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Beware the claw backs: Express Grain threatens to sue its own creditors and other companies that did business with it

Monday, August 22, 2022, 3:55 pm News Flash Archive

In court filings last week, bankrupt Express Grain put hundreds of individuals and businesses, including farmers owed money for their grain, on notice that it will be suing some of them to claw back money that EG paid them prior to filing bankruptcy for services and products sold to EG.

And the first victim of this claw back scheme has already fallen, a cautionary tale of the danger to innocent bystanders who were caught up in the collapse of a business like Express Grain.

Borton LC is a nation-wide heavy construction company that builds concrete structures, silos, and tanks, among other things. In mid-2020, Borton contracted with Express Grain to build structures at the Greenwood oil mill.

When EG filed for bankruptcy on September 29, 2021, it owed Borton $141,904.22. But nobody told Borton about the bankruptcy, so it continued to fulfil its construction contract. Borton claims that CR3 instructed it to carry on, assuring it would be paid.

But in November 2021, Borton canceled the contract when it discovered that it would not be paid.

Borton filed a claim against EG for the $141,904.22 that was owed before bankruptcy, and filed an "administrative expense" claim for the $246,418.91 that it was owed for work done after September 29.

To read our previous reporting on this matter, see here: Express Grain bankruptcy creditors scramble desperately to be paid, but to no avail

In all, Borton claims that Express Grain owes it $388,323.13.

But Borton has thrown in the towel, and agreed to pay $75,000 to Express Grain to make the whole nightmare go away. That means that Borton will suffer a total loss of $463,323.13.

That's because EG threatened to "claw back" part of the money that had already been paid to Borton prior to the EG bankruptcy filing.

Under the bankruptcy code's Chapter 5 "claw back" provisions, bankrupt debtors like EG are allowed, in certain cases, to force businesses that were paid during the 90 days prior to filing bankruptcy to return part or all of the money they received.

In Borton's case, it was paid $462,836.02 on August 16, 2021 by EG for work already done on the construction project. That money falls within the 90 day window in which claw backs can be taken by EG.

To read the sordid details of this settlement that Borton has reached with EG, see here: Motion to Settle Disputed Claims with Borton LC and Exhibits to Motion to Settle

EG owes around $218 million to farmers, banks, finance companies, and vendors, but it liquidated for somewhere around $85 million. Farmers are owed $48 million for grain they delivered to EG but were never paid for. Most of the farmers and other unsecured creditors will never see a penny of what they are owed.

But EG promises that this claw back from Borton is just the beginning of what it plans to do to other businesses and farmers that did business with EG. In its financial disclosure and liquidation plan filed last week, EG provides a long list of other potential targets of this claw back scenario. To see EG's filings in this regard, view here:

Express Grain Disclosure Statement

Express Grain Plan of Liquidation

According to the plan of liquidation, all of EG's remaining assets, which mostly consist of cash being held in escrow for the payment of claims, will be handed over to a new entity called "Express Grain Liquidating Trust." EG has asked the court to appoint a CR3 employee, Heather Williams, to head up the liquidating trust.

The liquidation activities will chiefly consist of suing people that EG had paid for legitimate services and products to "claw back" some of that money. That money will then be used to pay legal costs, attorney fees, CR3, and others, and if there is any money left over, creditors. Or, as EG puts it:

The concept of the Plan is simple: the Debtor will go about the business of litigating and collecting all of the claims and causes of action that are owed to it, pursuant to the appointment of a liquidating trustee, which the Debtor suggests should be Heather Williams, a duly-qualified and experienced employee of CR3. Ms. Williams is already familiar with the Debtor's business, its operations during the latter phase of active manufacturing operations, the 557 procedures, the 9019 motion and the Settlement Order. Ms. Williams will actually be the plaintiff and "holder" of title to assets of the Debtor once she is appointed, assuming the Court sees fit to do so.

In addition, EG will be suing some farmers who did not fulfill their contracts to deliver grain to EG after it filed for bankruptcy. Some of those contracts were settled through the 557 Grain Settlement Agreement for the Settling farmers and the Disclaiming farmers, but as to any remaining grain contracts that EG assumed:

As to farmers not responding to the motions to assume executory contracts, the Debtor will pursue those, post-confirmation.

EG is also considering suing Dr. Michael Coleman:

The Debtor may have a directors and officers violation of fiduciary and related duty claim against its majority shareholder and officer, Dr. Michael Coleman. The Debtor continues to evaluate that claim and reserves the right to pursue it for the benefit of unsecured creditors, post-confirmation.

Curiously, EG didn't bother to sue its president, John Coleman, or file any claims against him in his own personal bankruptcy, even though it was determined by the Mississippi Department of Agriculture and Commerce that he submitted forged audit reports to MDAC to renew EG's grain licenses, and even though he put around $180,000 of personal charges on EG's company credit card.

As for the claw backs, EG uses strong language in its disclosure and plan to warn potential victims:

As to creditors named in Exhibit "B": you are put on notice that the Debtor specifically names you as a potential target defendant and the recipient of an avoidable transfer. These claims will be evaluated during the Disclosure Statement/Plan process, some claims may be prosecuted during that process and some claims may be prosecuted thereafter. If you desire to express any defense you believe you may have to those claims that are listed in Exhibit "B" you are free to do so (but not required) in the interim Disclosure Statement/Plan process.

Under Chapter 5 provisions, an "avoidable transfer" is a payment made during the 90 day period prior to the bankruptcy filing that may have been a "preferential payment" of certain creditors over other creditors.

The list of such potential preferential payments, which includes hundreds of farmers and businesses, was filed with the court, and may be seen here, starting at page 3: Exhibit B - list of claw back prospects

To be sure, the farmers who either settled or disclaimed their interest in the grain held by EG have all been promised immunity from such claw backs, but that leaves unprotected farmers who had already been paid or did not participate in the 557 Grain Settlement.

The list includes all the other businesses and individuals that were paid for their products and services during the 90 day period, excluding EG employees.

As can be seen, some of the payments were quite large:

   $175,192.77 - Bunge
$1,179,590.12 - Cargill
   $128,894.50 - Compuweigh
     $47,354.33 - Delta Farm Auto
   $277,412.50 - Essmueller Company
   $174,594.02 - Greenville Metal Works
   $292,411.64 - Greenwood Utilities
   $333,243.26 - Gresham McPherson Oil
$1,073,927.01 - Maples Gas Company
   $352,665.41 - Mid-Delta Equipment
   $108,000.00 - Pathway Insurance
   $149,069.88 - Phillips 66
   $269,753.90 - Schneider Industries
   $109,781.07 - Scott Petroleum
     $78,069.97 - Southern Industrial Supply
   $491,018.64 - Turner Industries
$3,496,715.10 - UMB Bank
   $105,371.76 - United Rentals
   $171,688.70 - USI Insurance Services
   $109,781.20 - Warrior

There is no suggestion that any of these companies did anything wrong at all, as wrongdoing is not required for claw backs to be forced upon them.

Inclusion on the list filed by EG also does not guarantee that all the businesses and farmers will be sued for claw backs. The farmers who participated in the 557 Grain Settlement either as "settlers" or "disclaimers" are supposed to be released from all Chapter 5 claw backs, and unfulfilled executory contracts as well.

Additionally, the smaller claims may not be pursued, since the legal costs associated with filing suit, etc., may outweigh the benefit to be gained by EG.

Finally, Chapter 5 provides several defenses that claw back victims can raise to defeat EG's claims, if they are ever filed. For example, payments made "in the ordinary course of business" are supposed to be exempt from claw backs.

The liquidation plan, if and when it is executed, will result in the dissolution of Express Grain as a corporate entity, and all ownership and equity interests by the members, including John Coleman and Michael Coleman, will be extinguished.

The plan must be approved by the creditors, and by the bankruptcy court. But meanwhile, the filing of claw back lawsuits by EG can begin immediately.

The liquidating trustee will pay off the creditors' claims to the extent there is cash available, of which there is very little.

In fact, the highest priority claims, which are paid first, are "Administrative Claims," which include the attorney fees owed to the bankruptcy attorney Craig Geno, along with professional service fees owed to CR3 and other accountants and professionals, and large ongoing payments due to the United States Bankruptcy Trustee. But sadly, according to EG's filings:

Currently, there is not enough cash to pay for the administrative expense claims in full. Payment in full of those claims, especially when considering that substantial cash held by counsel for the Debtor has been carved out and earmarked only for payment of certain claims, and that there are likely a number of administrative expense claims which have not yet been filed and which are not yet known, is not yet firm or a sure thing. Accordingly, the Debtor must provide that allowed administrative expense claims will not necessarily be paid in full, in cash, at confirmation, but will be paid as and when cash is available to pay them.

It all goes downhill from there. UMB Bank is still owed an undisclosed amount of money for its secured claims, and then comes the "Unsecured Convenience Creditors," who are owed less than $2,500 each:

Unsecured claims totaling less than $2,500 will be paid in full, in cash, upon the Effective Date at the rate of 15% of the allowed amount of those claims. The 15% payment will be in full satisfaction of those claims.

These small creditors will receive 15 cents on the dollar for their claims.

Only after all these creditor classes have been paid, will any money go to general unsecured creditors. They are owed somewhere around $55 million in total.


To read all our coverage of the Express Grain bankruptcy case, see here: Index of Express Grain articles

 

John Pittman Hey
The Taxpayers Channel

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