Protecting Your Harvest: Mitigating Risks in Buyer Bankruptcies
Have you heard this one before? The farmer delivers product to a buyer and expects payment 30 days later. A check arrives in the mail a month later; the farmer cashes it. And then….bankruptcy. The next thing our farmer pulls out of the mailbox is a clawback letter, demanding that she give the money back!
Can this outrageous scenario possibly be legal? It’s as alarming as it is legal. But, farmers don’t have to be the victims. There are proactive steps a farmer can take to mitigate the impact a buyer bankruptcy might have on their operation. Let’s explore the legal details through a different story.
Let’s say Jill owns a specialty butcher shop where she retails fresh cuts and sausage products to high-end restaurants. Business has been rough. Jill considers her debt for processing equipment, low profitability, and a declining customer base and realizes bankruptcy is her best option. Her neighbor Bob dropped off $4,000 worth of meat about a month ago as did another farmer, Sue. Their invoices need to be paid. But Butcher Jill only has enough money to pay one vendor. She writes a check to Bob, he’s her neighbor, after all. A few days later, Jill files for bankruptcy. After the bankruptcy court looks at her case, the trustee issues a “clawback letter” to Bob telling him to return the payment for the meat.
When Bob reads the letter, he sees red. From his perspective, the court is either stealing his product or asking him to donate it to Butcher Jill! Sue is angry, too. Why does Bob get 100% payment of his invoice while she gets nothing? She thinks Jill shouldn’t be allowed to favor her neighbor in matters as serious as this.
As the saying goes, “a good compromise leaves everyone mad,” and it describes bankruptcy processes perfectly. The intention of the bankruptcy process is good: it’s designed to protect the public’s interest in an orderly and fair resolution when businesses can’t pay their bills. That means the court is especially sympathetic to people like Sue. The bankruptcy court wants to be sure that no creditors have received unfair “preferential treatment” in the 90 days leading up to the bankruptcy filing. Preferential treatment involves actions like making sure favorite vendors or people with influence get paid back the most. One of the first steps a bankruptcy process often takes is to demand a return of every payment made to creditors in the 90 days before the filing. The court starts by assuming all payments were preferential. After all, people like Jill know their business is struggling well before they file. The court’s goal is to take the clawed-back funds and split them evenly between Bob, Sue, and anyone else who extended credit to Jill in the 90 days before she filed.
If Bob were to take his clawback letter to an attorney, the first thing the attorney might do is explore an “ordinary course of business” defense. This defense allows Bob to say, “Hey, I was not being treated preferentially!” If Bob can show this, he may be able to keep his payment. One way Bob might win is by showing that the payment for his meat near to the time of bankruptcy was exactly as it was well before the bankruptcy was filed. Ideally, Bob would provide documentation showing that he was paid via the same method, form, and timing as he had been in every other instance. This gets harder if Bob only has a couple of transactions with Butcher Jill, perhaps because he’s a new vendor or because he only delivers his product once per year. In that case, Bob could try to show that his transaction was in perfect accordance with industry standards. But, this is an expensive proposition as Bob will need an expert witness who can testify as to how meat producers and butchers normally do things. Bob might burn more money getting the expert’s testimony prepared and admitted than his invoice with Jill is worth.
Bob’s attorney might also argue that Bob never extended credit to Butcher Jill. This is called a “contemporaneous exchange” defense. It allows Bob to say, “Wait a minute, I was never a creditor of Jill! You can only do a clawback from a creditor!” For Bob to prove this, he’d need to show that Jill paid him on delivery (or close to it). Bob might also need a signed sales contract showing Bob and Jill agreed that their sales were a contemporaneous exchange, along with a copy of the voided check that Jill sent and Bob cashed shortly after he left her shop. Some courts allow a small amount of time to pass between delivering the product and getting paid, while other courts insist the payment be made on delivery to make it a “contemporaneous exchange.” The contemporaneous exchange can be challenging as many large-scale commodity buyers simply won’t negotiate on their terms. They buy on credit and that’s it.
Time and again over our history, many small farmers have rallied to confront buyer business practices that aren’t working for them, and today’s bankruptcies are no different. State governments have responded to farmers’ vulnerability by creating things like bond programs and indemnity funds. Thirty states have a program like this. Many require that farmers submit a claim to the fund or program within a certain timeframe. Some programs may also limit the total amount they’ll give the farmer. Farmers who know the details of their state’s programs can protect themselves. They can make sure that they file on time, and they can limit total sales to any single buyer to the total amount the state will provide in compensation, should that buyer go bankrupt. Farmers may also consider filing a lien. Filing a lien has the effect of making the farmer a secured creditor: secured creditors get made whole first and they aren’t subject to clawback in bankruptcy. The process is usually simple, but states with bond and indemnity programs that cover grain farmers don’t also allow a lien. The law usually provides one or the other but not both.
Playing the long game, farmers can and should continue to work with each other to discover what isn’t working and advocate for what will work. Uniting with advocates and allies, farmers can continue to push for change that protects them. After all, bankruptcy and government programs resulted from democratic decision-making, and farmers can be full participants in that process.
Some Helpful Tips
In the event of a bankruptcy clawback letter:
| Defense | What it Means | What to Do | |
| Clawback Letter | Ordinary course of business | I was not given preferential treatment! This was a normal transaction. | 1. Show that you were paid the same way you were previously (method, form, timing)
2. Show payment is in accordance with industry standards |
| Clawback Letter | Contemporaneous exchange | I was never a creditor of this business. You can only trigger a clawback from a creditor. | 1. Show that you were paid on delivery (or close to it in some states)
2. A signed sales contract showing buyer and seller agreed that their sales were a contemporaneous exchange, along with proof that the money was received shortly after delivery |
What farmers can do about it:
- Find out if your state has an indemnity or bond program. (30 states do!)
- Only sell up to the amount an indemnity or bond program will cover in each instance.
- Know the rules of the indemnity or bond fund (filing timing, amounts, etc.) to protect yourself.
- Find out what the period is to file a claim. Some states have a limited window when you can file a claim. Minnesota passed new legislation in 2023 with a long indemnity claim period of 36 months to file a claim. Ask your state legislators to match Minnesota’s indemnity claim period to cover clawbacks that could be issued up to two years after a filed bankruptcy.
- Join an OFA Working Group on Fair Contracts, where we can find solutions to these sorts of challenges and more. Email julia@organicfarmersassociation.org to get connected.
- If you don’t have an indemnity fund and you want to start one, please contact us!
- Read more about the aftermath of a recent clawback bankruptcy case in OFA's Organic Voice magazine (Pages 11 & 21).
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This article was written by Rachel Armstrong for OFA. 
As the founder and Executive Director of Farm Commons, Rachel Armstrong has led dozens of webinars and workshops for thousands of farmers nationwide and created the organization’s innovative approach to farm law risk reduction. Rachel believes that farmers have what they need to be expert legal risk managers and that the right tools can awaken that capacity. As a leading authority on direct-to-consumer farm law, Rachel has authored many publications on farm law matters for farmers, published academic and trade articles for attorneys, and teaches university classes in farm law. She is a graduate of the University of Denver Sturm College of Law and the University of Wisconsin Madison, she lives in Northern Minnesota (where she grew up) with her family. She is licensed to practice law in Wisconsin and Minnesota.
OFA Celebrates Finalization of OLPS
For years, Organic Farmers Association and others in the organic community have advocated for more clear and stringent standards for organic livestock and poultry production. Today, the new Organic Livestock and Poultry Standards (OLPS) Rule was filed in the Federal Register. OFA applauds the release of this long-awaited rule, which we have advocated for before Congress and the USDA for years.
OLPS clarifies the production standards of avian and mammalian livestock to support consistent enforcement across producers and re-establish a strong organic label that assures consumers that USDA-certified organic livestock products meet a robust and uniform standard valuing both environmental and animal welfare. The rule:
- Clarifies living conditions, healthcare, transportation, and slaughter practices to support animal welfare for mammalian livestock species.
- Establishes poultry indoor and outdoor space requirements and stocking density limits, and clarifies that enclosed porches are not considered outdoor spaces.
USDA organic standards have always required outdoor access for poultry and livestock as well as living conditions that allow animals to express their natural instincts and the majority of organic livestock farmers uphold these standards. However, these regulations have not been consistently enforced and some certifiers have allowed large poultry companies to use narrow, enclosed porches instead of true outdoor access. This inequitable enforcement and interpretation has created an unfair playing field for organic livestock farmers and has undermined consumers' confidence in the organic label.
“OFA celebrates the finalization of the OLPS rule," says Kate Mendenhall, Executive Director, Organic Farmers Association. “These new standards will close loopholes in poultry production, laying important steps towards a more level playing field for organic poultry producers and improving animal welfare. We encourage the USDA to keep working towards high organic integrity. This is a step in that direction and there’s more work to do.”
While celebrating this important step for animal welfare, OFA recognizes that some important details were not included in the final rule. Notably, the rule allows five years for both layer and broiler producers to comply with the new rule, rather than three years as OFA recommended. Additionally, the rule failed to provide clarity around animal welfare standards for organic swine production. OFA will conduct an in-depth analysis of the rule in the coming days.
Find the final rule on the federal register and an OLPS fact sheet on the rule from the USDA.
O DAIRY Act of 2023 Introduced
ORGANIC DAIRY GROUPS APPLAUD INTRODUCTION OF O DAIRY ACT
Organic dairy farmers around the nation are facing an economic crisis caused by weather-related disasters, market consolidation, and skyrocketing energy and feed costs brought on by unstable global markets and inflation. Today, Senator Peter Welch of Vermont introduced the Organic Dairy Assistance, Investment, and Reporting Yields Act (O DAIRY ACT) to provide long-needed support for organic dairy producers. The bill will provide improved data collection, support to help cover dramatically increased input costs, and key investments in infrastructure.
The O Dairy Act of 2023 would provide crucial support to the organic dairy industry in the United States. Specifically, the bill:
- Extends ELAP to organic dairy farmers facing losses due to factors like organic feed shortages and increased input costs that result in a net income decrease of more than 10% in a given year.
- Requires the USDA to streamline the payment process under this program.
- Mandates improved data collection for organic dairy, including cost-of-production data for organic milk, feedstuff prices, and other production-related costs.
- Establishes the "Organic All Milk Price Survey" to collect and report data about organic milk prices.
- Requires the USDA to publish periodic reports for organic milk, equivalent to data reported for conventionally produced milk.
- Directs the USDA to develop a proposal and submit a report to Congress with recommendations for implementing an organic dairy safety net program.
- Establishes programs and positions to boost infrastructure investments, research, and innovation within the organic dairy sector, including authorizing funding for on-farm processing infrastructure.
Endorsing organizations include:
Organic Farmers Association, Northeast Organic Farming Association of Vermont, Northeast Organic Dairy Producers Alliance, Northeast Organic Farming Association of New York, Maine Organic Farmers and Gardeners Association, Western Organic Dairy Producers Alliance, Straus Family Creamery, Center for Food Safety, and National Organic Coalition.
"Organic dairy farmers in Vermont and around the country are facing an ongoing economic crisis fueled by supply chain volatility, increased input costs, and pay prices below their cost of production," says Grace Oedel, Executive Director of the Northeast Organic Farming Association of Vermont. "These farms combat climate change, produce nourishing food, and keep our rural communities healthy. We're grateful for Senator Welch's leadership in bringing this bill forward to provide much needed support."
"Family run organic dairy farms provide healthy food and environmental stewardship to rural communities across the country. The O DAIRY Act can provide much needed investments to alleviate the economic crisis these farmers are facing, and provide valuable data collection to inform future support for the industry," says Kate Mendenhall, Executive Director of Organic Farmers Association. "We applaud Senator Welch for championing this important work."
“It is very encouraging to see the introduction of the O DAIRY Act. The organic dairy industry has faced several unique challenges over the last five years that have resulted in several farms across the country closing their doors. While acknowledging that there is still more work to be done, organic dairies like mine see this as a huge step towards providing stability to organic milk sheds across the country,” says Zach Cahill, Board President of Western Organic Dairy Producers Alliance. “The organic dairy community applauds the numerous folks who have stepped up to fight for the rural communities that this Act will help support.”
"This bill will provide for the collection of organic dairy production data—the same type of data that has long been compiled for conventional dairy”, says Kathie Arnold, a co-owner/operator of Twin Oaks Dairy LLC in Truxton, NY that has been producing organic milk for 25 years. “The data is as essential for organic dairy as it is for conventional in providing a basis for good decision-making and policy development.” Arnold also states that, “A lack of adequate processing facilities has caused a loss of markets for organic dairy farms in some regions of the country and this bill will provide support for additional processing capacity. Without sufficient processing plants, organic dairy farmers’ milk cannot reach the consumer.”
Download OFA's O DAIRY Act Fact Sheet
TAKE ACTION
Ask your legislators to support organic dairy farmers in the 2023 Farm Bill.
For more information contact Lily Hawkins - Organic Farmers Association, Policy Director
Make Change for Organic Farmers During Organic Harvest Month
For organic farmers, September may just feel like the month that comes after the dog-days of summer. With the little bit of relief the transition to a new season provides before looking toward winter, it’s easy to just keep moving and not acknowledge the successes and hard work that results in this month’s harvest. So, this September we’re going to celebrate organic farmers and the healthy organic food they grow and raise in honor of Organic Harvest Month.
Designated as Organic Harvest Month, September, when harvests are at their peak in many regions of the U.S., is a great time to support the farmers who steward clean air, soil, and water and make a positive impact on our planet for the next generation. To mark the occasion and continue our mission of providing a strong and unified national voice for organic farmers and supporting a farmer-led national organic farmer movement, OFA is launching the Make Change for Organic Farmers campaign. We’ll be sharing a few stories of organic farmers this month, but also launching a fundraising campaign to support our members and work.
Our goal is to raise $5,000 to continue our mission and work in strengthening organic farmer voices like yours in D.C. during the final few months of this Farm Bill year.
There’s a strong possibility the Farm Bill draft won’t be released in September and we’ll need to continue our intense advocacy in our key priority areas later into the year. As we work to have organic included in climate and USDA programs, and ensure organic integrity and keep organic fraud at bay, we’ll need to lean into our advocacy and policy work even harder in the upcoming months.
Make Change for Organic Farmers Campaign
This unique campaign uses “set and forget” automated monthly donations to make it even easier to support OFA’s mission. All you need to do to support OFA this month is donate your spare change from your everyday purchases by joining our Make Change for Organic Farmers campaign.
By helping OFA raise $5,000 this September in honor of Organic Harvest Month, you can ensure we can keep working to make organic farmers’ voices heard on our Farm Bill policy priorities.
OFA was created to build the collective power of organic farmers and make the issues organic farmers care about heard by changemakers. This September, with just your spare change, you can help us Make Change for Organic Farmers and make an impact this fall in D.C.
Stay tuned throughout the month for stories and campaign updates from the OFA team. And of course, take a moment to celebrate the hard work of organic farmers in your community and network.