Farmland Industries Creditors Paid in Full

On May 1, 2004, the Effective Date of Farmland's Plan, all of the remaining assets of the debtors, including $654 million in cash available for distribution, along with liabilities totaling over $1.7 billion were transferred to the FI Liquidating Trust. At that time it was estimated by the debtors that the maximum recovery for unsecured creditors would likely not exceed 85% of their allowed claims and that it would take JPMorgan approximately 5 years to liquidate the remaining assets transferred to the Trust to achieve that payout.

Farmland was a very large bankruptcy case. The former Fortune 500 Company was the largest farmer-owned agricultural cooperative in North America with 600,000 members, 14,000 employees and $11.8 billion in revenue in 2001. Two creditors' committees were formed and fully participated in the bankruptcy proceedings through confirmation, representing interests set forth in over 33,000 filed claims. Once it was clear that a full liquidation rather than a reorganization of the debtors' assets was going to be the outcome of this Chapter 11 case, the debtors and committees determined that a large, institutional trustee was warranted given the volume, high dollar values and diversity of assets that were going to be transferred by the estate as well as the number of claims that would still need to be analyzed, resolved and paid.

Shared Goal

Like many large corporate reorganizations, Farmland was a very contentious case. The two committees (bondholders/trade creditors) often advocated opposing positions on the myriad of issues presented to the Court. Consensus among the debtors and the committees often was difficult to achieve. However, with the appointment of JPMorgan as Trustee, that adversarial environment immediately changed. The governance of the FI Liquidating Trust was structured with each committee appointing only two representatives to the newly created Post-Confirmation Committee (PCC) that would oversee and authorize JPMorgan's actions as Liquidating Trustee. The Trust's structure further provided that the PCC and the Trustee, absent a conflict, would be represented by the same counsel and other professionals. Given this structure, on the Effective Date, all previous adversarial or competing viewpoints and agendas disappeared, replaced by the common goal to maximize value for the beneficiaries of the Trust. The representation of the two creditor groups on the PCC being equal but small in number also allowed for the PCC to operate, deliberate and make decisions in an efficient but balanced manner. JPMorgan's administrative efforts in obtaining the necessary approvals from the PCC was never hampered or delayed by the logistics of obtaining the consensus of a large number of people. Monthly in-person meetings among the PCC, JPMorgan and counsel were also instrumental in keeping all of the parties well informed and on task so that decisions could be made promptly when appropriate.

Human Resources

Another essential component to JPMorgan's success in preserving the Trust's assets and maximizing their value was the Trustee's retention and management of key Farmland employees. In consultation with the PCC, JPMorgan retained approximately 25 Farmland employees through 2004. Specific functions necessary for the effective administration of the Trust's assets were identified and former employees with extensive historical knowledge and appropriate skills were matched to those functions. In addition to the KERP approved prior to confirmation, some of the employees also were provided with performance incentives tied to the recoveries of the Trust's beneficiaries. At the time of the sixth distribution, only one former Farmland employee remains while a handful of others continue to provide services under consultant or subject matter expert agreements. Their assisting JPMorgan in resolving $120 million in disputed claims, preserving and managing volumes of material documents and records material to pending litigation, and otherwise winding down the business of the debtors benefited the Trust's beneficiaries and more than offset the cost and expense of their continued temporary employment.

Professional Resources

From its initial interview with the committees and debtors, JPMorgan made it clear that its overall strategy to maximize the recovery for beneficiaries in an efficient and cost-effective manner was predicated on its ability to retain the professionals already involved in the Farmland bankruptcy proceedings. Counsel for the debtors (Bryan Cave) and the bondholders committee (Foley & Lardner), were retained as counsel for the Liquidating Trustee. Dozens of other law firms handling specific litigation in multiple jurisdictions were also retained by the Trustee, including those professionals overseeing the separate liquidation/wind down proceedings of the debtors' foreign subsidiaries in Europe, Africa, South America, and Mexico. Two local firms that had previously represented creditors in the bankruptcy proceedings were hired by the Trustee to litigate approximately 1600 preference avoidance actions that had to be filed within the first 30 days after the Effective Date to avoid the statutory bar. Where conflicts existed or where professionals simply declined to continue their involvement in the matter, as predicted by the Court, JPMorgan was able to draw from its global contacts and retain the necessary professionals and experts. Nevertheless, its core strategy of first retaining the professionals already involved in the bankruptcy proceedings allowed JPMorgan to not only 'hit the ground running' but to maintain that momentum in achieving the unanticipated recoveries 3 years in advance of expectations.

Sufficient Reserves

Given the magnitude of the FI Liquidating Trust, JPMorgan and the PCC ensured at the Effective Date that sufficient funds were reserved to properly administer the Trust. Although this segregated a significant amount from the funds transferred from the estate to the Trust that otherwise might have been available for the initial distribution to beneficiaries, the long-term administrative requirements and goals of the Trust required that the Trust be fully funded at the outset. The establishment of adequate reserves allowed the Trustee, PCC and its professionals to avoid having their thoughtful strategies limited or their reasoned decision-making unduly influenced by the need for immediate operating liquidity.

Utilizing ' 363

Although the governing trust agreement empowers the Trustee to liquidate assets through private sales, JPMorgan has purposefully utilized ' 363 of the Bankruptcy Code to liquidate the vast majority of assets that have contributed to the distributions to date. By selecting a 'stalking horse' for most assets, noticing the asset for sale by auction to qualified bidders pursuant to ' 363, and obtaining court approval for the sale with clear title, JPMorgan has been able to expand what was previously perceived as potentially limited markets for certain assets and thereby materially increase the anticipated liquidation value for most assets. Admittedly this strategy has not resulted in a 'homerun' sale price; however, it has resulted in a consistent series of 'doubles' that have added up over the last 2 years to the remarkable recoveries for beneficiaries.

Jeffrey Ayres is an attorney with extensive experience in managing the administration of bankruptcy claims and liquidation trustee appointments. Ayres is currently fulfilling and personally managing the role of liquidation trustee on behalf of JPMorgan for Farmland Industries, Inc. (28,000 claimants and over $1.1 billion in assets) as well as the foreign subsidiaries of Kaiser Aluminum Corporation ($686 million in assets). For more information please visit www.jpmorgan.com/info/bssmedia.

Maximizing the recovery for unsecured creditors is the primary goal of every liquidating trustee. In proposing the Farmland Industries liquidating plan, the debtor estimated that the maximum recovery for unsecured creditors would not exceed 85% of their allowed claims and that it would take the liquidating trustee approximately 5 years to reach that payout. Instead, JPMorgan, the appointed liquidating trustee, paid unsecured creditors more than 100% of their allowed claims 3 years earlier than anticipated. Several factors played a crucial role in maximizing the payout for Farmland Industries' unsecured creditors; these are explained in this article.

Some History

JPMorgan was appointed as the Liquidating Trustee for Farmland Industries, Inc. and distributed full payment totaling $891 million to unsecured creditors. With these funds, unsecured creditors received 104.6% of their claims (100% of principal ' the maximum amount of interest allowed under the terms of the Plan). This payment was the sixth distribution of funds, the last of which was sent in June of this year. This result far exceeded the expectations of the creditors and professionals that were involved in the Farmland bankruptcy case when JPMorgan began its administration of the FI Liquidating Trust on May 1, 2004. It is also a rare achievement in any Chapter 11 case, let alone for a fully liquidating corporate debtor.

On May 1, 2004, the Effective Date of Farmland's Plan, all of the remaining assets of the debtors, including $654 million in cash available for distribution, along with liabilities totaling over $1.7 billion were transferred to the FI Liquidating Trust. At that time it was estimated by the debtors that the maximum recovery for unsecured creditors would likely not exceed 85% of their allowed claims and that it would take JPMorgan approximately 5 years to liquidate the remaining assets transferred to the Trust to achieve that payout.

Farmland was a very large bankruptcy case. The former Fortune 500 Company was the largest farmer-owned agricultural cooperative in North America with 600,000 members, 14,000 employees and $11.8 billion in revenue in 2001. Two creditors' committees were formed and fully participated in the bankruptcy proceedings through confirmation, representing interests set forth in over 33,000 filed claims. Once it was clear that a full liquidation rather than a reorganization of the debtors' assets was going to be the outcome of this Chapter 11 case, the debtors and committees determined that a large, institutional trustee was warranted given the volume, high dollar values and diversity of assets that were going to be transferred by the estate as well as the number of claims that would still need to be analyzed, resolved and paid.

Shared Goal

Like many large corporate reorganizations, Farmland was a very contentious case. The two committees (bondholders/trade creditors) often advocated opposing positions on the myriad of issues presented to the Court. Consensus among the debtors and the committees often was difficult to achieve. However, with the appointment of JPMorgan as Trustee, that adversarial environment immediately changed. The governance of the FI Liquidating Trust was structured with each committee appointing only two representatives to the newly created Post-Confirmation Committee (PCC) that would oversee and authorize JPMorgan's actions as Liquidating Trustee. The Trust's structure further provided that the PCC and the Trustee, absent a conflict, would be represented by the same counsel and other professionals. Given this structure, on the Effective Date, all previous adversarial or competing viewpoints and agendas disappeared, replaced by the common goal to maximize value for the beneficiaries of the Trust. The representation of the two creditor groups on the PCC being equal but small in number also allowed for the PCC to operate, deliberate and make decisions in an efficient but balanced manner. JPMorgan's administrative efforts in obtaining the necessary approvals from the PCC was never hampered or delayed by the logistics of obtaining the consensus of a large number of people. Monthly in-person meetings among the PCC, JPMorgan and counsel were also instrumental in keeping all of the parties well informed and on task so that decisions could be made promptly when appropriate.

Human Resources

Another essential component to JPMorgan's success in preserving the Trust's assets and maximizing their value was the Trustee's retention and management of key Farmland employees. In consultation with the PCC, JPMorgan retained approximately 25 Farmland employees through 2004. Specific functions necessary for the effective administration of the Trust's assets were identified and former employees with extensive historical knowledge and appropriate skills were matched to those functions. In addition to the KERP approved prior to confirmation, some of the employees also were provided with performance incentives tied to the recoveries of the Trust's beneficiaries. At the time of the sixth distribution, only one former Farmland employee remains while a handful of others continue to provide services under consultant or subject matter expert agreements. Their assisting JPMorgan in resolving $120 million in disputed claims, preserving and managing volumes of material documents and records material to pending litigation, and otherwise winding down the business of the debtors benefited the Trust's beneficiaries and more than offset the cost and expense of their continued temporary employment.

Professional Resources

From its initial interview with the committees and debtors, JPMorgan made it clear that its overall strategy to maximize the recovery for beneficiaries in an efficient and cost-effective manner was predicated on its ability to retain the professionals already involved in the Farmland bankruptcy proceedings. Counsel for the debtors (Bryan Cave) and the bondholders committee (Foley & Lardner), were retained as counsel for the Liquidating Trustee. Dozens of other law firms handling specific litigation in multiple jurisdictions were also retained by the Trustee, including those professionals overseeing the separate liquidation/wind down proceedings of the debtors' foreign subsidiaries in Europe, Africa, South America, and Mexico. Two local firms that had previously represented creditors in the bankruptcy proceedings were hired by the Trustee to litigate approximately 1600 preference avoidance actions that had to be filed within the first 30 days after the Effective Date to avoid the statutory bar. Where conflicts existed or where professionals simply declined to continue their involvement in the matter, as predicted by the Court, JPMorgan was able to draw from its global contacts and retain the necessary professionals and experts. Nevertheless, its core strategy of first retaining the professionals already involved in the bankruptcy proceedings allowed JPMorgan to not only 'hit the ground running' but to maintain that momentum in achieving the unanticipated recoveries 3 years in advance of expectations.

Sufficient Reserves

Given the magnitude of the FI Liquidating Trust, JPMorgan and the PCC ensured at the Effective Date that sufficient funds were reserved to properly administer the Trust. Although this segregated a significant amount from the funds transferred from the estate to the Trust that otherwise might have been available for the initial distribution to beneficiaries, the long-term administrative requirements and goals of the Trust required that the Trust be fully funded at the outset. The establishment of adequate reserves allowed the Trustee, PCC and its professionals to avoid having their thoughtful strategies limited or their reasoned decision-making unduly influenced by the need for immediate operating liquidity.

Utilizing ' 363

Although the governing trust agreement empowers the Trustee to liquidate assets through private sales, JPMorgan has purposefully utilized ' 363 of the Bankruptcy Code to liquidate the vast majority of assets that have contributed to the distributions to date. By selecting a 'stalking horse' for most assets, noticing the asset for sale by auction to qualified bidders pursuant to ' 363, and obtaining court approval for the sale with clear title, JPMorgan has been able to expand what was previously perceived as potentially limited markets for certain assets and thereby materially increase the anticipated liquidation value for most assets. Admittedly this strategy has not resulted in a 'homerun' sale price; however, it has resulted in a consistent series of 'doubles' that have added up over the last 2 years to the remarkable recoveries for beneficiaries.

Jeffrey Ayres is an attorney with extensive experience in managing the administration of bankruptcy claims and liquidation trustee appointments. Ayres is currently fulfilling and personally managing the role of liquidation trustee on behalf of JPMorgan for Farmland Industries, Inc. (28,000 claimants and over $1.1 billion in assets) as well as the foreign subsidiaries of Kaiser Aluminum Corporation ($686 million in assets). For more information please visit www.jpmorgan.com/info/bssmedia.