meet all claims in these cases. “You want to make sure that you are at the front of the line before the porridge runs out,” he says. “The way you can advance up that claim hierarchy, or ladder, and get paid before other folks, is by saying that you have a trust fund claim.” He likens the concept to the difference between your
neighbor owing you money and the same neighbor having your lawnmower in his garage. “Just because it’s in his garage doesn’t make it
his property,” Binford says. “That’s how trust fund claims work. They say this because the law says that the dollar bills in your bank account that you owe me are actually my property; those dollar bills belong to me. Therefore, I don’t have a claim, I have property rights, and if you get rid of my property — if you spend my dollar bills paying somebody else — then you’re in a lot of trouble. It would be just as if my neighbor sold my lawnmower; I can sue him and get damages for that act.” Sometimes the right to assert these claims is enu-
merated. PSA is an example. Another is Section 181 of the Texas Agricultural Code, which requires a milk processor to “hold in trust all payments received from the sale of milk for the benefi t of the dairy farmer from whom the milk was purchased until the dairy farmer has received full payment of the purchase price for the milk.” Says Binford, “The legislature of the state of Texas
has determined that it is very important that dairy producers get paid; otherwise, they are going to go out of business and we’re not going to have this important resource of milk.” He said he argued a case on behalf of a dairy produc-
ers’ cooperative that had delivered milk to a bankrupt ice cream factory; “The bank said, ‘We have a fi rst lien on all the ice cream factory’s assets. We fi led a U.C.C. (a claim under the Uniform Commercial Code, which governs commercial transactions). We’re bulletproof, so we get paid fi rst.’ We were able to come in and use this trust fund concept to get paid before the bank, which is as good as it gets in bankruptcy… getting paid fi rst means getting paid in full, while other people are going to be left with the scraps.”
Records and documentation are critical It is critical to have documentation of the transac-
tion. “One thing you will get into with these trust fund claims,” says Binford, “is that the party you’re making the claim against will say, ‘It’s all well and good that you have property rights on the dollar bills in my bank
78 The Cattleman January 2015
account, but all dollar bills look alike, and how am I supposed to tell which ones are yours and which ones are everybody else’s?’ That’s a concept called ‘tracing’ where you trace the funds through the bank, and this is very document intensive.”
paid in full, while other people are Getting paid fi rst means getting
going to be left with the scraps. It is to the benefi t of the claimant that the burden of
tracing is on the party that fi led for bankruptcy. If the debtor claims to be unable to identify the claimant’s funds, the claimant can simply respond, “’If you can’t trace my particular dollars, then I’m going to take all of it.’ That usually incentivizes the bankrupt party to get more serious about documentation,” says Binford. For trust fund type claims, it doesn’t matter under
which chapter of the U.S. Bankruptcy Code the debtor has fi led. Chapter 11, under which a business seeks protec-
tion from creditors while it restructures, is familiar to most people. Chapter 13 is geared for an individual. Chapter 7
moves an entity through liquidation. Chapter 12, which was codifi ed during the farm
equity crisis of the ‘80s, pertains only to family farm- ers and fi shermen and has special provisions tailored for those industries, such as higher debt ceilings and more advantageous exemptions. The main difference, says Binford, is to whom you
would be trying to make your trust fund arguments — a Chapter 7 trustee, who has shut down the company and is trying to convert its assets quickly for distribu- tion to creditors — as opposed to Chapter 11 or Chap- ter 12, where you’re dealing with the company itself as a “debtor in possession” that continues to operate the business. To ensure you will be able to make a claim that
vaults you to the top of the heap of creditors in the event of a bankruptcy, you need to know what the pertinent statute is. Yet another federal statute that establishes a fl oating
trust in favor of farmers is the Perishable Agricultural Commodities Act, or PACA. It is directed to produc- ers of fruits and vegetables, and is very similar to the Packers & Stockyards Act. But Binford cautions that it is different in one very important manner. He explains,
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