WASHINGTON
(DTN) -- On Oct. 11, 2008, one of the nation's largest ethanol producers,
VeraSun Energy, filed for Chapter 11 bankruptcy protection. The action left
thousands of farmers who sold corn to the South Dakota company's ethanol plants
at a loss.
What
compounded those losses, attorney Joseph A. Peiffer said, is the producers he
represented were faced with VeraSun filing bankruptcy in the state of its
incorporation, Delaware.
Though
legal, the move by VeraSun left many Iowa farmers facing the prospects of
having to fight a legal battle in a distant state. This made it costly and
logistically difficult for farmers to succeed.
Peiffer,
now a shareholder in Ag and Business Legal Strategies based in Hiawatha, Iowa,
has drawn the attention of Washington lawmakers who next week are set to
introduce a bill in the United States Senate that would forbid companies from
filing bankruptcy in states of their incorporations.
"My
clients had grain delivery contracts with the 26 VeraSun ethanol and biodiesel
plants in the six Midwest states where the plants were located," Peiffer
said.
"None
of the plants were physically located in Delaware, nor was the headquarters of
any VeraSun company located in Delaware. However, because the first company to
file its Chapter 11 bankruptcy was organized in the state of Delaware, all the
affiliated companies could file their cases in Delaware. I recall the
frustration that each of my clients expressed with having to participate in a
bankruptcy in Delaware instead of where the contracts were to be
performed."
Sens.
John Cornyn, R-Texas, and Elizabeth Warren, D-Mass., are set to introduce the
Bankruptcy Venue Reform Act of 2018 next week.
According
to the text of the bill obtained by DTN, bankruptcy law allowed entities to
file for Chapter 11 in a wide range of court venues.
"The
wide range of permissible bankruptcy venue options has led to an increase in
companies filing for bankruptcy outside of their home states, or the district
in which their principal place of business or principal assets are located, a
practice known as forum shopping, and has resulted in a concentration of
bankruptcy cases in a few districts," the bill says.
"Bankruptcy
forum shopping prevents small businesses, employees, retirees, creditors, and
other important stakeholders from fully participating in bankruptcy cases that
will have tremendous impacts on their lives, communities, and local economies,
and deprives district courts of the United States of the opportunity to
contribute to the development of bankruptcy law in their jurisdictions."
The new
legislation would eliminate the place of incorporation as a proper venue, and
the affiliate rule that allows companies to file a Delaware affiliate first in
Delaware and then the rest of the cases in Delaware.
Currently,
bankruptcies can be filed in several places. That includes the state of
organization of the company, the district where a company has significant
business assets or conducts business, or in the district where a parent or an
affiliate has filed bankruptcy.
"I
suspect the next ethanol, packing plant, grain elevator, or dairy bankruptcies
will be filed far from Iowa if this bill is not passed," Peiffer said.
VeraSun
filed for Chapter 11 bankruptcy protection as a result of getting caught on the
wrong side of volatile corn prices in the summer of 2008, according to reports
VeraSun filed with the U.S. Securities and Exchange Commission. Thousands of
farmers who supplied grain to the company's ethanol plants were unable to
recover their losses.
Sen.
Cornyn said in a statement, "Closing the loophole that allows corporations
to 'forum shop' for districts sympathetic to their interests will strengthen
the integrity of the bankruptcy system and build public confidence. I urge my
colleagues to support this bipartisan, common-sense solution to ensure equal
access to the courts in bankruptcy proceedings."
Sen.
Warren said in a statement, "Workers, creditors, and consumers lose when
corporations manipulate the system to file for bankruptcy wherever they please.
I'm glad to work with Sen. Cornyn to prevent big companies from cherry-picking
courts that they think will rule in their favor and to crack down on this
corporate abuse of our nation's bankruptcy laws."