of organizations and individuals in key positions in several states have been diligently working on behalf of producers to help determine paths for producers to challenge the ASK letters received Thanksgiving week, in order to resolve the situation with minimal legal costs and headaches to individuals farmers. American Farm Bureau, and the Pennsylvania Milk Marketing Board, courtesy of Counsel Doug Eberly, have taken these actions:
– American Farm Bureau Challenges ASK with Strongly Worded Letter (For news release & letter, please scroll)
– FORMS YOU CAN USE to reach resolution (LINK): The Pennsylvania Milk Marketing Board has been in communications with ASK, and working with that firm, has developed “Resolution Forms” which can be used by all affected farmers and/or haulers to send to ASK in order to avoid any payback:
The American Farm Bureau Federation is standing-up for hundreds of dairy farmers being targeted by predatory lawyers representing the estate of Dean Foods, which is currently undergoing bankruptcy proceedings. Almost 500 dairy farmers who once sold milk to Dean Foods received letters threatening legal action unless they refund money legitimately earned prior to the bankruptcy filing.
“Shame on these predatory lawyers for bullying dairy farmers at a time when many are struggling to keep their farms running,” said American Farm Bureau Federation President Zippy Duvall. “It’s ludicrous to suggest the meager profits from regularly scheduled and routine milk sales – sales that are heavily watched and regulated by the federal government – were outside the regular course of business. Someone needs to have the farmers’ backs and I’m proud to say AFBF is stepping-in to do just that.”
AFBF sent a letter to the law firm managing the Dean Foods estate calling for an immediate reversal of their “predatory shakedown” and threatening potential legal action if the firm fails to withdraw the letters sent to farmers. In the letter, AFBF General Counsel Ellen Steen says the letters sent to farmers “are deceptive and constitute an abuse of process that attempts to extract funds that the Debtor (Dean Foods) is not entitled to under the threat of a lawsuit. Put plainly, your letters are a predatory shakedown, written in legalese.”
Many recipients of the Debtor letters are independent farmers already struggling through difficult economic times made worse by the COVID-19 pandemic. The letters put producers in an impossible position—either pay the amounts demanded or incur the cost of legal counsel to defend against the Debtor’s allegations.
The AFBF letter outlines the legal legitimacy of the payments made to dairy farmers and admonishes the lawyers representing Dean Foods for knowingly taking advantage of farmers, saying, “Sending the Letters under these circumstances is not only deceptive, but outrageous because they threaten legal action when in fact the Producers have no legal exposure for the reasons set forth herein.”AFBF further calls upon those lawyers to retract their demands by notifying each farmer by separate letter within 10 business days; returning any funds already received; and by ceasing any litigation against farmers who did business with the company. The AFBF letter clearly states a willingness to step-in in the event that the Dean Foods estate pursues litigation against farmers.
News Release, December 9th from PA Milk Marketing Board
PMMB QUICK ACTION LEADS TO RESOLUTION OF PAYMENT DEMANDS
The Pennsylvania Milk Marketing Board, working with the Pennsylvania Attorney General’s office and ASK LLP, has developed declarations to respond to avoidance claim settlement offers received by Pennsylvania dairy farmers and milk haulers. The declarations, available on the Board’s website at https://www.mmb.pa.gov/Consumer/Pages/default.aspx, are a simple and standardized way for farmers and haulers to demonstrate that they received payments from Dean Foods in the ordinary course of their business with Dean.
Dairy farmers and milk haulers should read the explanation on the Board’s website and return the appropriate declaration to ASK. We emphasize that it is vitally important that farmers and haulers return the completed declarations to ASK as soon as possible.
In a bankruptcy, payments made by the debtor during the 90 days prior to the bankruptcy filing may be avoided and recovered under some circumstances. In the continuing aftermath of last year’s Dean Foods bankruptcy, dairy farmers and milk haulers received avoidance claim settlement offers from ASK LLP seeking to recover a portion of the payments they received during that 90-day period. However, if dairy farmers and milk haulers demonstrate that payments were received in the ordinary course of their business with Dean, those payments may not be recovered, and those farmers and haulers do not have to return those payments.
Because milk marketing is highly regulated, the Board believes that the settlement offers’ request for records spanning May 2018 through November 2019 is not necessary to demonstrate that dairy farmers and milk haulers received payments in the ordinary course of their business with Dean. ASK agreed to accept declarations in lieu of the records. After receiving and reviewing a declaration, ASK will seek authority from its client to close the file and then inform the farmer or hauler.
Board Secretary Carol Hardbarger stated that the cooperation received from not only the Attorney General’s office, but other organizations such as the Center for Dairy Excellence and the PA Farm Bureau, enabled the quick resolution of this issue. Board Chairman Robert Barley and Member Jim Van Blarcom echoed that sentiment.
The information provided is not legal advice and is not a substitute for obtaining legal advice from a licensed attorney.
_______ ADDITIONAL REFERENCES and RESOURCES ___________
A TEAM EFFORT – All will continue to work until resolution: There are many government officials, organizations and individuals both nationally, and in several states, who continue to work on this issue. Much of this work is being done behind the scenes, and there may be a few days when we don’t hear or know anything while people do the work that matters, using their resources, according to their professional processes.
In the meantime, make sure you fill out and submit your paperwork to ASK, and take care of what you can do as a farmer or hauler. All involved are aware of the pending deadlines which were noted in the packets which producers received; those deadlines vary from December 19th through December 24th. These packets also contain different names of whom to respond – make sure your ‘defense response and declaration’ is directed to the correct party.
Dean Foods Chapter 11: Quickly Evolving Events weeks of Nov. 23rd through December 4th, 2020 – a Year after filing
“WHAT SHOULD A PRODUCER DO ABOUT THE REQUESTS FROM ASK SUGGESTING FARMERS SHOULD PAYBACK MONEY?” is the question first and foremost on farmers’ minds. Most are electing to wait until more information is gathered before sending any money to this law firm, realizing some of the deadlines are pending. This situation has been and continues to be QUICKLY EVOLVING, with information changing by the minute.
NOTICE: This post contains and refers to information and reports about legal events, with some attorneys quoted and official legal notices included, but should not be considered legal advice. I am not an attorney, so any information should be considered as public information, and not taken as advice on a course of action for any individual.
LEGAL REFERENCE: Case #19-36313, US Bankruptcy Court, Southern District of Texas-Houston; Presiding Judge: David R. Jones
SUMMARY – some good news:
The good news is that producers do have recourse and options per many industry reports, although the exact course of action has yet to be determined, and it may differ for individual producers.
ADDITIONAL COURT ACTIVITY this week: On Nov. 30, Southern Foods Group, LLC / Dean Foods et.al. filed several documents outlining a “Plan of Liquidation” in the above-referenced Bankruptcy Action. (See graphic below). Some producers have received emails, or may receive letters in the mail, regarding a hearing related to this process, scheduled for Jan 11 at 2:30 pm. (Doc. 3234 at the Epiq Southern Foods Court Docket) Producers can participate in this January proceeding via audio/video if they wish.
Past Week: As many already know, there has been a lot of activity since the last week of November, 2020, concerning an attempt from ASK, LLP to reclaim a portion of funds paid to producers, and other entities doing business with Dean Foods, in the 90 days prior to the Dean Foods/Southern Foods Group Chapter 11 Bankruptcy filing on Nov. 12 of 2019.
Who all got the notices? It has been confirmed through several sources that farmers were not the only parties who got such notices: a few co-ops and other business entities, such as milk check assignees, consultants, and milk haulers, also received similar letters, and have challenged the requests in a variety of ways. The resolution of these challenges is not yet known.
Since producers began receiving letters on or about Wednesday, Nov. 25, there has been a flurry of phone calls, text messages, communication to and among agricultural advocacy organizations and dairy producer groups, and others trying to gather and assemble all pertinent information.
The main goal was to establish a producer’s rights and potential courses of action in regards to these solicitation letters from ASK, LLP, and to determine if a producer would eventually be required to pay the requested amounts at all. Just because ASK asked, does not necessarily mean they will receive.
In communications with many, most farmers have elected to wait until more information was forthcoming before they paid anything to this third party, some have engaged individual attorneys, and some have elected to wait to see if their is a ‘blanket’ recourse on a collective group of farmers.
The Beginning: How ASK, LLP got involved:
ASK, LLP is working based on contingency fees ranging from 15-27.5%, stated in a ‘letter of engagement’ on the Bankruptcy Court’s Docket. This ‘letter of engagement’ is dated July 18, 2020, and was sent to Gary Rahlfs, Chief Financial Officer, Southern Foods Group/Dean Foods. That engagement was approved by via a Court Order of Sept. 1, 2020. That Order, Document #2898, was publicly posted at the Bankruptcy website on Sept. 1, 2020, and it can be downloaded.
On Social Media? Be careful!!! By this time, social media is full of posts of dismay, indignation, and asking what to do. While these posts generally may be interesting to read, they should not be considered as valid sources of legal information or advice.
SUMMARY ARTICLES (the most complete, most accurate, and most in-context with the entire situation – all contain pertinent information):
Quote from article: “We find it extremely disappointing that hardworking dairy farm families are now put in the position of having to incur costs, either in paying the amounts demanded, or obtaining legal counsel to defend themselves against these farfetched claims.”
Document 3230: JOINT CHAPTER PLAN OF LIQUIDATION of SOUTHERN FOODS GROUP, LLC, DEAN FOODS COMPANY, and THEIR DEBTOR AFFILIATES (75 pages) with the US Bankruptcy Court for the Southern District of Texas – Houston Division, and
Document 3229 (143 pages), which is captioned: MOTION OF DEBTORS FOR ENTRY OF AN ORDER (I) APPROVING THEDISCLOSURE STATEMENT, (II) ESTABLISHING PROCEDURES FOR THESOLICITATION AND TABULATION OF VOTES TO ACCEPT OR REJECT THEPLAN, (III)APPROVING THE FORMS OF BALLOTS AND SOLICITATIONMATERIALS, (IV) ESTABLISHING THE VOTING RECORD DATE, (V) FIXINGTHE DATE, TIME, AND PLACE FOR THE CONFIRMATION HEARING ANDTHE DEADLINE FOR FILING OBJECTIONS THERETO, (VI) APPROVINGRELATED NOTICE PROCEDURES, AND (VII) GRANTING RELATED RELIEF
CONFERENCE CALL NEXT THURSDAY – via PA Center for Dairy Excellence
The PA Center for Dairy Excellence is graciously inviting those affected by this Dean Foods event to participate in a Conference Call on Thursday, Dec. 10, 2010. The Dean situation is only one to be discussed – Rob Barley and Doug Eberly, Counsel for the PA Milk Marketing Board, will address the letters and how they affect farmers.
QUICKLY MOVING, EVOLVING SITUATION – Stay Tuned
It is expected there are other significant actions and news to be shared in the next few days, since this is a quickly moving event with pending response deadlines as early as Dec. 19th. Rest assured that many individuals, information networks, and advocacy organizations are trying to get answers and information to folks as quickly as they can.
UPDATE – JUNE 9th, 2020:Southeast area farmers, previous Dean Independent producers, report that they have received funds for their April Settlement milk checks via electronic deposit into their bank accounts. This action follows several letters from producer organizations both to the Court and to the Committee for Unsecured Creditors.
Please scroll for letters from Zippy Duvall, President of the American Farm Bureau Federation, and H. Barlow, Executive Secretary of the Kentucky Dairy Development Council (KDDC), which were sent to the Court.
On behalf of the (former) Dean independent producers, we say “THANKS” to the Honorable Judge David Jones, the Court, Dean Foods estate officials, and to all who advocated on their behalf.
At this time, it is not known if dairy co-ops or the FMMO Producer Settlement Funds have received the balance of the funds owed to them by the Dean Foods Estate.
Letter from Zippy Duvall, President, American Farm Bureau, to the Court and Dean Foods (Estate) Officials
Letter from H. Barlow, Executive Secretary, KDDC, to the Court:
The story as first reported:
Payments to Farmers Late at Best, in Question for the Future
A May 13, 2020 memorandum from USDA-Agricultural Marketing Service, Appalachian Order, reads as follows:
TO: Regulated Handlers
FROM: Harold H. Friedly, Jr., Market Administrator, F.O. 5
SUBJECT: Producer Settlement Fund Non Payment
On May 12, 2020, Dean Foods, DIP (debtor-in-possession), a regulated handler on the Appalachian Order, did not pay its obligation to the Producer Settlement Fund (PSF) as required by Federal Milk Marketing Order regulations. USDA recognizes the significance of this non-payment and is continuing to work with the Department of Justice to attempt to recover these monies as part of the Dean Foods, DIP, estate.
When payment is not made to the PSF, Federal Milk Marketing Order regulations prescribe procedure for how the remaining marketwide pool monies should be distributed to handlers (1005.72). When PSF monies are not sufficient to make full payments to handlers, the Market Administrator shall reduce uniformly such payments to handlers due a payment from the PSF.
Accordingly, for milk pooled on Order 5 during April 2020, payments to handlers from the PSF have been reduced pro rata. Should the PSF payments be recovered from Dean Foods, DIP, Estate at a later time, full payments will be distributed. In the meantime, Federal Milk Marketing Order regulations provide for reduced payments to producers from regulated handlers who did not receive full payment from the PSF (1005.73(c)). Consequently, the enforced minimum payments to producers will be at the pro rata amount.
USDA will continue to monitor the situation and work to assist the dairy industry. Additional information will be provided as it becomes available to all market participants. Please feel free to contact Jason Nierman, via email@example.com, or (502) 499-0040, ext. 222, if you have any questions.
The memorandum also had this addendum included:
This schematic explains workings of a Producer Settlement Fund:
News could not have come at a worse time:
From an industry viewpoint, this non-payment could not come at a worse time for the farmers themselves.
When monies are received by the Producer Settlement Fund, they in turn are paid back out to handlers (co-ops or agents), who then distribute the money to farmers, paying them for milk sold (see the diagram above). This process is highly regulated by FMMO rules, and has proven to be predictable, and reliable for decades.
Farmers then use their money to pay bills to any number of agribusiness and service firms with whom they do business. Since this process has been so reliable, most farmers have set-up automatic withdrawals to pay supply companies. Farmers will now be dealing with any issues related to those automatic withdrawals and any repercussions due to lack of funds. Agribusinesses will lose money as well, and incur any number of extra costs.
Ravaged by a myriad of challenges due to Covid-19, farmers are facing financial stress of an untold magnitude, and many multi-generational farms with long histories of serving consumers are at risk of being lost. The mental health and fortitude of those farmers is a prime concern across the country, due to the stresses which were already in place. Many fear that this news could catalyze additional health issues in farm communities.
An industry insider, who asked not to be identified, said this Dean Foods payment to the PSF could normally be in a range from $160-$250 million, affecting dairy co-ops, individual farms and the communities they serve in many states. (Note – this figure will be verified and updated if needed – Covid 19 has changed almost everything.)
PERPLEXING: WHY did this happen given Chapter 11 processes?
This payment, which is a regular course of business in both a predictable amount and timing in getting farms and co-ops paid for milk, had regularly been made by Dean Foods during the course of the Chapter 11 proceedings.
Therefore, it stands to reason that attorneys, accountants, and consultants representing Dean Foods should have budgeted and accounted for these payments as Dean Foods books were closed out over the course of the next few months. In the last months of the process, fluid milk sales were up substantially according to many sources, which should also have added to Dean Foods income. (An email inquiry to an attorney representing Dean Foods in the proceedings has not received a response as of this posting.)
This gets even more perplexing since farmers were named as critical vendors in the early days of the Chapter 11 process. Dean Foods officials filed motions, which were granted by the Court, to ensure that those payments were indeed accomplished. It was believed those financial obligations to farmers for products delivered would have been honored until the last payment was due.
Impact on an individual farm: During this payment cycle, any single farm would be due payments from thousands of dollars to even hundreds of thousands of dollars, depending on the size of the herd.
POSSIBLE SOLUTIONS OR HOPE AHEAD?
At this time, this is a profound question with unknown answers. Some of those answers might be:
Payment to Settlement Funds in all FMM Orders might come at one of the later dates in this payment cycle, being only a few days late
Payment to the Producer Settlement Fund might come later, as accounts receivable from product and property sales come into the Dean Estate
Payment to farmers might not come at all, which is a bitter pill to swallow at this juncture in history.
Whatever the answer is, farmer co-ops and individual farmers deserve that answer, and deserve it quickly. Perhaps a projected payment schedule could be stated by the Dean Foods Estate officials. Even if it’s a worst case answer, to know what that answer is will honor the dignity of earnest farmers who deserve an answer so they can make some possibly excruciating decisions, instead of ‘the system’ tap dancing around farm families like performers on a Broadway stage.
One dairyman has often said “The dairy industry at the grass roots level is a dairy community full of really good, decent people who want to earn an honest living and contribute to their communities. However, those good people often have to endure some very wicked events.”
Dean Foods has historically paid its ‘independent producers’ well, which is much appreciated. It is sincerely hoped that Dean Foods closes its chapter on a better note than this non-payment, and quickly rectifies this payment shortfall to farmers. For the sake of the mental and physical health of many farmers and their families, lets hope they do just that.
Attorneys representing Dean Foods in their Chapter 11 proceedings have filed two highly anticipated notices of bids and bid results with the US Bankruptcy Court for the Southern District of Texas, Houston Division.
The notices are Document 1270, Notice of Bid Results, and Document 1271, Notice of Bids.
The Court has a hearing scheduled for April 3, 2010, for the purpose of hearing any objections and furthering the sale process. Any objections to a Sale Order or a Sale Transaction must be filed by April 1, 2020 at 12:00 pm, CST.
Dairy Farmers of America, Inc. has been announced by Dean Foods as the successful bidder for the great majority of Dean Assets. This includes 8 facilities situated in the following southeast locations:
Athens, TN (Mayfield)
Birmingham, AL (Ice Cream)
Nashville, TN (2 plants – Purity and Country Delite)
High Point, NC
Spartanburg, SC (Pet)
Orlando and Orange City, FL (TG Lee)
Prairie Farms Dairy, Inc. has filed bids which were successful for the Birmingham Fluid Plant (Barber’s), the Hammond Louisiana plant, and the Customer list related to Louisville, KY facility. Prairie Farms also successfully bid on several plants throughout the Midwest.
The McArthur Dairy assets have a successful bid from Mana Saves McArthur, LLC.
Alternative bids were stated in Document 1270. MD-VA Milk Producers was the Alternate for High Point, NC. OP Church Street Property, LLC, is listed as an alternate for the Country Delite property in Nashville.
Details of various Bid offers for plants across the country can be found in a number of documents at the Epiq Southern Foodswebsite.
The “Notice of Bid Results” – 6 pages long – is posted below: