UPDATE on Dean trustee letters demanding payment from farmers. Don’t pay. Gather records. Fight back.

Posted on December 3, 2020 by Agmoos

BREAKING UPDATE (events on Dec. 4 after this article was published): Farm Bureau issued statement, stands up for producers. Farm Bureau attorneys sent a letter to ASK LLP and Dean Estate seeking withdrawal of preference demand letters within 10 days. The Pennsylvania Milk Marketing Board (PMMB) is working with the State Attorney General’s office and ASK LLP to resolve avoidance claim settlement offers received by dairy farmers and milk haulers. PMMB says ‘be patient, don’t sign anything and don’t write any checks.’ PMMB expects to provide specific guidance to dairy farmers and haulers prior to the December 10 Dairy Industry Conference Call sponsored by the Center for Dairy Excellence. The call will be open to dairy producers outside of Pa. as well.

Don’t ignore these letters. But don’t pay the settlement offers. Sit tight. Gather records.

AUTHOR’S NOTE: I am not a lawyer, and this is not legal advice. This is more of ‘what we know now’ in a rapidly evolving story. The Pennsylvania Attorney General is involved. Other states are mobilizing to perhaps work together. USDA AMS Dairy Programs is now referring all inquiries to the Department of Justice. American Farm Bureau is taking action. Please know that as dairy farmers, you have produced milk that was paid for according to federal and state milk marketing laws, that provided nourishment to families and that has enabled the Dean Foods Company to continue to operate until it was sold. Without you and those payments to you, Dean would have had to abruptly close, and the estate would have nothing.

By Sherry Bunting, Farmshine, Dec. 4, 2020

BROWNSTOWN, Pa. — Most of the letters descended on dairy farms the day before and after Thanksgiving with due dates of December 19 or December 24. More were received this week, and it is expanding to include assignees. No, these are not Happy Thanksgiving and Merry Christmas John and Jane Q. Dairy Farmer. These are thinly veiled attempts at blackmail — demands to pay the Dean Foods Company estate a portion of milk checks from August 14 through November 12, 2019 in order to avoid being sued for much larger, scarier, sums of money.

ASK LLP, the St. Paul, Minn. law firm approved in September to be the Dean estate trustee, conjured up the ‘ghost of milk payments past’ to extort money from dairy farmers for the big bottler’s bankrupt estate by threatening lawsuits to reclaim payments to dairy farmers during what is known as the ‘preference’ period.

These are called ‘preference action recovery’ or ‘trustee avoidance’ claims. This is the legal basis for the action the letters threaten will occur if farmers don’t pay the ‘settlement offer’ or negotiate it with a satisfactory defense by the due date.

In layman’s terms, the claim is that a defendant farmer (Dean Foods creditor) could have received a pre-bankruptcy payment for milk that could have been a better deal than the ‘trustee’ would have divvied out.

Wrong. Federal and state law set forth dates and formulas for milk payments as a requirement for Class I beverage milk companies to operate. That money has already been spent by dairy farmers keeping cows fed and keeping lights on at farms already beleaguered by five years of marginal and below breakeven prices. No windfall there.

The intimidating letters show ways to assert a defense — through hiring a bankruptcy attorney and showing 15 to 18 months worth of invoices. But it’s cumbersome for farmers. They don’t invoice for their milk!

Of course, they want producers to just pay the settlement offer at a reduced rate, as stated in the letter, to avoid legal action commencing the week after the due date. (Don’t.)

Did I mention the due dates are December 19 for some; December 24 for others?

Did I mention farmers have 21 days from the date of the letter to respond with a defense and 30 days (now down to 14 to 20 days remaining) to sign the ‘settlement offers’ with checks payable to Dean Foods Company or risk – says the letter – paying amounts 5 to 6 times higher? People are still receiving these letters, given the Thanksgiving holiday and backlogged post offices. Some producers may not have opened them. The envelopes are non-descript.

In one example, a family milking 100 cows received a packet with a settlement offer of $20,000 placed next to the threat of paying over $110,000. Larger family farms face even larger sums. This is predatory intimidation to push farmers to send money that the bankrupt Dean estate is not entitled to. Yes, it is extortion.

So what happened? On the day before and after Thanksgiving, notices of Intended Litigation and Settlement Offers were received by dairy farmers from ASK LLP representing the Dean Foods Company estate. The action covers payments by the former Dean Foods to independent dairy farmers for raw milk sales from August 14 to November 12, 2019 — the 90 days prior to Dean’s filing on Nov. 12, 2019 for Chapter 11 bankruptcy protection and sale.

This is a little-known part of bankruptcy law where the estate trustee can go back 90 days before a filing to collect payments believed to be ‘preferential.’

Farmshine has confirmed letters were received by Dean Dairy Direct producers in numerous states — including Pennsylvania, Ohio, New York, Kentucky, Tennessee, and assuredly others.

The letters list payment transactions (on the Federal Order specified dates), a total claim amount the farmer will be sued for, and a settlement offer at about 15 to 20% of that amount due December 19 or 24, 2020 (depending on the date of the letter).

Under Southern Foods Group LLC, case number 19-36313 in the bankruptcy court of Houston, Texas, with Judge David R. Jones presiding, the Dean Chapter 11 reorganization is headed to an omnibus hearing scheduled for Dec. 11, 2020 and disclosure hearing Jan. 11, 2021. Debtor filed its Plan of Reorganization Nov. 30 as file number 3230 on the docket at https://dm.epiq11.com/case/dnf/info (The Milksheds blog offers additional happenings of context and perspective here.)

If you are a dairy farmer who received a ‘demand package’ from ASK LLP representing the Dean estate, don’t ignore this, but don’t panic, don’t pay anything, don’t sign anything, sit tight for a bit, get prepared by gathering records (milk statements, contracts) and know that many trustworthy, well-situated people are working on this.

These letters are an intimidating threat to see what ‘other people’s money’ the law firm can shake loose for the Dean estate after the fire sale in which the bulk of assets were sold to Dairy Farmers of America (DFA).

In an email Wednesday, DFA, a large supplier of former Dean plants they now own, indicated that they did not receive these legal preference action letters.

“As part of the Asset Purchase Agreement, and as a result of a broad release of claims against each other, Dean Foods released DFA from these potential claims,” a DFA representative stated. “Ultimately, we had no idea that the Dean estate was planning to make these claims against independent producers. It’s disappointing that they sould take this kind of aggressive action against hard-working dairy farm families who supplied them with milk prior to the filing.”

The cooperative indicated in a statement that it “DFA does not control the actions or decisions of Dean Foods in its bankruptcy liquidation and was not involved with the decision to pursue these claims.”

Among other cooperatives doing business with the former Dean plants, at least one regional cooperative executive confirmed receiving a letter six weeks ago for dairy ingredient sales (cream and condensed milk) during the 90-day pre-bankruptcy time-period. They have not agreed to nor negotiated any settlement, but they provided their volumes and documentation of these sales to ASK LLP through their bankruptcy attorneys — and are monitoring the situation.

This source also believes other regional cooperatives received letters pertaining to pre-bankruptcy raw milk and ingredient sales.

On Tuesday, we confirmed that a milk hauler received a letter, and at least two entities receiving “assignments” direct from a producer’s milk check have received letters. This goes deep, and it is getting deeper.

The letters mention two potential defenses in a separate “additional instructions” piece, urging producers to “make a copy of this letter and all enclosures to send to your attorney should you choose to defend this matter rather than settle and return the payments.”

Even the ‘instructions’ intimidate the dairy farmer to feel they might have some financial obligation to the Dean Estate (absurd).

The instructions state: “Under certain circumstances you may have a defense warranting settlement of this action at less than the settlement offer extended. We will be happy to consider your defense and ‘explore’ settlement.”

Media calls and emails to several undersigned representatives at ASK LLP have gone unanswered.

Questions posed to USDA AMS Dairy Programs have been met with a blanket response that they are looking into the situation and would be providing a general ‘official’ description of how Federal Orders govern payments for Class I milk in relation to producers showing ‘ordinary course of business’ defense. After all, USDA FMMO market administrators have the specified dates and regulations posted at each of the 11 FMMO websites, and the dates correspond with the payments made to producers as listed in these predatory preference action letters.

USDA has not confirmed nor denied whether market administrators received similar letters regarding payments Dean made to producer settlement funds in the pre-bankruptcy period.

Late Tuesday evening, USDA stated in an email that, “We’re forwarding all media inquiries on this matter to the Department of Justice press office.” This indicates the DOJ is potentially also looking at the concerns surrounding these predatory attempts to intimidate farmers into sending payments to Dean Foods.

In Pennsylvania, where over 100 dairy farmers are affected by the letters, the State Attorney General is involved. Pennsylvania has the added layer of Class I pricing regulation through the Pa. Milk Marketing Law enforced by the Pa. Milk Marketing Board (PMMB).

“The PMMB wants to make sure every Pa. dairy farmer is treated fairly,” states Rob Barley, chairman. “I have complete trust in the PMMB staff in consultation with the Attorney General that this will ultimately happen. We will do all we can in our power to ensure that it does.”

Expressing her concern for dairy farmers receiving these letters with a short time-frame for response at a difficult time, Carol Hardbarger, PMMB executive secretary confirmed late Monday that, “The Pennsylvania State Attorney General’s office is aware of these letters.”

Hardbarger noted that the PMMB board and staff sprang into action with a joint meeting Monday morning after learning about the legal actions over the weekend. They have been working on it ever since. She provided at Farmshine’s request a description of how payments to Pennsylvania farms by Pennsylvania-regulated plants are governed at the state level — in addition to Federal Order rules.

“Dairy farmers selling milk to a dairy processor and being paid per federal and state regulations is a paradigm that is ordinary course of business for the industry,” states PMMB chief counsel Doug Eberly. As with anything, he adds, there may be the odd deviation in that, but he can’t think of any leading to a trustee avoidance claim.

Both Eberly and Hardbarger stressed that the PMMB is working on this within the scope of their authority and working with the State Attorney General’s office as several producers in the eastern and western parts of the state have stepped forward to provide copies to PMMB of the legal packets they received.

More will be discussed as regards Pennsylvania producers at the upcoming Dairy Industry Conference call next Thursday, Dec. 10 where Eberly and Barley will speak.

Other state organizations are reaching out to Farmshine as they learn what Pennsylvania is doing. Even without a milk marketing board, producers and their organizations in other states can contact their Agriculture Secretaries or Commissioners, even lawmakers, and ask that their State Attorneys General look into these surprise legal notices and payment demands and the predatory nature of them.

While stopping short of giving legal advice, Eberly said there are some general points for producers to know within this rapidly evolving situation:

1) Absolutely don’t pay anything now. (And don’t sign anything without consulting an attorney.

2) Start gathering deposit records for the 3-month period identified in the letter (Aug. 14 – Nov. 12, 2020) and the 15 months prior to that (as stated in the letter), so you have this information ready.

3) Don’t worry about putting anything into the requested formats mentioned in the letter, just get these items together for now.

4) Know that the Pennsylvania State Attorney General’s office is aware of these letters.

“The ordinary course of business affirmative defense means that the vast majority of farmers most likely will owe nothing, we just have to get them there in the most efficient way possible,” said Eberly.

More key takeaways for dairy farmers in this rapidly evolving situation here:

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Milk payment process officially described, relevant to Dean trustee ‘avoidance claims’ seeking partial payback from farmers.

Posted on December 3, 2020 by Agmoos

By Sherry Bunting, Farmshine, December 4, 2020

BROWNSTOWN, Pa. – In addition to dairy producers, those receiving assigned amounts directly from producer milk checks, such as haulers, have begun receiving these letters of ‘preference action recovery.’ The wide net being cast by ASK LLP as trustee for the Dean Foods Company estate — in search of money to pay bankruptcy administration costs — may become a web of entanglement.

USDA AMS Dairy Programs has not confirmed nor denied whether Market Administrators for the 11 Federal Milk Marketing Order (FMMO) Producer Settlement Funds (PSF) have received letters from ASK LLP or whether Dean’s pre-bankruptcy payments to them have been made subject to these trustee avoidance claims. If so, this would produce another wrinkle.

While USDA AMS is now referring to the Department of Justice all inquiries about the bankrupt Dean Foods estate trustee letters intimidating farmers to repay a portion of their Aug – Nov 2019 milk checks, the USDA did respond late Wednesday evening to Farmshine’s request for a general official description of FMMO milk payment procedures and dates.

This could be helpful to affected dairy producers because the twice monthly transaction dates listed in the letters correspond directly with these official descriptions — showing pre-bankruptcy payments to farmers, and their milk check assignees, are not only ‘ordinary course of business’ and ‘customary for the industry’, but also regulated by Federal Orders.

In Pennsylvania, there is the added layer of the Pennsylvania Milk Marketing Law enforced by the Pa. Milk Marketing Board (PMMB).

PMMB executive secretary Carol Hardbarger provided a synopsis from state statute regarding how PA-regulated plants pay farmers for milk. There are seven Dean plants that are licensed dealers regulated under PMMB, four of these plants are located in Pennsylvania. All seven are now owned by Dairy Farmers of America (DFA) as part of the Southern Foods Group LLC (Dean Foods and holdings) bankruptcy sale.

The PMMB is recommending that farmers do not pay the settlement offers in these letters, and sit tight for further guidance. In Pennsylvania, the State Attorney General is involved. The PMMB chief counsel and Attorney General’s office plan to communicate with ASK LLP this week.

USDA’s FMMO milk payment description follows:

“In general, handlers report monthly to the FMMO (Federal Milk Marketing Orders) their receipts and utilization of producer milk from the previous month. The receipts include the skim and fat pounds of the milk, as well as its average monthly component tests (protein, other solids, nonfat solids) in the component orders. Utilization reports include how such butterfat and skim milk (including components) were used during that month.

“The FMMO office computes the uniform butterfat price and the uniform skim milk price in the four fat and skim pricing orders (FO 5, FO 6, FO 7, and FO 131) and the producer price differential (PPD) in the seven component pricing orders. These prices are computed based upon the total value of milk in the producer milk received and utilized by all handlers pooling on the Order for the month.

“Reporting and price announcement dates are set in regulation and vary by order (see attached chart). For example, for Orders 5, 6, and 7 (Southeast, Florida and Appalachian Orders), producer prices are released on or before the 11th of the month for the previous month, while the announced producer prices for the Northeast order could occur as late as the 17th of the month for the previous month.

“Each handler with pooled milk for the marketing period receives an accounting from the Market Administrator, indicating their plant(s) use value for the month along with the associated payments due to producers for that milk. If a plant use value is greater than the producer payments, the difference is due to the Producer Settlement Fund (PSF) of that respective Order.

“A handler whose plant use value is lower than the producer payments owed will receive a payment from the PSF to allow them to make the producer payments in a timely fashion. Th above reporting and payment date chart lists when payments are due to and from the PSF.

“Final payments to producers and cooperatives are made a day or two after the payments from the producer settlement fund are made.

“Each of the 11 orders requires (advance) payments by handlers for the milk received during the first 15 days of the month a week or two after the 15th of the month.“

For Pennsylvania regulated plants, payment due dates are outlined in Milk Marketing Law Regulation 143.12 as follows:

§ 143.12. Terms of payment.

“(a) Producers shall be paid not later than the 26th day of each month and the 17th day of the following month, as follows:

“(1) Payment that covers the approximate value of milk or cream purchased from the first to the 15th of each month shall be made not later than the 26th day of each month. This payment need not be accompanied by an itemized statement. This payment shall be at least the lowest announced class price for the previous month for the number of pounds purchased or received during the first 15 days of the month.

“(2) Final settlement for all milk and cream purchased during any month shall be made not later than the 17th day of the following month. The final settlement shall include any balances due for the first 15-day period and shall be accompanied by a statement to each producer setting forth the information required under § 143.14 (relating to monthly statement to producers).“

Ghost of milk payments past invoked as intimidating letters seek money from farmers for big bottler’s bankrupt estate: Don’t pay. Don’t panic. Don’t sign anything. Sit tight. Gather records.

Posted on December 1, 2020 by Agmoos

BREAKING NEWS UPDATES 4:00 – 9:00 p.m. Dec 2: Updates after the essential background article below, appear in separate articles here and here.

USDA is forwarding inquiries about ‘preference action’ letters to DOJ. In PA, the Attorney General’s office is involved.

By Sherry Bunting for Farmshine

Disclaimer: I am not a lawyer, and this is not legal advice, but researched information based on many people working on the issue. This is a ‘what we know now’ pre-press preview of a rapidly evolving story, check Friday’s Farmshine and this link for updates, including information about a conference call for dairy farmers in Pennsylvania and open to affecte producers outside of PA (call details here); other states also mobilizing!

BROWNSTOWN, Pa. — Notices of Intended Litigation and Settlement Offers have been received by dairy farmers last week from ASK LLP, a law firm in St. Paul, Minn., seeking payment to the Dean Foods Company Estate under what is known as preference action recovery or trustee avoidance claims covering payments to dairy farmers for raw milk (and co-ops for ingredients) from August 14 to November 12, 2019 — the 90 days prior to Dean’s Nov. 12, 2019 filing for Chapter 11 bankruptcy protection and sale.

We have confirmed these predatory letters have been received by Dean Dairy Direct producers in numerous states – including Pennsylvania, Ohio, New York, Kentucky, Tennessee and assuredly others — on the day before and after Thanksgiving. These letters contain a record of payment transactions (on the Federal Order specified dates), list a total claim amount the farmer will be sued for, and a settlement offer at about 15 to 20% of that amount due December 19 or 24, 2020 (depending on the date of the letter).

Under Southern Foods Group LLC, case number 19-36313 in the bankruptcy court of Houston, Texas, with Judge David R. Jones presiding, the Dean Chapter 11 reorganization is headed to an omnibus hearing scheduled for Dec. 11, 2020 and disclosure hearing Jan. 11, 2021. Debtor filed its Plan of Reorganization as file number 3230 today, Nov. 30, on the docket at https://dm.epiq11.com/case/dnf/info

If you are a dairy farmer who received a ‘demand package’ from ASK LLP representing the Dean Foods Company Estate, don’t ignore the letter, but don’t panic, don’t pay anything, don’t sign anything, sit tight for a bit, get prepared, and know many trustworthy, well-situated people are working on this.

The letters and legal packets are an intimidating threat to see what ‘other people’s money’ the law firm can shake loose for the Dean Foods Estate after the fire sale in which the bulk of assets were sold to Dairy Farmers of America (DFA). For its part, DFA as the new owner of the bulk of Dean’s plants issued a statement that it does not control Dean’s decisions on their bankruptcy and did not participate in this decision.

The letters do mention two potential defenses in a separate “additional instructions” piece, urging producers to “make a copy of this letter and all enclosures to send to your attorney should you choose to defend this matter rather than settle and return the payments.”

The instructions go on to state: “Under certain circumstances you may have a defense warranting settlement of this action at less than the settlement offer extended. We will be happy to consider your defense and ‘explore’ settlement.”

Even in that statement the ‘instructions’ intimidate the dairy farmer receiving it to feel they might have some financial obligation to the Dean Estate (absurd).

Please know that as dairy farmers, you have produced milk that was paid for according to federal and state milk marketing laws, that provided nourishment to families and that has enabled the Dean Foods Company to continue to operate until it was sold.

What’s happening and what dairy farmers should know:

First. Know that you are not alone and stay tuned. A range of emotions and reactions are no doubt happening on receipt of these letters.

Second. Don’t panic, don’t pay, don’t sign, and hold off in hiring an attorney. If you already have a trusted attorney advisor, talk to them, but these letters are concerning from a collective perspective. They name individual farms as defendants and demand a refund of a portion of what they were paid for milk they produced and shipped to Dean, that was bottled by Dean and sold by Dean in the 90 days BEFORE Dean filed for bankruptcy protection.

The situation may ultimately require farms to individually hire a bankruptcy attorney to assert a defense and prove qualification for exemption. But, well-situated sources indicate that it is also possible that collective group action could occur. More answers are needed by authorities and interested parties.

Yes, this preference recovery action is a loophole in bankruptcy law with farms caught in the shakedown net cast by the law firm working for the Dean Estate. There are concerning aspects based on how dairy farms are paid via federal and state laws that preclude the normal business activities of “invoicing.”

In Pennsylvania, the Pa. Milk Marketing Board is looking into this, and the State Attorney General’s office is aware of these letters. Dairy farmers selling milk to a dairy processor and being paid per federal/state regulations is ordinary course of business.

Third. Sit tight but use this time to be prepared by gathering milk statements for the past 15 to 18 months. Many trustworthy and reputable people are working on this issue affecting hundreds of independent dairy farms, and entities to which portions of their milk checks were assigned.

Sources indicate regional cooperatives may have received such letters for raw milk sales, though none have confirmed this. USDA has not confirmed nor denied whether market administrators received similar letters regarding producer settlement fund payments in the pre-bankruptcy period.

One regional cooperative executive has confirmed receiving a letter six weeks ago in relation to ingredient sales during the 90-day pre-bankruptcy time-period and indicates other regional co-ops have as well. They have not agreed to nor negotiated any settlement, but they provided their volumes and documentation of these sales to the soliciting law firm through their bankruptcy attorneys — and are monitoring the situation.

Dairy farmers can do the same.

Absolutely don’t pay or sign anything right now.
Start gathering deposit records for the 3-month period (Aug 14 – Nov 12, 2019) plus the 15 months before that as stated in the letter’s instructions about potential defense assertions.
Don’t worry about putting any of this information into the requested spreadsheet or other formats mentioned in the letter, just get these items together for now.
The Pennsylvania Attorney General’s office is aware of these letters. Producers in other states could look at involving the offices of their Secretaries of Agriculture and/or Attorneys General.
The ordinary course of business affirmative defense means that the vast majority of farmers most likely will owe nothing, and people are working on how to get producers to that point in the most efficient way possible.

Fourth. Know that USDA AMS Dairy Programs has been contacted and is looking into the matter. Know that every one of the Federal Milk Marketing Order websites shows the strict dates and procedures concerning payment for milk. Dean Foods – or Southern Foods Group LLC as it is named covering all holdings in the bankruptcy case #19-36313 – could not have operated nor could it have been sold to yield any funds for the estate had the farmers not been paid for the milk sold.

Fifth. Know that in Pennsylvania, the Pa. Milk Marketing Board (PMMB) became involved immediately. The board and staff started their day Monday morning with a joint meeting on this issue that was brought to their attention over the weekend. Know that they have begun a conversation with Pennsylvania’s State Attorney General who is looking into this and is already familiar with some of the elements having been involved in getting final payments arranged using the mandatory bond insurance Pennsylvania requires all licensed milk dealers to carry. Know that in Pennsylvania, milk plants follow state payment and bonding regulations in addition to federal orders. Know that there are seven Dean Foods plants regulated by PMMB because they receive milk produced on Pennsylvania farms, and four of these plants are located in Pennsylvania.

Know that producers outside of Pennsylvania can band together and through their state dairy organizations or Secretaries of Agriculture – ask their State Attorneys General to look at this.

Sixth. Know that other well-situated people are looking into a way for all affected producers to fight this together instead of each farm going it alone and having the expense of hiring legal counsel with bankruptcy experience to “assert” their defense in writing to the law firm ASK LLP (aka Ebenezer Scrooge).

Seventh. Know that answers to various questions and concerns are being sought. More will be learned in the coming days, and the situation is one that is rapidly evolving.

Eighth. Know that ASK LLP should know better. The Dean estate trustee should already know that these dairy farmer critical vendor payments are not “preferential” payments warranting trustee avoidance claims. Not only should they know the critical vendors of Dean Foods — since the bankruptcy judge issued orders that dairy farmers be paid as critical vendors during the proceedings so Dean could operate and be sold – they should know that Judge David R. Jones in hearings on several occasions stated his big concern that school children would continue to receive their milk and dairy farmers would continue to be paid during the bankruptcy proceedings.

ASK LLP should know that the very charts they included in their ‘demand packages’ — showing all transfers from Dean plants to individual ‘defendant’ dairy farmers — are made on the precise same dates twice a month as is the regulation for milk payments under Federal Orders.

Ninth. Know that Bankruptcy Judge David R. Jones’ office in Houston, Texas has been notified of the ‘demand packages’ sent to dairy farmers for the pre-petition period. Several high-profile members of the U.S. House and Senate Agriculture Committees have also been notified.

BACKGROUND: The letters descended on dairy farms the day before and after Thanksgiving with due dates of December 19 or December 24. No, these were not Happy Thanksgiving and Merry Christmas John and Jane Q Dairy Farmer, these were thinly veiled attempts at blackmail – demands to pay Dean Foods Company Estate a portion of milk checks from August 14 through November 12, 2019 in order to avoid being sued for much larger sums of money.

Ebenezer Scrooge (ASK LLP) conjured up the ghost of Dean Bankruptcy Past to insinuate that monetary transfers from Dean to dairy farmers — or their assigns — in return for milk they received, processed and sold, were ‘preferential’ resulting in what are called Trustee Avoidance claims by the law firm purported to represent Southern Foods Group LLC the conglomerate name for the bankruptcy and sale of Dean and all of its holdings.

A Trustee Avoidance claim – the legal action that the letters state will occur after the due date for payment of the settlement offer – indicate that such payments to farms could have been ‘preferential’ to avoid the bankruptcy trustee making sure all creditors are treated fairly. In layman’s terms, the claim is that a defendant farmer’s payment for milk pre-bankruptcy could have been a ‘better deal’ than the ‘trustee’ would have divvied out.

Wrong. Federal and state law set forth dates and formulas for milk payments as a requirement for milk companies to operate. That money has already been spent by dairy farmers keeping cows fed and keeping lights on at farms already beleaguered by five years of marginal and below breakeven prices. No windfall there.

Sure, the intimidating packet shows ways a recipient can assert their defense – through hiring a bankruptcy attorney. They can show invoices for those three months – and the 15 months before that – to show “ordinary course of business.” They can assert their defense with milk check statements the scrooge law firm says must be supplied in Excel spreadsheets requiring certain types of entries and documentation. Or they can just pay the settlement offer at a reduced rate to avoid legal action commencing the week after the due date.

Did I mention the due dates are December 19 for some; December 24 for others?

Did I mention farmers have 21 days from the date of the letter to sign and pay the ‘settlement offers’ with checks payable to Dean Foods Company or risk – says the letter – paying amounts 5 to 6 times higher?

Yes. This is what intimidation looks like, a shakedown to see what they can get away with, what money can be extorted, to improve their cut on the deal by threatening hard-working, nose-to-the-grindstone dairy farmers with big numbers, big words, and big assumptions.

They know better, and if they don’t, they should.

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Dean pays independents for April milk, owes millions to co-ops, USDA FMMOs, MilkPEP

Posted on June 11, 2020 by Agmoos

The Dean Foods product lineup as pictured on its website just prior to the November 2019 bankruptcy filing and May 2020 sale.

By Sherry Bunting, Farmshine, June 12, 2020

HOUSTON, Tex. — Dairy producers who ship milk independently to any of the former Dean Foods’ 57 milk plants began receiving their final payments for April milk on Monday, June 8. These were the payments due from Dean debtor in possession (DIP) in mid-May that became part of the administrative expenses in the post-sale proceedings of the Southern Foods Group (Dean Foods) bankruptcy in the Southern District Court of Texas.

Several dairy producers in several states confirmed to Farmshine Tuesday that they received these payments. Furthermore, their May advance payments were timely made by the new owners of the former Dean plants — namely DFA and Prairie Farms.

The Pennsylvania Milk Marketing Board (PMMB) staff also confirmed late Tuesday that, “All Pennsylvania independent Dean producers have been paid what was due them for April.”

For its part, the PMMB staff had initially begun the process of auditing non-payments in preparation of filing bond claims. Seven of Dean’s plants are licensed and bonded in Pennsylvania – a requirement to buy milk from farms in the state. This includes four plants in Pennsylvania, one in New Jersey, one in New York and one in Ohio.

The PMMB quickly shifted gears early this week from auditing non-payments to auditing the payments to independent producers, and as conveyed, found that producers received what was due.

The PMMB staff also indicated they are completing their auditing of what is still owed to milk cooperatives. If payments to cooperatives are not received, PMMB will file the necessary bond claims for any Pennsylvania cooperative milk that remains unpaid by the Dean bankruptcy estate.

Nationwide, independent producers have been paid, but cooperatives are still owed for April milk as of June 10.

In addition, USDA AMS Dairy Programs in Washington replied Tuesday, June 9 that, “USDA has not received payment from Dean (DIP) for April producer settlement funds owed.”

USDA had previously indicated that not only were the pool funds outstanding, Dean had also not paid the FMMOs for producer marketing services, transportation credits and administrative service in nine Federal Orders. Dean Foods is fully regulated in all Federal Orders except for the Pacific Northwest and Arizona.

In mid-May, USDA reported that, “handlers were notified via memorandum of the non-payment and the pro-ration of the available producer settlement monies.”

The loss of Dean’s Class I contributions to Federal Order settlement funds from 57 plants regulated in nine Federal Orders would decrease the blend price paid to all producers in those areas — under normal conditions — by reducing the pool funds drawn by handlers for other class uses. Several cooperatives are handling the loss of pool funds from back in Oct./Nov., and potentially April, by way of milk check deductions that will continue until the pool shortfalls are covered.

In an email response this week to Farmshine, USDA AMS Dairy Programs confirmed that, “No claims for these April producer settlement funds have been filed with the bankruptcy court because the April Federal Milk Marketing Order (FMMO) obligations are post-bankruptcy debts and are recouped through the post-bankruptcy process.”

The post-bankruptcy process involves the Dean estate’s plan being filed with the court outlining how it will pay its vendors (including USDA producer settlement funds) as it winds down operations of the estate. According to USDA, Dean has notified the court that it will file the payment plan by August 3.

How much is owed for April milk to the USDA FMMO producer settlement funds across the U.S. is deemed proprietary information, according to USDA, and “it has not yet been aggregated with appropriate redactions and cannot be released at this time.”

However, some milk cooperative sources handling only manufacturing class milk in the Northeast and Mideast are pegging their losses from these unpaid April settlement funds to be upwards of 30% of the blend price.

In addition to the missed payments to FMMO settlement funds for April, USDA confirmed in an email that it filed proofs of claim in the bankruptcy proceeding for monies owed prior to the bankruptcy filing for October and mid-November 2019 milk marketings.

“Those proofs of claim (for Oct./Nov. 2019) totaled $13.8 million for monies owed to producer settlement fund, marketing service, administrative, and transportation credit funds, as well as the Fluid Milk Processor Promotion Program. The proof of claim documents were filed on April 21, 2020 and can be viewed on the Dean Foods Restructuring website,” USDA stated in an email response this week.

With more than 3000 documents on the Southern Foods Group bankruptcy docket, a search of claims did yield more than two dozen separate proof of claim filings by USDA on April 21, including information showing that Dean owes $3.1 million for Oct./Nov. 2019 to the Fluid Milk Processor Education and Promotion Program (MilkPEP). Fluid milk processors are obligated by USDA to pay 20 cents per hundredweight into this fluid milk promotion fund.

It is unclear how much of what was due the cooperatives back in Oct./Nov. 2019 is also upaid, but proofs of claim filed in March 2020 by milk cooperatives peg the largest amounts owed from last fall at $103.4 million to Dairy Farmers of America (DFA); around $14 million to Southeast Milk (SMI); and over $7 million to Land O’Lakes. The link to claims documents on the Southern Foods Group bankruptcy docket can be found at https://dm.epiq11.com/case/dnf/claims

As for what is owed to USDA for April 2020, it is difficult to estimate an amount based on the proof of claims filed for Oct./Nov. 2019 because COVID-19 disruptions completely altered the milk marketing landscape in April.

While Class I sales were much higher in April 2020 compared with October and November 2019, the Class I base price was $5.00 per hundredweight lower in April vs. Oct./Nov. Also, the amount of milk diverted to the lowest class “dumpage and other use” category for April was enormous – at 350 million pounds across all Federal Orders, this was up 960% from a year ago and represented almost 2% of the entire U.S. milk supply in April (see related story in next week’s edition of Farmshine).

These factors would most assuredly reduce the Dean settlement fund obligations to the FMMOs for April 2020 as compared with “normal conditions”. However, the marketing, transportation credits and MilkPEP checkoff obligations were likely higher in April than last fall.

Producers and state and federal sources indicate that the remaining skeleton staff for Dean Foods, post-sale, has been helpful in keeping lines of communication open. Each step of the way, independent producers, producer groups, state boards and others received information about the process and its potential timelines.

In the case of the independent shippers, at least, the Dean estate paid them the first week of June after letters were sent the week prior, indicating potential payment by mid-June.

State and regional organizations, such as Farm Bureaus, milk marketing boards, state departments of agriculture, and others had written letters to the bankruptcy court and the Dean estate, and articles about the unfolding situation had also been provided, leading up to Dean’s communication with producers and ultimately these payments to independent shippers being made.

As well, the bankruptcy court docket, hearing process, and bidding process seem to have been transparent, for the most part, albeit extremely complex.

In spite of this transparency, bidders other than Dairy Farmers of America (DFA) were not privy to details needed about payables for some of the Dean plants – information that was critical to putting together financing for potential bids. Furthermore, the 44-plant lump-bid by DFA provided an edge to win plants that had multiple contending bidders by lumping them together with plants that had no contending bidders.

What remains unclear is how the more than $100 million dollars, Dean owes to DFA will be handled in relation to DFA’s purchase of substantially most of Dean’s plants and assets at a price of $433 million. The U.S. Department of Justice (DOJ) approved the sale, with the stipulation that three plants located in Wisconsin, Illinois and Massachusetts be divested.

The map of Dean Foods plants as provided by Dean Foods after its bankruptcy filing last November juxtaposed with the map of DFA plants — both wholly owned and affiliated — according to locations listed as such or otherwise publicly available.

Through the Chapter 11 bankruptcy sale process, which was consummated the first week of May 2020, 44 of Dean Foods’ 57 milk plants (including all seven licensed to buy milk from Pennsylvania farms) were acquired by DFA, the nation’s largest milk cooperative, headquartered in Kansas City, Kansas accounting for one-third of the U.S. raw milk supply with members nationwide and sales nationally and internationally. DFA was Dean’s largest milk supplier and the Dean accounts represented DFA’s largest milk buyer, according to court documents.

Eight Dean plants and other assets were acquired by Prairie Farms, a milk cooperative headquartered in Edwardsville, Illinois with members as far south and east as Kentucky to as far north and west as Minnesota, marketing products in at least 14 states. Several years ago, DFA and Prairie Farms jointly purchased and incorporated the previously family-owned Hiland Dairy Foods, headquartered in Kansas City, Missouri, with its 17 fluid milk and dairy plants and 51 distribution centers that together stretch through the Heartland from Texas to South Dakota.

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USDA communicates with DOJ as Dean ‘Estate’ misses final payments on April milk; lawsuit filed to block sale to DFA

Posted on May 22, 2020 by Agmoos

By Sherry Bunting, Farmshine, May 22, 2020

HOUSTON, Tex. — Dean is a dead duck, with an estate. The ‘pools’ (no pun intended), in which it reigned as top duck — and most of the pool toys it gathered over the past 20 years — have been sold to its largest supplier, Dairy Farmers of America (DFA), leaving just the Dean Foods (Southern Foods Group) Estate to settle its affairs, including paying farmers for April milk sold in good faith.

But the funds to do that are locked into the Chapter 11 plan handling all manner of administrative expense claims that could take days, weeks or months to sort out. Part of the issue is that the super-priority credit facility of $850 million was extended to Dean to keep operating before sale. Now the sale is consummated, and that credit facility is not being used for critical vendors. In fact, what was used of the $850 million becomes the first post-petition debt to settle.

Meanwhile, dairy farmers are looking at their contracts and the regulated pricing structures and even those states with bonding and wondering what recourse they have for payment. Most have no recourse. In states like Pennsylvania, there is bonding of licensed milk buyers through the Pennsylvania Milk Marketing Board, and it is a complex process.

On a recent DMI ‘open mic’ call for producers, Jim Mulhern of National Milk Producers Federation was a guest. He said they have looked into whether the Packers and Stockyards Act guaranteeing prompt payment for livestock could be use. It can’t, he said. There is no national insurance-bonding of milk buyers like there is for meat and poultry.

Not only did Dean milk suppliers not receive payment, cooperative handlers also went without payment, and the Federal Order pools in which Dean Foods is regulated did not receive their settlement payments. This then affects payments to handlers from the pool for April milk, which in turn affects other dairy producers paid by those other handlers.

Dean Foods did pay the April advance – the first of two monthly checks paid to dairy farmers. But the settlement funds for April milk due mid-May have not been paid, and Federal Milk Marketing Orders have established dates in each milk marketing area of the country stating when the settlement payments are made to the pool, when the handlers are paid from the pool and when the producers are paid by the handlers.

All of those dates for all Federal Milk Marketing Orders have now passed as of May 19, and Dean Foods’ Estate has not honored any of these April milk settlement obligations.

According to USDA Dairy Programs, “Dean Foods, DIP, (Dean) is fully regulated in all Federal milk marketing orders except the Pacific Northwest and Arizona. Dean did not make payment into the Producer Settlement Fund (PSF) for April pooled milk to any FMMO where it is fully regulated.”

USDA also confirms that, “Dean is responsible for paying the blend price to the independent producers who supply its plants. That payment is not contingent on whether or not Dean pays into the Producer Settlement Fund.”

Dairy farmers that ship to Dean Foods confirm no payment has been received, and the Pa. Milk Marketing Board confirms being notified of the same as it regulates these payments in Pennsylvania as well.

USDA indicates that it is “closely monitoring the situation and is keenly aware of the impact this failure to pay has on the dairy industry.”

Furthermore, USDA is continuing to consult with the Department of Justice in an effort to work within the confines of the bankruptcy laws to recoup monies owed to the Pool Settlement Funds.

Handlers were notified by USDA via memorandum (see Order 5 example of what went out to all FMMO handlers above). They were notified of the non-payment and the pro-ration of available producer settlement monies.

Some handlers have indicated this affects their funds to pay their producers by 20 to 30% for April milk.

In Pennsylvania, where there is bonding through the Pa. Milk Marketing Board, every bond claim is unique and fact-dependent, so there’s no set time that has to pass before a claim is made.

Activity reports are not due to the Pa. Milk Marketing Board until May 25, so a bond claim cannot be made for Pennsylvania milk until the PMMB knows how much is owed.

On the national side, USDA confirms that Dean did timely file its milk receipts and utilization report for April, but these figures are confidential and proprietary, so the amounts owed to farmers and the Producer Settlement Fund are not known.

While USDA is communicating with the U.S. Department of Justice on this, the PMMB is reportedly doing their best to communicate and work with Dean to determine if there’s anything it can do — short of the agency filing a bond claim to have Pennsylvania producers paid. There are four Dean plants in Pennsylvania and at least two out-of-state plants, including one in New Jersey, receiving milk from Pennsylvania and surrounding states.

For Dean’s part, Gary Rahlfs is the chief financial officer overseeing the “winding down” of the Dean Foods Estate. In an email reply early this week, he referred to the May 6 public announcement at the Dean restructuring website after the sale of plants and other assets was completed that week, stating: “Dean Foods anticipates that the plan will provide for the full payment of all administrative expense claims in several months (following the repayment of its senior secured super-priority post-petition financing facility) as proceeds continue to come into the Dean Foods Estate.”

In addition to the public announcement, Rahlfs confirmed that administrative expense claims do include the payments Dean owes for April milk and many other payables.

“We are working diligently to ensure this process and the payments are made as quickly as possible,” Rahlfs wrote in an email response to Farmshine.

Unfortunately, it appears from the wording of the announcement that this could take several months, and the super-priority credit facility Dean used to continue operations during the bankruptcy sale process is being prioritized for repayment as income comes in from sale of assets and prior sales of product during this “winding down” plan for the bankruptcy.

All through the bankruptcy and sale proceedings in the Southern District of Texas, Judge David Jones referred often to how it was a priority of his to ensure a sale process that would not leave schoolchildren without milk and would not leave farmers without markets or employees without jobs. He talked often of fond memories as a child of milk delivered by the milkman.

In fact, this is one reason, Judge Jones approved retainment bonuses for professional staff to be sure that the people who understand the milk business would continue in their positions so the company and its 57 plants would remain in operation and viable during the bankruptcy sale to avoid the chaos that would result if the company fell into Chapter 7 status.

However, a detail left hanging is the final payment to farmers and cooperatives supplying milk to Dean Foods.

Back in November, when Dean Foods filed under Chapter 11, farmers had many questions about whether or not they would continue to be paid for milk. Credit facility of $850 million was secured, and the court gave permission to use income and credit facility for day to day operations to pay employees and critical vendors, including farmers.

In fact, a Raw Milk Supplier FAQ dated November 2019 still searchable in a cache file of the Dean restructuring website stated (as shown above) states: “We intend to pay suppliers in full under normal terms for goods and services provided after the filing date (Nov. 12).”

That language is no longer readily shown on the website. It was replaced when DFA became heir-apparent by a completely new and different Raw Milk Supplier FAQ dated February 2020.

While DFA, the buyer of 44 of the 57 Dean plants at a price of $433 million, has been Dean Foods’ largest milk supplier, the company also has many independent family farm shippers throughout the Northeast, Southeast and across the country. All are left waiting for payment at a time when they’ve already come through five years of low income and below-break-even prices and at a time when they are taking further losses in milk pricing and additional marketing costs due to the COVID-19 pandemic.

In a separate action this week, a lawsuit was filed for an injunction against the sale of 44 of Dean’s 57 plants to DFA. The lawsuit was filed by Food Lion and Maryland Virginia Milk Producers Cooperative in Federal District Court for Middle North Carolina in Greensboro Tuesday, May 19.

The lawsuit states that DFA’s ownership of Dean’s milk plants is the “coup de grâce (final blow) for competition” in fluid milk markets, arguing the merger gives DFA monopoly over the dairy supply chain, the death of the independent, family-owned dairy farms, and higher prices ultimately for consumers.

Plaintiffs are specifically asking the Court to grant a preliminary injunction to block the sale and want DFA to divest at least one of the Dean facilities in the Carolinas to an unaffiliated independent purchaser.

“This action arises out of Defendant Dairy Farmers of America, Inc.’s (“DFA”) longstanding effort to seize control of the milk supply chain. Indeed, for the past two decades, DFA has rapidly consolidated and dominated the market for the supply of raw milk not by competing on the merits, but through unlawful conduct and anti-competitive agreements through which it has gained near-complete control over the purchasing of key nationwide milk processors,” the plaintiffs state in their filing.

“This anti-competitive campaign has allowed DFA to transform itself from a modest regional dairy cooperative into the Standard Oil of the modern dairy industry.”

The U.S. Department of Justice (DOJ) already approved the deal three weeks ago with the stipulation that three plants in Wisconsin, Illinois and Massachusetts be divested from the 44-plant DFA purchase.

Prior to the bankruptcy and sale, Dean Foods was DFA’s largest customer and DFA was Dean Food’s largest milk-supplier.

“Their partnership was forged through a corrupt bargain entered into at the time of a prior merger between Dean and another dairy processing giant, in order to avoid U.S. Department of Justice (“DOJ”) scrutiny through subterfuge and deception,” the plaintiffs state.

“On May 1, 2020, DFA and Dean closed on the Asset Sale, transforming DFA overnight into both the largest milk producer and the largest milk processor in the United States,” plaintiffs continue. “With capability to wield market power at two levels of the supply chain, DFA now has both the ability and the incentive to wipe out any remaining pockets of competition.”

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More open bidding process, accelerated timetable underway for sale of Dean Foods plants

Posted on March 30, 2020 by Agmoos

By Sherry Bunting, Farmshine, Friday, March 27, 2020

HOUSTON, Texas – Changes have officially been made to the bidding procedures originally sought by Dean Foods in the conglomerate’s Southern Foods Group Chapter 11 bankruptcy and sale in the Southern District of Texas.

In a very brief continuation of bidding procedures hearing on March 19, U.S. Judge David R. Jones said he would sign an order that outlined the new procedures and accelerated timetable for bankruptcy and sale proceedings. A cover story in last week’s Farmshine described the concerns and changes that led to the new order.

On the evening before the hearing, Dean withdrew its original proposal for Dairy Farmers of America (DFA) to be designated as stalking horse bidder, essentially dissolving key elements of the Feb. 17 Asset Purchase Agreement with DFA on 44 of Dean’s 57 plants.

This move to a “value maximizing” sale process opens the bidding to more opportunities for additional single- and multi-plant bids as well as a potential restructuring bid.

Bids are due by Noon CDT on March 30, 2020, with Dean declaring winners shortly thereafter.

Objections to a sale order or transaction are to be filed in writing by April 1, 2020 at Noon CDT.

A hearing to consider the proposed sale transaction will be held before Judge Jones on April 3, 2020 at 9:00 a.m. CDT.

Attorneys and consultants for interested parties worked together at the suggestion of Judge Jones to modify the original proposal after objections were raised by the creditors committee, potential buyers of Dean assets, and more than a half dozen dairy cooperatives. Their concerns focused on the lack of fairness and transparency in the previously proposed bidding process that sought to designate DFA as lead bidder with protections for its 44-plant bid.

The order at the case docket does not remove DFA as a potential bidder but opens the process by not designating DFA as the stalking horse bidder.

More information can be found at the website for the Southern Foods Group case at https://dm.epiq11.com/case/southernfoods/dockets and at https://deanfoodsrestructuring.com/

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Judge insists on open, transparent, fair process in sale of Dean Foods assets

Posted on March 19, 2020 by Agmoos

By Sherry Bunting, Farmshine, Friday, March 20, 2020

BREAKING NEWS UPDATE: After the below story about the March 12 bidding procedures hearing was written and filed with Farmshine for yesterday’s press deadline, docket 1167 — posted late last evening — shows that a motion was filed ahead of today’s anticipated hearing to modify the proposed bidding procedures and withdraw the prior request for DFA to be Stalking Horse Bidder in the sale of Dean Foods assets, noting that DFA will remain a potential bidder in modified proposed bidding procedures. Docket 1167 states in part: “…after extensive discussions, DFA and the Debtors (Dean Foods) determined to proceed without being the Stalking Horse Bidder and without Bid Protections. Accordingly, the Debtors (Dean Foods) are withdrawing their request for approval of DFA as a Stalking Horse Bidder, and any approval or authorization of the Stalking Horse Asset Purchase Agreement or Bid Protections. Critically, this withdrawal by the Debtors (Dean Foods) of their request for a Stalking Horse Bidder does not signal a withdrawal by DFA from the bidding process, and the Debtors (Dean Foods) expect and believe that by avoiding litigation over procedure, all parties-in-interest, including DFA, will focus on developing competitive and value-maximizing bids. In addition, the Debtors (Dean Foods) have been working around-the-clock to respond to continuing data requests from the Ad Hoc Group in an effort to provide that key constituency with all of the information needed to formulate a bid…”

HOUSTON, Tex. – Last Thursday (March 12) a hearing here on the Southern Foods Group bankruptcy considered a motion to approve Dairy Farmers of America Inc. (DFA) as “stalking horse bidder” and to set bid procedures outlined in the Dean Foods / DFA $425 million Asset Purchase Agreement covering 44 of Dean’s 57 plants.

Judge David R. Jones instead asked for Dean Foods to come back with a sale process that is “open, transparent and fair to everyone.” He also set a hearing for Thursday March 19 to revisit new bidding procedures and protections sought by DFA,

Judge Jones also expedited proposed sale dates, indicating March 30 at Noon as a deadline for bids to be submitted, a quick turnaround for Dean to “declare winners” ahead of April 1 for parties to file objections, and April 3 as a sale hearing. Dean confirmed this week that these are the dates they are working with pending the March 19 hearing outcome.

Part of the reason for expediting dates in a more “open” bidding process is the company’s liquidity concerns in the face of financial and commodity market challenges due to school closings and other supply chain happenings related to novel coronavirus / CoVid-19.

It was revealed that 22% of Dean Foods’ sales – approximately $52 million per month – is school milk and foodservice sales.

In separate inquiries this week of several fluid milk processors, including Dean Foods, a surge in demand for milk is being reported that began last Friday when widespread school closings were also announced.

This surge in store demand is currently more than making up for any losses due to school closings in the short-term, but uncertainty is the cloud over everything, especially in this bankruptcy sale where liquidity provided by a combination of cash flow and bankruptcy financing was projected on March 6 to last through June after being projected last fall to last through July. It was noted that recent events may further compress these liquidity projections, an important factor to keeping the bankruptcy from falling into a Chapter 7 category.

In the three-hour hearing with two recesses for parties to confer, Judge Jones heard from counsel representing Dean Foods, DFA, an ad hoc committee for dairy cooperatives, and committees of creditors, bondholders, labor unions and others.

Department of Justice concerns over specific plants included in the 44-plant DFA bid were also referenced, but not explained or detailed, and the Judge expressed his desire to see the winning bid mix handled in a way that would be open to potential regional buyers for single plants and in a way that puts forward the best “mix” that returns the best value, while also keeping the jobs going and milk flowing, and hinges on satisfying any known DOJ concerns.

It was indicated that communication between DFA and DOJ and Dean and DOJ have been ongoing since October.

Essentially, the Judge asked Dean Foods to provide information needed by bondholders working on a potential restructure, to simplify the bidding procedures so that anyone who is not a bankruptcy attorney can understand them, and to provide the opportunity for potential buyers to bid on one plant or multiple plants.

Judge Jones again issued a plea for all parties to work together in the sale of the company he said is in everyone’s best interests to see continue and is “important to our country.”

“I am giving you full flexibility to propose and handle this however you want to handle it and reserving flexibility to drive this process if I have to,” said Judge Jones, indicating that he hoped an auction would not ultimately be necessary on all assets.

Throughout portions of the hearing, counsel for Dean indicated the need for bid protections for DFA, given their work in putting together the first actual sale plan covering a majority of assets.

Part of the “stalking horse” status sought for DFA by Dean’s original motion was to include “break up” fees averaging $15 million per plant that would have to be paid by bidders winning plants in an auction situation and pulling them out of DFA’s 44-plant bid. Judge Jones wasn’t convinced that breakup fees were necessary; although he did indicate that DFA should receive something for their contribution in putting together the first bid for a substantial portion of Dean’s assets to get the process moving – something no other entity has done to-date.

In fact, Judge Jones stated that he was less concerned about breakup fees than he was about the bidding process itself.

Counsel for the creditors committee said they were receiving broad interest from potential bidders on single or multiple plants, but that without a fair and open process and without documents needed to formulate bids, these potential bidders would be operating in the dark or unable to participate.

Judge Jones said that, “It’s theoretically possible to cobble together bids for individual plants (in the asset mix), and they are all telling me they are not getting a fair shake because you won’t give them the opportunity to make a bid for one or two or three plants,” said the Judge. “My way does that.”

He said that they (DFA) aren’t going to get copies of the other bids and that DFA would not have to break down their bid to a plant by plant pricing.

“No way, that’s not going to happen. I am trying to give examples of how unhappy I am with this process. I hear you trying to talk me out of it, and I assure you, I am far more stubborn than you,” said the Judge. “At the end of the day, I get to be right or wrong.”

With the expedited bid deadline — a date certain when every interest would put its best bid forward for a single plant or multiple plants — everyone involved would see everyone else’s bid at the same time, and they would be made public.

In essence, no one got everything they wanted, and everyone got something they wanted in the new process parameters set forth by the Judge to be revisited at the hearing this week (March 19).

Interests pleading for time to put together a bondholder restructure did not get extra time, and interests looking for special protections to streamline majority assets going to DFA did not get that either.

Judge Jones asked no less than three times: “Why do you need an auction at all?”

He said further that Dean has “the best advisers in the world. You have gan asset mix that is incredibly hard to have an auction on to be fair. Let’s set a deadline for everyone to put their best foot forward by that date (potentially March 30 Noon), then you put together the best deal (the best mix of winning bids March 31) and ask me to approve it (potential sale hearing April 3), and if someone has an issue with it, they can stand up and take their shots (objections by April 1). This forces people to put up or shut up.”

Bottom line, said the Judge, “I want a fair and open process, not just for two parties, but for all parties.

“I am not going to lawyer this deal, but I want a process where… everyone gets a shot. The (process) that you have outlined doesn’t do that,” he said of the bidding procedures in Dean’s motion.

In the bankruptcy proceedings, all proof of claims are due by March 27 with the first omnibus hearing still on the court calendar for March 30, followed by another on April 22. Information is available at https://deanfoodsrestructuring.com/ and dockets can be found at https://dm.epiq11.com/SouthernFoods

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Co-ops seek bid process modifications, object to ‘stalking horse’ status in DFA bid for 44 Dean plants

Posted on March 12, 2020 by Agmoos

6 co-ops covering 3000 farms and 10% of milk cite bid barriers, antitrust concerns, detrimental impacts

By Sherry Bunting, Farmshine, Friday, March 13, 2020

HOUSTON, Texas – New ripples emerged this week in the Dean Foods Company (Southern Foods Group LLC) Chapter 11 sale proceedings in the bankruptcy court of the southern district of Texas.

Just three days before the March 12 hearing on Dean’s motion to approve DFA as “stalking horse bidder,” an ad hoc committee for dairy cooperatives filed a limited objection on Monday, March 9 regarding the Feb. 17th DFA-Dean asset purchase agreement that covers a majority of Dean’s assets.

If Judge David Jones grants stalking horse status to DFA’s $425 million bid for 44 of the 57 plants and other itemized assets and liabilities, this would become part of the bidding procedures, which the March 12 hearing is expected to further outline, and it would provide certain protections to DFA’s initial bid.

“A potential sale of assets to Dairy Farmers of America Inc. (DFA), if approved, would effectively consolidate DFA’s grip on the national milk market. The ripple effects of the sale will detrimentally impact all of DFA’s competitors, from the largest dairy cooperatives and milk producers, to the smallest farmers,” the objection stated.

“For exactly this reason, the ad hoc committee, which includes certain creditors of (Dean) and competitors of DFA, was formed to… monitor the Chapter 11 cases, examine the impact that a sale to DFA would have on their businesses, and to the greatest extent possible, ensure that some semblance of fairness remains in the competitive process for the benefit of all dairy cooperatives,” the objection stated.

The ad hoc committee represents what is described as a broad cross-section of U.S. farm milk, covering over 3000-member dairy farms producing nearly 10% of the nation’s milk.
Six cooperatives are listed in the objection, and they have a mix of circumstances — one is a creditor of the debtor (Dean Foods) some are non-creditors except for non-pool payments that are owed, some are current suppliers of Dean Foods, and some are competitors in retail milk distribution.

According to the objection on the case docket, the six co-ops are:

• Lone Star Milk Producers, Inc., based in Wichita Falls, Texas with 120 member farms in eight states, marketing 1.9 billion pounds of milk annually;

• Agri-Mark Inc.,with 850 member farms in New England and New York marketing 3.3 billion pounds of milk annually;

• Cayuga Marketing, LLC, based in Auburn, New York with 30 member farms producing 1.3 billion pounds of milk annually;

• Cobblestone Milk Cooperative, Inc., Chatham, Virginia with 19 member farms from Virginia to Georgia marketing 0.6 billion pounds of milk annually;

• Maryland and Virginia Milk Producers Cooperative Association Inc., with 930 member farms in multiple states of the Midatlantic and Southeast producing 2.5 billion pounds of milk annually; and

• Michigan Milk Producers Association with 1300 member farms in Michigan, Ohio, Indiana and Wisconsin producing over 5 billion pounds of milk annually.
The limited objection seeks to address “certain fundamental flaws in the bidding procedures,” which “exacerbate the antitrust issues that plague the debtors’ proposed sale to DFA.”

• In a separate action, Southeast Milk, a Florida-based dairy cooperative also filed a similar objection this week.

At the start of the Chapter 11 cases that were all lumped together under Southern Foods Group LLC, the debtors, Dean Foods, proclaimed intentions of expanding the sale and marketing process and of exploring restructuring alternatives. Instead, the objection asserts that Dean Foods “spent months negotiating and finalizing proposed bidding procedures with DFA that only serve to create unnecessary competitive issues.”

Cited barriers to competing bids included the multi-step qualification process and compressed time frame that make it difficult for others to bid, including the use of terms that are not defined.

“Perhaps by design, these procedures make it a foregone conclusion that DFA will be the successful bidder for all stalking horse assets, even assuming that an auction were to occur,” the objection states.

On these and other grounds, the ad hoc committee for dairy cooperatives filed the limited objection and submitted that, “The proposed bidding procedures are not reasonably designed to secure the highest and best bid for the sale of the bid assets.”

While the debtors assert their proposed bidding procedures were designed to facilitate a flexible, robust and competitive bidding process, the objection asserts that, “The debtors have closely held all sale-related information and other information that they consider to be potentially confidential.”

In addition, objections are raised about the bidding procedures being “strategically crafted to prevent any of the stalking horse assets (44 plants) from being siphoned off by DFA’s competitors and broken down into auction lots that could yield a greater aggregate sale price for the debtors’ estates.”

The breadth of the DFA-Dean asset purchase agreement is a barrier if approved as ‘stalking horse’ assets because few, if any, bidders could compete on those assets collectively — keeping potential regional buyers that could be affected by the outcome from actually bidding.

Several modifications are requested, including how qualifications are set, how much discretion is given to Dean on separating auction lots, extension of the time frame, and a dual track auction process that would provide for back-up successful bidders and back-up alternate bidders for auction lots as separate sale transactions in the event that the DOJ does not provide the necessary regulatory approval for the sale to DFA.

Stay tuned.

While Dean negotiated with DFA, other interests requested documents they never received

Posted on March 6, 2020 by Agmoos

Antitrust issues at core of motion to form equity holders committee

By Sherry Bunting, Farmshine, Friday, March 6, 2020

HOUSTON, Tex. – Ahead of next week’s hearings on the Dean Foods Company (Southern Foods Group LLC) bankruptcy and sale, it is illustrative to review the motions hearing of Feb. 19. On tap for March 12 is the hearing to consider DFA as “stalking horse bidder” with the asset purchase agreement DFA and Dean agreed to on Feb. 17 involving 44 plants at a $425 million bid as reported Feb. 21 in Farmshine.

Also on tap next week is a hearing set for March 10 on the motion presented by Joshua Haar to form an adhoc committee of shareholders.

During the Feb. 19 motions hearing, there was extensive discussion about professional bonus payments to keep top staff on board during the bankruptcy. An attorney representing the Teamsters Union challenged these retention bonuses in the face of knowing union contracts will be renegotiated by new buyers, especially if the buyer is DFA.

The bottom line in that exchange was summed up by Judge David Jones’ comment that he is guided by his own interpretation of the numbers, trusts his own bankruptcy experience and skill sets and has clear concern that all parties should work together to see that the assets of Dean Foods continue to operate. Period.

In fact, Judge Jones often chided attorneys to talk in terms of the “practicality” of the situation above their own “strategically” motivated interests.

“I need what’s left of this company to be comfortable and stay in place,” said Jones. “We need to get to a sale process and have people see the opportunity for future jobs to stay in place.”

He showed low tolerance for any party expecting to get 100% of what they have gotten in the past (except for retaining the “critical institutional knowledge” provided by professional staff receiving bonuses), and he indicated that the retention bonus payments are necessary in that regard, giving him “some comfort that we may actually make the end of this because good people will stay in place.”

The Teamsters’ concerns were for financial awards and windfall profits to “talent at the top” while their member employees become creditors owed vacation and so forth.

To understand how Judge Jones views the national fluid milk model of Dean Foods, he said: “This is a business model that worked in the 60s and doesn’t work in 2020,” he said. “I could give a first-year business student this business model and they would look at me and say this is a model that doesn’t work.”

Judge Jones asked during motions, “Why not be hand-in-hand on this issue? I do not want to be responsible for school children not getting their milk, that means a lot to me.”

Saying that the Unions have overstepped in trying to prevent the payment of retention bonuses to professionals that constitute “institutional knowledge,” Judge Jones granted the debtor’s (Dean’s) motion to approve the “key employee retention plan” consisting of a schedule for paying these bonuses.

This exchange about “working together” — with the goal of keeping Dean assets operating — set the stage for Judge Jones to hear a motion by Joshua Haar to form an ad hoc committee of equity holders (shareholders). Haar is the attorney son of Jonathan and Claudia Haar, the New York dairy farmers who were part of the original representatives of the dairy farmer class in the previously settled Northeast Class Action Antitrust Lawsuit against DFA and Dean Foods.

Before hearing Haar’s motion, Judge Jones said he is “getting a sense of urgency,” in regard to seeing an end point and that he did not want to entertain motions that “extend the case on the backs of the vendors, including the farmers supplying the milk.”

In other words, he did not want to see the timeline of this case extended for an “exercise” that did not materially provide a practical solution.

Judge Jones offered to hear Haar’s motion the very next day, for which Haar said he would not be ready. Asking Haar if one hour is sufficient, Judge Jones set hearing on the appointment of an equity committee at 3 p.m. March 10 – two days before the March 12 hearing on the DFA “stalking horse” bid.

As part of this discussion, it was noted that the ad hoc committee of bondholders wanted time to put a plan forward, that they are “actively working on the financing and need time for equity holder involvement,” said Haar.

“On this equity committee request, there will never be an equity recovery here,” said the Judge. In fact, he added later that equity or share holders in Dean Foods, a publicly traded company “are in the worst possible place. If the debtor’s numbers are right, their money was lost years ago, and this is an event that recognizes history.”

Haar’s lengthy motion described milk supply chain and potential antitrust issues inherent in a DFA purchase, seeking time for other options to surface.

Judge Jones said he read the motion, but added: “I want you to understand the standard that is required for an equity committee. I’ll always give you the opportunity to talk and give the shareholder’s view of the world, but if you are looking for a committee, that’s a tough burden, and I expect you not to waste everyone’s time.”

He warned against a prepared speech of “just words… Telling me all the things you might do that are eloquent, I tend to be more blunt… especially when I tell people what’s coming and they choose to ignore it. I want you to represent your people. This is about people. But that’s what I expect.”

He expects an equity holders committee to be able to contribute to the process of the Dean Foods reorganization and sale, not to use one group of stakeholder for the sake of others.

Haar indicated that among the equity holders are persons and entities “connected to 15% of the U.S. milk supply” so in that sense this motion was not trying the milk supply antitrust concerns but rather what could be a legitimate consideration of a better way to move forward with offers that could potentially allow equity holders to participate in value recovery.

It was apparent that Judge Jones needs to be convinced with numbers and math and actual bids that can be consummated in the next few months, not the eloquence of ideas about what can or should or could be some time in the future.

Harr said of the motion that, “We can add significant value to the estate.”

With that, the hearing for Haar’s motion was set for March 10 with response motions due March 3.

Next up in the vein of “other options” was the existing creditors committee. Their attorney indicated concern as to how the asset purchase agreement negotiations with DFA took place.

“They got bid materials. We issued requests for these materials. The debtor (Dean Foods) wanted to share these materials but were unable to share them with us because DFA put a confidentiality clause on it,” said the attorney for the Dean creditors. “We did a letter writing campaign. DFA would not agree. We did file an emergency form to compel the bid materials, and an hour before the bid deadline, the documents flowed to the advisors for the committee.”

In other words, too late to analyze the issues.

As the negotiations between Dean Foods and DFA continued, the creditors committee apparently repeated its requests for information and were told “no.”

Finally, a week before the Feb. 19 motions hearing, they received a two-page slide packet from DFA that “gave very little information and did not give the information about what Dean plants were included and excluded in that asset purchase agreement until it was announced publicly.

“The creditors committee’s initial impression is negative,” said the attorney representing the committee, indicating it will be heavily contested. “First and foremost, we are concerned about aggregate consideration… it is not clear that there is enough (in the bid) to pay-in-full the creditors.”

She mentioned that DFA, in addition to seeking stalking horse bidder status, is also a large creditor of Dean Foods with significant payables and that their bid could represent a “dollar-for-dollar deduction in value of assets to cover their claims.”

The Judge was un-moved. “If integration fixes the problem, then we ought to be working on integration,” he said, telling the DFA lawyer to work with the lawyer for the creditor committee. “Get her at your table,” he said.

The response from counsel for the creditors was that they want a seat at the table and would “engage in good faith, but there could still be a contested hearing on March 12.”

Attorneys for DFA and Dean indicated engaging in dialog with the DOJ on antitrust issues.

A potential bondholder bid was also referenced. The attorney for the creditors said the bondholders have done a “tremendous amount of work looking into financial investment into the company. We are hopeful the process can get there before March 12 with a more value-maximizing offer than the one on the table now.”

But again, it was mentioned that a “critical piece of information is still missing. There is some information that the ad hoc bondholder committee needs that the debtor is not willing to provide and we implore the debtor to turn it over now so the bondholders have the information. The next two weeks are critical.”

One item needed is “milk payables. We need to see, or the financiers need to see that, and it has been difficult getting it provided to us for third-party financing.”

Judge Jones offered his office as mediator for emergency hearings to get that flow of documents moving in the event that having the information allows other bid processes to go forward.

In short, the creditors committee, ad hoc bondholders committee and lenders were “left out of the information flow” during the Dean negotiations with DFA on their asset purchase agreement. They all read it at the same time (when it became public on Feb. 17) and are looking for a bid with more value to come in.

Judge Jones turned to the Dean Foods attorney and said “you took this in and you know what to do. I am trying to convey my sense of urgency here. Let’s figure out how to move the process forward. We all have the same goal.”

(Facilities in South Dakota, North Dakota and Minnesota — where Dean bottles under the Land O’Lakes brand — are excluded from the DFA-Dean asset purchase agreement. The licensing of the Land O’Lakes brand elsewhere is also excluded.)

-30-

The time has come to disrupt the disruptors

Posted on December 5, 2019 by Agmoos

Opinion: Dean bankruptcy offers opportunity we should earnestly pursue

By Sherry Bunting, Farmshine, Friday, Nov. 29, 2019

If ever there was a time for state governments to sit down with their dairy farmers and agriculture infrastructure for a meeting of the minds… it is now.

The future is very much at stake with Dean Foods – the nation’s largest milk bottler – in Chapter 11 bankruptcy and sale proceedings, as the industry is largely signaling the buyer should be DFA.

But not so fast.

This could be an opportunity to look at the strength of Dean’s holdings and consider a different path forward, one that returns some of the regional branding power to farmers and consumers in the regions served by Dean’s 60 milk processing plants.

Dean Foods accounts for one-third of the milk bottled in the U.S., and the roots of its holdings go back to family operations with brands that were once – and some still are – household names.

In focus groups and shopper surveys, consumers demonstrate they understand what it means to buy local. They understand that buying local – especially fresh staples like milk – means keeping their dollars working in their communities. Consumers also say they want to help local farms. And they want to see clear labeling to know where their milk comes from.

Meanwhile, surveys show the gallon and half-gallon jug are still the most popular packaging among real milk buyers. Even though the category as a whole is declining, it is still a huge category and one that has not been tended or nurtured or cared for in more than a decade. In fact, the category has seen the deck stacked against it by government rules and government speech.

Taste is also important to consumers, as is nutrition. Where fluid milk is concerned, these two areas have also been lacking because checkoff-funded promotion became government speech that pushed fat-free and low-fat milk to the point where consumers have no idea what real milk tastes like – until they switch to whole milk, and they are.

Folks, this is an opportunity to chart a new path for fresh fluid milk, to breathe some life into it. We see it in whole milk sales that are rising. Just think what could be accomplished if significant resources were devoted to truly revitalizing milk.

As the dairy industry streamlines behind innovation and checkoff-funded partnerships to disrupt the dairy case — to be more like the plant-based non-dairy disruptors — there is still a majority of consumers choosing real milk, and more of them are choosing real whole milk as whole milk today is the top seller in the category, and whole flavored milk is growing by double-digits.

Can we disrupt all the disruption with a disruptive back-to-the-future original? I think so. But now is the time to hit it hard. A few years from now will be too late.

Dean Foods has the network and the facilities and the history a savvy consortium of buyers could tap into for going back to local or regional emphasis with brands. The DairyPure national branding experiment started out strong, but in the past few years has been squeezed-out by large retailers – and notably Walmart — pushing their own store brands with loss-leading strategies while hoisting the price of Dean DairyPure much higher.

And that’s part of the problem. Stores think it’s okay to loss-lead with milk, but they are not willing to eat that loss themselves. We need them at the regional dairy future table as well.

In the bankruptcy proceedings at hand, some of Dean Foods’ unsecured bondholders are protesting a rapid sale of assets to DFA in what they say equates to a “fire sale” that doesn’t maximize value. Did Dean receive a proposal from them too before filing bankruptcy? Sources indicate bondholders offered restructuring terms before the bankruptcy filing that would have changed the current picture for Dean Foods.

Will these bondholders that are opposing sale to DFA make an offer now? Can Dean Foods’ assets be sold piece by piece to be broken up more regionally? These questions don’t have clear answers at this time.

What is clear is that payments for milk by Dean to DFA are being delayed five business days as bondholders want to be sure they are truly ‘critical vendor’ payments and that there are no shenanigans between the would-be buyer and seller.

What is also clear is that Dean and DFA have a history, and that history includes the good, the bad, and yes, the ugly.

DFA was there every step of the way as mergers and acquisitions led Dean Foods on its path to become the nation’s largest milk bottler. DFA is Dean’s largest supplier of milk, and DFA leaders are on record stating that Dean Foods is the largest buyer of DFA milk.

If DFA purchases “substantially all” of Dean’s assets, we know more rapid consolidation of the fluid milk market will occur. DFA’s leaders — as well as the leaders of all the prominent organizations in the dairy industry, including the dairy checkoff — have been clear if we’re paying attention. The future they see is in moving away from investing in fresh fluid milk and moving toward ultrafiltration and aseptic packaging and blending and innovating for beverages that can be supplied to anywhere from anywhere without transporting milk’s water-volume by tanker.

Those are more of the ingredients for a monopolization of milk that may not even be considered by the Department of Justice. Without another offer or series of regional offers on the table, DFA would stand as the only option — other than complete failure of the firm under bankruptcy. This, alone, could put the sale to DFA on the fast track as sources talk about bankruptcy clauses that allow purchases to occur — without DOJ approval — when failure is the only other option.

So while consumers are consciously being pursued by the industry and dairy checkoff to move them away from their habit of reaching for that jug of milk and toward new beverages that contain milk — or are innovated new varieties of milk, or are blended and diluted with plant-based alternatives — what happens to the dairy producers in communities whose relevance is tied closely with retaining fresh fluid milk as a nurtured market and being a producer of a ‘local’ and fresh product? These producers are also forced to pay into the dairy checkoff that is developing these alternatives, not promoting or educating about fresh whole milk, and in effect funding their own demise.

Who will tend this store, nurture these customers, satisfy consumer desires to buy-local and ‘help farmers’ and their new-found eagerness to learn more about real fresh whole milk nutrition?

If states and regions don’t work to keep fresh milk facilities in their midst, the global message on ‘sustainability’, ‘carbon footprint’, ‘flexitarian diets,’ and ‘planetary boundaries’ will overtake the public consciousness, and the choices disrupting and diluting the dairy case will overtake fresh fluid milk.

In business today, that’s all we hear: Innovate and disrupt. Maybe it’s time to disrupt the disruptors, to put together a fresh fluid milk branding and packaging campaign that makes milk new again.

-30-

Ag Moos

Tag Archives: Dean Foods bankruptcy

UPDATE on Dean trustee letters demanding payment from farmers. Don’t pay. Gather records. Fight back.

Milk payment process officially described, relevant to Dean trustee ‘avoidance claims’ seeking partial payback from farmers.

Ghost of milk payments past invoked as intimidating letters seek money from farmers for big bottler’s bankrupt estate: Don’t pay. Don’t panic. Don’t sign anything. Sit tight. Gather records.

Dean pays independents for April milk, owes millions to co-ops, USDA FMMOs, MilkPEP

USDA communicates with DOJ as Dean ‘Estate’ misses final payments on April milk; lawsuit filed to block sale to DFA

More open bidding process, accelerated timetable underway for sale of Dean Foods plants

Judge insists on open, transparent, fair process in sale of Dean Foods assets

Co-ops seek bid process modifications, object to ‘stalking horse’ status in DFA bid for 44 Dean plants

While Dean negotiated with DFA, other interests requested documents they never received

The time has come to disrupt the disruptors

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