A worker checks mixed vegetables flowing toward bagging machines at a NORPAC plant.

PORTLAND — Concerns that an agricultural lender was pushing ahead of farmers to be repaid for loans to the bankrupt NORPAC cooperative were resolved during a Sept. 10 court hearing.

In late August, the farmer-owned vegetable processor announced it was selling most of its assets to entrepreneur Frank Tiegs for $155.5 million as part of a Chapter 11 bankruptcy, which allows companies to operate while restructuring debt.

While the cooperative said suppliers would be “paid in the ordinary course of business,” two farms raised objections to a financing agreement intended to keep NORPAC solvent until the asset sale is completed by the end of October.

CoBank, part of the Farm Credit System of agricultural lenders, is owed about $125 million by NORPAC and is prepared to extend another $15 million, without which the cooperative and its subsidiaries said they “will not be able to continue the operation of their business.”

The problem, according to the farms that raised objections, is that CoBank had structured the agreement so that it would be repaid from sale proceeds ahead of growers who sold crops to NORPAC and whose liens on the cooperative’s assets have priority for repayment.

J&M Farming of Echo, Ore., said it’s still owed more than $800,000 for sugar snap peas delivered to the processor in June and July and fully supports the cooperative’s continued operations.

However, the company said it’s concerned that CoBank would immediately be repaid from sale proceeds while growers would be paid by Tiegs afterwards, even though he’d acquired NORPAC’s assets “free and clear of the growers’ liens.”

Castle Rock Farming of Boardman, Ore., likewise said it had supplied an unspecified amount of sweet corn to NORPAC and complained CoBank wanted to have its “liens attach to the sale proceeds ahead of producer liens.”

“It’s something I don’t think is reasonable,” said Oren Haker, attorney for Castle Rock, during the Sept. 10 bankruptcy court hearing.

The financing agreement must be amended so that CoBank isn’t paid before growers who have priority liens, he said. “There needs to be a mechanism to ensure that’s what’s going to be what happens here.”

CoBank’s attorney, Teresa Pearson, said the dispute resulted from a “misunderstanding” of the financing agreement, which preserves the seniority of farmers’ liens over the lender’s liens.

The bank simply wants assurances that if it extends another $15 million to keep NORPAC operational, it will be repaid at the time of the sale instead of the repayment being postponed while conflicts among other lien holders are resolved.

“Our concern is just timing,” Pearson said.

At one point during the hearing, Bankruptcy Judge Peter McKittrick said he would not sign an order approving the financing agreement if CoBank is repaid ahead of priority lien holders and later gave the parties time to modify the agreement.

CoBank, the farms and other creditors who had filed objections ultimately reported to the judge that they’d agreed to changes and would submit the financing agreement for an approval order.

Under the provisions related to crop payments, farmers would be paid directly out of the sale proceeds or their liens would be assumed by Tiegs, who’d deduct those amounts from the purchase price for NORPAC’s assets.

I've been working at Capital Press since 2006 and I primarily cover legislative, regulatory and legal issues.

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