The Express Grain Terminals, LLC (“Express Grain”) bankruptcy is a case study for grain farmers and their crop production lenders. Near the end of corn harvest and during the peak of soybean harvest, many grain farmers in the Mississippi Delta discovered that they faced potential financial ruin as a result of the bankruptcy filing by Express Grain1 on September 29, 2021 (the “Petition Date”). The dismal datapoints for farmers to consider included the following:
- as of the Petition Date, Express Grain estimated that it had outstanding “grain payables” owing to over 200 farmers (the “Farmers”) in excess of $40 million;
- while grain farmers had delivered millions of bushels of corn and soybeans to Express Grain for either sale or storage, as of the Petition Date, Express Grain only possessed approximately 1.5 million bushels of corn and 3.2 million bushels of soybeans;
- as will be discussed in more detail, certain financial institutions were the holders of negotiable warehouse receipts and alleged an ownership interest in over 4.7 million bushels of soybeans; and
- in the immediate runup to filing for bankruptcy, including on the day before the Petition Date, Express Grain issued numerous checks to certain Farmers and the cumulative amount of the checks that bounced was in the millions of dollars.
Clearly, as the one year anniversary of the bankruptcy filing approaches, the Express Grain Terminal bankruptcy case is a reminder to farmers and their crop production lenders to monitor prior to harvest the financial condition of the grain elevator that purchases the farmers’ grain.
But as noted above, the Farmers were not the only parties facing the risk of significant losses as a result of the Express Grain bankruptcy case. Others with financial risk included:
- the community banks and ag lenders (the “Production Lenders”) that provided financing to the Farmers for the production of the grain that was in the possession of Express Grain. In most, if not all, situations, the Farmer borrower provided the Production Lender with a security interest in the grain produced by the Farmer borrower during the 2021 crop year and the Production Lender perfected the security interest under both state law by filing a financing statement compliant with Article 9 of the Mississippi Uniform Commercial Code2 (the “Mississippi UCC”) and federal law by filing a financing statement compliant with the Food Security Act of 19853 (the “FSA”);
- a commercial bank (the “Secured Lender”), which provided over $70 million in revolving and term loans to Express Grain secured by all or substantially all of the assets of Express Grain and its affiliates, including corn, soybeans and other grain. As it related to the grain, the Secured Lender perfected its security interest pursuant to Article 9 of the Mississippi UCC. Further, the Secured Lender asserted that it was the holder of negotiable warehouse receipts reflecting its ownership of 1,285,000 bushels of soybeans stored with Express Grain and issued pursuant to Article 7 of the Mississippi UCC;4 and
- financial institutions (the “Repo Lenders”) that provided funding to Express Grain in the form of repurchase financing. The Repo Lenders asserted that they were the holders of negotiable warehouse receipts reflecting their ownership of over 3.5 million bushels of soybeans stored with Express Grain and issued pursuant to Article 7 of the Mississippi UCC.
Due to Express Grain having insufficient funds to repay the obligations it owed to the Farmers (and their Production Lenders), the Secured Lender and the Repo Lenders, the Express Grain bankruptcy set up a sadly notable dispute about the various parties’ rights to the grain and the proceeds from the sale of the grain. Indeed, due to conflicting rights granted under the various statutes, each of the parties asserted that they held an interest in the grain senior to everyone else. Because of the cost and risk associated with litigating their respective rights in the proceeds from the sale of the grain, the parties negotiated a settlement that resulted in the sharing of the losses. As it relates to the Farmers, they received only $9.25 million of the $40+ million owed to them. Clearly a significant loss felt by many farm families.
The first point of this note is a warning to farmers and their crop production lenders to be prudent prior to and during harvest season and not suffer the kinds of losses endured by the parties in interest to Express Grain. The Express Grain bankruptcy case highlights a situation in which the interests of the Farmers and their Production Lenders were aligned against the grain elevator, its Secured Lender and its Repo Lenders. As such, prior to delivering grain to an elevator, farmers and their crop production lenders should conduct due diligence about the financial wherewithal of the grain elevator such as conducting public record searches to determine if any liens on grain have been granted by the grain elevator to any lender; and if necessary, conduct further investigation about the financial condition of the elevator. If an elevator appears to be in financial distress, farmers and their crop production lenders may benefit from finding alternative buyers for the farmers’ grain.
A second point of this note is that the uncertainty surrounding the priority of rights asserted by the various parties provides an opportunity for Congress and state legislators to consider the proper allocation of risk of loss in the event of a bankruptcy of a grain elevator. The policy question is whether the risk of loss should be borne by the farmers (and by extension, their crop production lenders), secured creditors with lines perfected under Article 9 of the applicable Uniform Commercial Code, or the third party purchasers of the grain, including those storing the grain at the elevator and holding negotiable warehouse receipts. If nothing else, the Express Grain bankruptcy case made clear that the questions of which group bears the risk of loss remains open and should be reconsidered.