The two-year-old Agriprocessors bankruptcy case could drag on for another two years because missing business records required a massive effort to search for fraudulent payments and equalize payments among creditors.
Nearly 130 lawsuits were filed last fall against companies, individuals and even charities that received payments from the kosher meat packing company in its final two years of operations.
Many of the defendants in the cases will be found to have no obligation, but filing the cases ensured the maximum recovery potential for the bankruptcy estate, according to Dan Childers, Cedar Rapids-based attorney for bankruptcy trustee Joe Sarachek. The trustee faced a statutory two-year limit on filing the claims and could not determine what payments might be recoverable because Agriprocessors business records that should have indicated what the payments were for were missing.
“We’re suing them because we know they got money and we can’t figure out why,” Childers said.
The lawsuits are the latest fallout of a business failure that included one of the largest immigration raids in United States history at its Postville plant and evidence the company knowingly employed large numbers of undocumented and underage workers. Agriprocessors Vice President Sholom Rubashkin has since been convicted of fraud in a case which included evidence the company maintained phony books to avoid detection of improper and illegal transactions.
A typical defendant in one of the Agriprocessors lawsuits was cattleman Darrin King of Chickasaw County. He received a complaint in October 2010 demanding reocvery of over $75,000 he was paid for cattle deliveries two years earlier, during the 90-day period before Agriprocessors filed bankruptcy.
The claim “came out of the blue,” accordingto King’s attorney, Christine Stilton of Nashua. It was ultimately dismissed by the trustee, but not before King had to hire an attorney, hunt down his own records of each transaction, and respond to the claim.
Stilton said the payments to King were no different than others he’d received for earlier cattle deliveries. King had engaged in no unusual collection or payment activity, and there was no indication he had tried to take advantage of Agriprocessors deteriorating financial condition, Stilton said. Even so, he had to pay attorney’s fees and endure the anguish of awaiting the outcome.
Childers agreed that the collection efforts have prompted some bad feelings. He said he’d have preferred to avoid filing cases against livestock sellers, but the only payment records the trustee could locate were bank records indicating the parties paid and the amounts they received.
As of Nov. 22, 2010, the trustee had filed claims seeking to recover nearly $68 million. He had negotiated settlements with 16 creditors totaling nearly $500,000.
The bankruptcy laws require the trustee to recover both “fraudulent” payments and “preferential payments” in order to redistribute them among creditors.
Childers said fraudulent payments are generally defined as payments for which the debtor received no value, regardless of whether fraud was intended. Preferential payments are those that fully or mostly reimbursed specific creditors during a period of insolvency when the company could not pay all of its creditors, the 90 days before the filing of bankruptcy.
“Some charities were given money,” Childers said. “Some of them were very worthy charities, but with corporations there is no safe harbor for money given to charities as there is for individuals.”
The claims are often settled through a partial payment of the amount the trustee sought to recover. Big amounts are at stake for some of the parties being dunned.
Luana Savings Bank of Luana, Iowa, received a $3.7 million claim. United Mehadrin Kosher of Minneapolis, which provided kosher certification services, was asked to repay $2.8 million.
Some commonly accepted defenses against the claims are that the payments were received in the ordinary course of business for value provided, and that the claims added “new value” to the business, Childers said.
The funds recovered will be redistributed to creditors that have claims with higher priority under bankruptcy law, but it appears that large secured lenders such as banks would receive most, if not all, of the monies recovered.
“There are some very worthy priority claims,” Childers said. They included workers who were owed money, and claimis for doctor bills for employees and their families that weren’t paid. Agriprocessors’ health plan was self-funded.
“It will probably be a year or two before this is resolved,” Childers said.The process of recovering payments began later than usual in the Agriprocessors case, Childers said, because the trustee was focusing on finding a buyer for the business in order to maintain the jobs and economic activity the meat company’s operations provided. He said that aspect of the trustee’s work has been successful.