by Katie Micik, katie.micik@telventdtn.com
Creditors owed $20.7 million by Eastern Livestock Co. are trying to force the cattle brokerage into a Chapter 11 involuntary bankruptcy, according to a petition filed in a federal bankruptcy court.
The bankruptcy filing comes also as Eastern Livestock’s main bank, Third Fifth Bank of Cincinnati, Ohio, alleges in a separate state court case that Eastern may have had as much as $2.5 billion in fictitious transactions in fiscal 2010 from sales between Eastern Livestock and its affiliates. The bank states the cattle brokerage was not able to produce documents showing that the sales were real.
Two livestock auctions and a rancher filed a petition in Indiana’s Southern District Bankruptcy Court on Tuesday of this week, but the amounts they are owed — a combined $1.452 million — pale in comparison to the more than $19 million that Eastern owes to Superior Livestock Auction, Inc., which joined the petition along with another individual on Wednesday.
According to court documents, Eastern Livestock defaulted on approximately 500 contracts with Superior Livestock Auction and owes the online and satellite video cattle auction service $19,270,617 on cattle delivered between Oct. 22 and Nov. 13, according to a list of unpaid sales in the court documents.
Creditors can continue to join the petition until the case is discharged or dismissed.
Eastern Livestock has 20 days to object to the petition before a judge determines whether to go forward with the bankruptcy case. A Chapter 11 bankruptcy would force Eastern Livestock to restructure and pay its creditors from its cash flow.
The involuntary bankruptcy proceeding is in addition to the action taken by Fifth Third Bank in Ohio state court, which appointed a receiver to take control of Eastern Livestock’s books and business. Fifth Third Bank froze the assets of Eastern Livestock and its primary owner, Thomas Gibson, after detecting an alleged check kiting scheme. Gibson also has declared personal bankruptcy.
The growing document trail also is beginning to shed some light on the magnitude of Eastern Livestock’s operations, while raising more questions about problems behind the business. According to statements in an Ohio state court, Eastern Livestock’s annual sales in the 2010 fiscal year were $3.9 billion. That’s a $2.6 billion increase over the $1.3 billion of 2009 sales. Fifth Third Bank alleges that $2.5 billion of the increase came from fictitious sales.
After Fifth Third froze the accounts, checks for cattle purchases began to bounce, and the Grain Inspection, Packers and Stockyards Administration began its investigations into the failed payments. GIPSA estimates that more than 743 sellers were shorted at least $130 million by the livestock brokerage. GIPSA has encouraged those left in the cold by Eastern Livestock to file a claim against the company’s $875,000 bond. According to USDA, 250 bond claims totaling $7,407,886 have already been filed, meaning bond claims will pay about a penny on the dollar.
The bankruptcy proceedings acknowledged the Ohio court’s appointment of a receiver, Elizabeth Lynch, and appointed her as the custodian in the bankruptcy case. Usually a custodian in bankruptcy cases cannot make disbursements of property or business decisions on behalf of the bankrupt business, but the judge waived those requirements.
The court also approved the receiver’s proposal for how proceeds from cattle sales will be handled. After deducting the costs of the sale (commission, check-off, etc.) the proceeds will be deposited in the receiver’s account and be used toward paying creditors at a later date.
“The foregoing sale process shall not be considered to be or construed as the Receiver engaging in the ongoing business operations of Eastern Livestock,” the court motion stated. “Rather, the foregoing describes the process by which the Receiver shall liquidate Eastern Livestock’s inventory so as to maximize the potential recovery to Eastern Livestock’s creditors.”
Creditors don’t petition for involuntary bankruptcy often because the creditors can be left on the hook for attorney’s fees and damages if the judge denies the petition.
John Ames, the attorney for the petitioning creditors — David L. Rings from Russell Springs, Ky.; Southeast Livestock Exchange fromWaynesville, N.C.; Moseley Cattle Auction in Blakely, Ga.; Superior Livestock of Bush, Colo.; and Gary S. Bell of Edmonton, Ky. — was not available to comment when contacted by DTN. Fifth Third Bank, The First Bank and Trust Company and Republic Bank and Trust Companies were also listed as creditors.
A representative of Eastern Livestock declined to comment.
As more ranchers, livestock markets and feedlots search for avenues for payment, Eastern Livestock’s legal woes are mounting.
It faces GIPSA’s administrative complaint, which alleges it didn’t keep an adequate surety bond, failure to pay for purchases and failure to pay for purchase in a timely manner.
Eastern also faces Fifth Third Bank’s lawsuit alleging the check kiting scheme, which the bank stated in court documents left Eastern Livestock’s accounts overdrawn by $13 million. The bank’s case also alleges that Eastern Livestock inflated its sales figures by creating fictitious sales to associated entities in order to be approved for a larger $32 million loan, on which Eastern Livestock defaulted.
There are also the Friona Industries and Cactus Feeders cases in Texas courts where the feedlots that bought cattle from Eastern Livestock are fighting to make sure they don’t end up paying twice.
The state of Kentucky has launched an official investigation into Eastern Livestock’s dealings.
Also, state courts are dealing with countless cases brought by livestock markets and ranchers seeking payment for cattle sold to the cattle dealer.
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Posted with DTN Permission by Haylie Shipp
