In January, Farmland Industries accepted new loan terms that require bankruptcy court approval and lawyers for Farmland’s unsecured creditors recently urged U.S. Bankruptcy Judge Jerry Venters to cancel that agreement.

The creditors contend the group of lenders unfairly pressured Farmland into accepting new, costly loan provisions, leaving less money for the unsecured creditors. The lawyers say there is no doubt that Farmland will be able to repay the $260 million it currently owes the banks, so there is no need for stricter, more expensive loan provisions.

The hearing came only two days after Farmland announced a $270 million deal to sell most of its fertilizer business to Koch Nitrogen of Witchita, Kan. The proceeds from that sale are pledged to the banks.

Most of the testimony was closed to the public, but Dan Flanigan, lawyer for Farmland bondholders, told the judge before the proceedings were closed that the banks were pushing Farmland to sell off its valuable beef and pork businesses as early as last summer.

In one letter, the banks insisted that the company sell its profitable pork processing business to competitor Smithfield Foods, even though Farmland executives indicated they intended to reorganize the company around the pork business.

When Farmland wouldn’t agree to some of these demands, the banks “unfairly” used a threat to cancel loans to get Farmland to agree to make concessions, Flanigan said.

As early as October, Farmland had provided the bank with information that projected it would reduce its bank debt to about $26 million by the end of March by selling off assets, according to an affidavit. The cooperative disclosed that it had agreed to sell part or all of its beef business to pay the banks if it failed to meet its projections with other asset sales. But the banks were not satisfied.

Farmland chief executive Robert Terry said in court documents that the lenders in December claimed the cooperative had defaulted on some provisions of its loans. While Farmland fervently disagreed, executives feared a court battle could scuttle its reorganization efforts.

The Kansas City Star