Dean Foods Bankruptcy Estate Attempts to Recover Payments Made by Dean to Dairy Producers

Written by Brook Duer, Staff Attorney

On November 24, 2020, a commercial collections law firm named ASK LLP, headquartered in St. Paul, Minnesota and hired to represent the Southern Foods Group, LLC formerly d/b/a Dean Foods (“Dean”) Chapter 11 bankruptcy estate, mailed demand letters asserting legal claims for the repayment of milk check proceeds against thousands of dairy producers (including cooperatives) throughout the United States.  The claims seek the recovery of milk checks received from Dean within ninety days preceding Dean’s filing of bankruptcy (i.e. between August 14, 2019 and November 12, 2019).

The payments are alleged to be so-called “preference payments” recoverable under Section 547 of the U.S. Bankruptcy Code.  Section 547 states, among other things, that a person or entity that receives payment (in this case for milk delivered) from a bankrupt entity within ninety days prior to a bankruptcy filing may be compelled to return that money to the bankruptcy estate under certain conditions.  This provision is designed to allow the bankruptcy trustee the discretion to recoup payments that may have been made outside the normal course of business which result in some unsecured creditors receiving preferential treatment by the debtor in the 90 days leading to bankruptcy, thereby receiving an unfair advantage over other unsecured creditors.

The amount claimed against each dairy producer in the demand letters varies depending upon the history of deliveries and payments in the subject 90-day window.  The claims asserted range from thousands of dollars to hundreds of thousands of dollars in claims against a dairy producer cooperative for repayment.  The demand letters state that if a “compromise” amount of 90% of the amount claimed to be due is not paid by December 24, 2020, or the dairy producer does not respond with certain requested information by December 15, 2020, a lawsuit (called an “avoidance action”) to collect the amount claimed to be due will be filed during the week of December 28, 2020, against the dairy producer in the United States Bankruptcy Court for the  Southern District of Texas located in Houston, Texas.  A Disclosure Statement for Dean’s Chapter 11 Plan filed with the Bankruptcy Court on November 30, 2020, states that as of that date, 2,500 demands for the return of alleged preference payments were mailed, but only a portion of those would have been directed to dairy producers.

Excluding non-dairy producers, and excluding the demand letters sent to a cooperative (treated as one producer), it is estimated that nationwide somewhere between 1000-1500 demand letters have been directed to independent producers selling to Dean plants.  In Pennsylvania, approximately 50-75 independent producers sold to Dean plants.

This is the only known usage of Bankruptcy Code Section 547 to try to recover milk check payments from dairy producers as the result of a dairy processor bankruptcy in recent times.  There are multiple complete legal defenses to the claims for repayment and the American Farm Bureau Federation has issued a public letter to legal counsel for Dean Bankruptcy Estate on December 4, 2020 demanding that all demands be withdrawn within ten (10) days and stating that “AFBF will consider all remedies that it can seek as an advocate of the Producers, including asking the Court to enjoin any litigation against the Producers and to hold any funds received by the Debtor in settlement in escrow.”

On December 9, 2020, the Pennsylvania Milk Marketing Board (PMMB), partnering with the Pennsylvania Office of Attorney General, announced that it had negotiated with the St. Paul, Minnesota, law firm representing the Chapter 11 bankruptcy estate of Dean Foods, ASK LLP.  As a result, the PMMB prepared, and posted on the PMMB website, forms which can be downloaded, completed by producers and milk haulers in any state in the country, and mailed to ASK LLP as soon as possible as a response to the demand letters asserting claims for the repayment of thousands of dollars of milk check proceeds.  Depending upon the content, accuracy and completeness of the information provided, the forms provide information that the bankruptcy estate’s legal counsel has agreed may be sufficient to prove all payments from Dean were made in the normal course of business and as required by law, and sufficient to have the claims for repayment completely withdrawn.

This material is based upon work supported by the National Agricultural Library, U.S. Department of Agriculture.