Officials of the bankrupt Farmers Cooperative Assn. are suing the bank they say forced the closure of the Lawrence-based business two years ago.

The association filed a lawsuit against Denver-based CoBank, claiming the bank unnecessarily forced the closure and bankruptcy of the co-op in 2000 by improperly pulling the company’s line of credit. The lawsuit was filed last week in federal court in Wichita. The association plans to seek at least $12 million in damages.

Tom Haney, a Topeka-attorney representing the board overseeing the co-op’s bankruptcy, said the lawsuit’s contention was simple. He said the cooperative in September 2000 was short of cash, but given permission by CoBank to write more than $3 million worth of checks to farmers for grain from the fall harvest. It got permission to issue another $1 million worth of checks to employees and vendors, he said.

Two days later, when the cooperative instructed CoBank to transfer funds to its account to cover the checks, the bank refused, Haney said. The result was that checks bounced, the cooperative filed for bankruptcy and shut down its operations.

“What this lawsuit simply is about is that people are owed a duty of fairness by their bankers,” Haney said. “Bankers should honor their word to their borrowers. Our thinking is that you don’t give your word if you can’t stick by it. The consequences of breaking their word were devastating to the co-op.”

Jack Cassidy, a spokesman with CoBank, said bank officials were confident they did nothing wrong.

“We think we were within our rights under the loan agreement,” Cassidy said. “Sometimes, though, people don’t agree with their bankers and it has to get sorted out in court. I guess that’s what will happen here.”

The lawsuit doesn’t seek a specific amount of money, but Mel Squyres, manager of the cooperative’s post-confirmation trust, said the group was considering seeking $12 million and an unspecified amount of punitive damages.

Squyres said the suit spells out facts he’s been eager to to share with area farmers about why the co-op bought grain it couldn’t pay for. “We were forced by CoBank to screw the farmers,” he said. “We didn’t want to, but we were forced to.”

Any money received from the lawsuit would be used to pay the approximately 2,600 members of the co-op, who owned about $8.9 million worth of equity in the company.

Squyres said the co-op had a tentative plan for paying off its members in full, but the lawsuit may speed up the payback process. Currently, the cooperative has $10.35 million worth of equity in other regional co-ops such as Cenex/Harvest States, AGP and Farmland.

But there’s no guarantee those co-ops, because of a slowing agriculture economy, will be able to pay Farmers Cooperative. Squyres said he was doubtful Farmland, which also is in bankruptcy, would be able to pay $4.7 million it owes.

“I fear Farmland is horrendously insolvent and we’re not going to see any of that investment,” Squyres said.

As for the investments in the other co-ops, Squyres said it would be at least 12 years before Farmers Cooperative could redeem enough shares to fully pay its members because the co-ops generally do not allow a company to redeem more than 10 percent of its equity in any one year.

The Lawrence association already has fully paid the farmers, employees and vendors who were written bad checks in September 2000. The co-op paid those debts by selling it assets, including 26 grain elevators in northeast Kansas and western Missouri. Three of the elevators are located in Lawrence and are now being operated by the Ottawa Cooperative Assn.

Squyres said the fact the association was able to fully pay all of its vendors after the bankruptcy proved to him the company never should have been forced to close.

“It didn’t have to happen,” Squyres said. “We were never given the chance to turn it around.”

Haney said he did not have a specific timeline for when the case may go to trial, but said he hoped it would be within a year.