Dean Foods seeks to get back money paid to dairy farmers before bankruptcy

Hundreds of dairy farmers nationwide fear they could owe substantial sums to the bankrupt dairy processor Dean Foods after the company sent out letters attempting to claw back payments made to farmers in the months preceding the company’s Chapter 11 filing last year. Dean’s actions have been harshly criticized by farm groups and, for some, underscore the dangers of a heavily consolidated dairy industry that leaves farmers with few processing options.

Dean, once the largest milk processor in the country, filed for bankruptcy last November. Farmers began receiving letters from Dean representatives in late November of this year demanding that they return money that had been paid to them by Dean in the three months preceding the company’s bankruptcy filing. Some farmers were ordered to pay as much as $50,000 by mid-December or face litigation.

Under bankruptcy law, a company may seek to recover payments made to its creditors within 90 days of its Chapter 11 filing. Dean’s actions are a legal application of the bankruptcy code, and not an uncommon way for bankrupt firms to attempt to service their debts, says Roger McEowen, a professor of agricultural law and taxation at Washburn University. But in this case, “it’s safe to say that Dean Foods and/or the bankruptcy trustee didn’t do their background research.”

That’s because, according to McEowen, “the vast majority” of farmers will be able to argue that they were paid for their milk in the normal course of doing business with Dean, which would exempt them from having to pay back the large sums. “If they did their research, I’m not sure how many letters would go out, but it would be vastly fewer,” McEowen says. Reports have estimated that 500 farmers received the claim letters from Dean.

But even with a ready defense, farmers will likely still need to fight the claims by retaining legal counsel and pulling together any relevant records in just a few weeks. This burden could further strain farmers who, in the midst of the pandemic, may already be struggling financially and emotionally, says Darin Von Ruden, president of the Wisconsin Farmers Union.

“The mismanagement of Dean Foods has nothing to do with the farmers, and yet we’re being put through the ringer for no reason,” he says. Now farmers could face an “extra mental health issue” when confronting Dean’s demand to “pay back tens of thousands of dollars when you simply don’t have that money.”

Dean did not respond to a request for comment.

This bankruptcy scenario has happened before in the farm sector. In 2010, the ethanol producer VeraSun, which had gone bankrupt two years before, brought similar claims against hundreds of corn farmers across the Midwest. After the National Corn Growers Association and other trade groups got involved, the company dropped its claims against the farmers.

This month, farm groups have quickly stepped in to advise their members on how to address Dean’s letters and to attempt to stop the company from taking further legal action. In a letter sent to Dean’s legal counsel on Dec. 4, the American Farm Bureau Federation called the company’s actions “reprehensible” and demanded that Dean retract the letters sent to farmers within 10 business days.

“Put plainly, your letters are a predatory shakedown, written in legalese,” the AFBF said.

State groups are also working on the issue. The Pennsylvania Milk Marketing Board worked with the state’s attorney general and the law firm representing Dean to draft a form letter that farmers in the state can send back to the company arguing why they shouldn’t pay the claims. The Ohio Farm Bureau is seeking legal counsel to aid its members in addressing the letters they’ve received.

A significant portion of Dean’s assets were purchased this year by Dairy Farmers of America (DFA), the nation’s largest dairy cooperative and a longtime Dean business partner. The two entities have been sued in the past for allegedly violating antitrust laws by forming exclusive supply agreements.

DFA said in a statement that it finds Dean’s claims “frivolous,” but noted that the cooperative “has no connection to the Dean Foods Estate.”

“We find it extremely disappointing that hardworking dairy farm families are now put in the position of having to incur costs, either in paying the amounts demanded or obtaining legal counsel to defend themselves against these far-fetched claims,” the company said.

Von Ruden draws a link between Dean’s letters to farmers and ongoing consolidation in the dairy sector, including DFA’s recent acquisition of Dean’s assets. He says that the high level of concentration in the dairy market gives farmers few options for selling their milk, leaving them vulnerable to big players.

“When you look at the monopolization that’s happening, farmers have less and less of a voice every day,” he says.

When Dean filed for Chapter 11 bankruptcy last year, it cited the declining consumption of fluid milk and the rise of non-dairy milk alternatives, like almond and oat milk, as the reason for its decline. DFA’s acquisition of the majority of Dean’s assets was criticized by farmers and antitrust experts concerned about the cooperative’s growing power over the dairy market. The deal was reviewed by the Department of Justice, which approved the merger in May on the condition that DFA sell three of Dean’s processing facilities.