Southern Foods Group, LLC d/b/a Dean Foods (“Dean Foods”) has filed for bankruptcy protection in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the “Bankruptcy Court”) seeking relief under chapter 11 of the United States Bankruptcy Code (“Chapter 11”). Chapter 11 is designed to allow debtors to reorganize their businesses either through internal restructuring or a sale of their assets with a goal of maximizing the return to their creditors. In their pleadings filed with the Bankruptcy Court, Dean Foods has already indicated that they are exploring a possible sale of their assets to Dairy Farmers of America. Dean Foods has also filed a motion seeking permission to pay certain of their creditors in the near term as “Critical Vendors” to facilitate their ongoing operations (Docket No. 28).
In the next few days members of the Tennessee Farm Bureau who are suppliers of Dean Foods will likely receive communications from Dean Foods regarding its bankruptcy case and their possible designation as Critical Vendors. In advance of their communications with Dean Foods, producers should consider the following points:
- Hiring an Attorney
- In the near term, producers will likely have many decisions to make with respect to their relationship with Dean Foods that will depend on their individual circumstances. Producers should strongly considerd consulting with a competent bankruptcy professional regarding their personal circumstances.
- Critical Vendor Status
- As mentioned above, Dean Foods has filed a motion seeking to pay certain of its creditors, including milk producers, as Critical Vendors as the outstanding amounts become due in the ordinary course of business. The motion indicates that Dean Food will be sending a letter with an individual offer to each of the creditors that it considers to be a Critical Vendor.
- In the letter Dean Foods may offer to pay a certain percentage of the money it owes the producer in exchange for the producer agreeing to (i) release its claim to any additional moneys owed and (ii) continue to supply Dean Foods during its bankruptcy case according to the creditor’s customary trade terms with Dean Foods.
- Producers should carefully read any communications received from Dean Foods and consider consulting with a competent bankruptcy attorney regarding their individual situations and the potential benefits or risks associated with being a Critical Vendor.
- Priority Claims
- Under section 503(b)(9) of the United States Bankruptcy Code, creditors who provided goods to a debtor in the twenty-day period prior to the debtor filing for bankruptcy are accorded special status as priority creditors. Generally, 503(b)9) claims must be paid in full as part of debtor’s plan or reorganization, though there is some risk that 503(b)(9) claims will go unpaid if a debtor is forced to liquidate.
- As part of its Critical Vendors motion, Dean Foods is also seeking permission to pay its 503(b)(9) claims in the ordinary course of business. The 503(b)(9) claims include approximately $90.4 million in claims owed to milk vendors, which Dean Foods is seeking to pay in the first thirty days of the case.
- Contracts with Dean Foods
- Under the Bankruptcy Code, a debtor’s bankruptcy filing does not relieve a creditor from its obligations to continue operating pursuant to its contract with the debtor. Additionally, the filing of a bankruptcy case results in the imposition of an automatic stay which prohibits creditors from taking any unilateral action against a debtor without first seeking relief from the stay from the bankruptcy court.
- Producers should carefully review their contracts with Dean Foods to understand their contractual obligations, rights, and remedies with respect to Dean Foods.