A bankruptcy maneuver appears to have taken advantage of farmers. No, we’re not talking about the MF Global cover-up.

Texas farmers suing Scopia Capital Management

According to a FinAlternatives report, a group of Texas farmers is suing a New York hedge fund saying it defrauded them in a bankruptcy play.

The dispute is between farmers of “guar,” a highly profitable bean used in shale gas production and fracking processes, and Scopia Capital Management.  In the middle of the deal is an organization, West Texas Guar, that apparently procured the guar from 285 farmers but failed to pay, instead filing for bankruptcy.  Scopia is the largest shareholder of West Texas Guar.

The deal gets muddy, as a federal bankruptcy judge granted the farmers 75 percent of their claims in May but were thwarted from receiving a payment by Scopia, who filed suit against the farmers and West Texas Guar.

Farmers

Scopia Capital’s involvement in West Texas Guar

In a case of dueling lawsuits, the farmers claim that Scopia, with involvement in West Texas Guar, was aware the company was in financial trouble.  Scopia is claiming West Texas Guar has not repaid a $6 million loan made in 2012, the substance of which appears yet to be validated in court.

“Scopia fraudulently tricked these farmers into giving them their guar when they knew they couldn’t pay,” Fernando Bustos, a lawyer for the farmers, was quoted as saying.  The farmers claim “there was a method to their madness” and that the bankruptcy was planned to defraud the farmers of their payments for product.

The guar craze – and rise in the price of the commodity – can be tied to the rise in fracking.  It is used as a water thickener and creates a “gum” like substance.

A recent Guardian article pointed out that India is the world’s leading producer of guar beans.  The product is used to make ice cream and provides ketchup its “gloopiness.”  The most important use of the bean, however, is its use in fracking.

Since fracking gained popularity at the end of 2010, the price of guar increased 15-fold, the report noted at the time. A guarseed contract is currently trading near 5,000 indian Rupee or close to $84 USD.