Creditors of the former NORPAC cooperative want to “claw back” nearly $5.3 million from farmers for crop payments and seed they’ve already received from the bankrupt processor.
A committee representing unsecured creditors — who don’t have collateral for loans to NORPAC — argues the crop payments were “fraudulent transfers” the farmers must return under bankruptcy law.
Recovering the $5.3 million on behalf of the cooperative would benefit the unsecured creditors, who currently stand to be repaid only 10% to 45% of the money they’re owed by NORPAC. Under bankruptcy law, money from debtors can be “clawed back” if it’s paid out improperly.
Earlier this year, the former NORPAC cooperative, now called North Pacific Canners & Packers, filed a lawsuit against 10 farm members seeking a declaration that they were owed no additional payments for 2019 crops beyond advances for harvesting and hauling expenses.
Now, the unsecured creditors want to file another complaint seeking to recover additional funds that were already received by those same 10 growers, with the lawsuit serving as a test case.
However, the litigation may have additional repercussions for all of NORPAC’s 140 grower-owners.
The unsecured creditors allege that NORPAC growers were paid cash for crops in 2018 and 2019 even though the cooperative was insolvent and had sustained a net economic loss from processing and selling those vegetables.
NORPAC’s bylaws required the cooperative to reduce cash payments to farmers during money-losing years and instead compensate them more with patronage retains, or ownership in the cooperative, according to a court document filed by unsecured creditors.
Despite sustaining heavy losses in 2018 and 2019, NORPAC made cash payments to the defendant growers that exceeded what they were owed under the cooperative’s bylaws by $2.8 million, the unsecured creditors claim.
NORPAC also should not have paid out more than $1.8 million harvest advances to growers in 2019 and failed to recoup more than $600,000 they owed for seed, according to the unsecured creditors.
The farmer-members “facilitated the fraudulent transfers with the actual intent to hinder, delay, and defraud” NORPAC’s creditors by “exercising control over the board,” the court document said.
At this point, the unsecured creditors have asked a bankruptcy judge for permission to intervene and file their complaint in the existing litigation between NORPAC and the growers.
Unsecured creditors have demanded that NORPAC try clawing back the $5.3 million itself, but the cooperative has refused, which is “not surprising” since the farmers have been on its board of directors, the committee said.
The committee is represented by packaging, seed, paper and pension companies, as well as George Smith, NORPAC’s former president, who has a $5.9 million claim related to his life insurance and pension benefits.
Rebecca Russell, attorney for some of the defendant farmers, said the claims are unfounded because NORPAC followed the correct procedures in setting crop prices.
The theory that growers shouldn’t even have been paid harvest and hauling advances doesn’t make sense, as those crop deliveries sustained NORPAC and provided creditors with assets — otherwise they’d have received nothing, she said.
“NORPAC would have collapse completely had they not paid the harvest advances,” Russell said.
It’s likely that unsecured creditors are seeking to claw back the money as a tactic to extract concessions from farmers and convince them to accept less money for 2019 crops in settlement negotiations, she said.
“I think they’re trying to get members to accept less than they should be getting,” Russell said. “I don’t think it’s right that they’re asking for it, because it’s so unfair.”
During a June 4 hearing, Albert Kennedy, an attorney for the cooperative, said his client was open to having the unsecured creditors intervene in the case.
However, U.S. Bankruptcy Judge Peter McKittrick said he’d revisit the issue in mid-July, after the parties had conducted settlement discussions.
McKittrick said he intended no disrespect, since it was probably “unavoidable,” but the NORPAC bankruptcy was turning into a “big pile of litigation” with “too many cooks in the kitchen.”
“Things are getting way too expensive,” he said. “We’re going to be fighting over an administratively insolvent estate if we’re not careful.”