Eastern Livestock Company update: Trustee pursues assets
April 22, 2011
NEW ALBANY, IN (DTN) – A stuffed longhorn bull, sporting a faded blue Eastern Livestock Company baseball cap, overlooks a wood boardroom table in the troubled cattle brokerage’s headquarters. One of three lawyers at the table jokingly asks bankruptcy trustee Jim Knauer if he’ll get to take the bull home with him when the company is dissolved. Another lays claim to the hat.
The men had just come from a court hearing in which Knauer explained that it’s unlikely Eastern Livestock’s unsecured creditors – mostly ranchers, livestock markets and cattle trucking companies – will see a dime when Knauer’s job of unraveling the company finances is done. Unlike whoever takes the stuffed bull home, the cattlemen’s only mementos for their dealings with Eastern will likely be bad checks, bruised wallets and new livestock marketing rules.
Once a trusted name in the livestock brokerage business, Eastern Livestock Company may now be one of the most loathed. In late October 2010, Fifth Third Bank, Eastern Livestock’s primary bank, froze the cattle brokerage’s accounts. That caused $130 million of worthless checks to be sent to more than 700 ranchers and livestock markets in 30 states.
Since then, the Packers and Stockyard Administration’s bond process and the industry’s payment and contract practices have all faced heavy scrutiny as cattlemen look for ways to protect their businesses from future failures.
The first court meeting of Eastern’s creditors was an hour-and-a-half-long hearing April 7. Knauer split the time answering creditor questions and explaining discrepancies between the company’s bankruptcy schedules and what his investigation was discovering. Attendance at such a first creditors’ meeting in bankruptcy cases is usually sparse. Eastern’s hearing was held in a courtroom to accommodate the 14 people – lawyers representing various banks, utility companies and groups of individual creditors plus two of Eastern’s largest non-bank creditors – who came.
The federal bankruptcy courthouse in downtown New Albany sits in the shadow of blooming dogwood trees and the bigger, busier county courthouse next door. Yet the glass-paneled federal courthouse is handling one of the biggest cases this southern Indiana community has ever seen. Few locals knew of Eastern, or seem interested that it was one of the largest cattle brokerages in the country. A local lawyer attending the hearing said she drove past Eastern’s headquarters every day, but had no idea such a large company was housed there. No local media attended the hearing.
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Also conspicuously absent was Thomas Gibson, Eastern Livestock’s primary owner. Typically, a business operator testifies at such bankruptcy meetings. Due to the accusations of mismanagement, the court barred Gibson from all involvement with Eastern after Fifth Third filed its complaint against the company. Gibson, who is about 70 years old and who is said to have started in the cattle business with his grandfather when he was 10, has declined press requests for interviews. When DTN drove to Gibson’s home – surrounded by more than 400 acres of pasture – no one was there.
Those who were in the courtroom listened to Knauer describe poring over Eastern’s financial records, tracing and recreating transactions from bank records, notes on slips of paper, employee memories and help from livestock buyers. Knauer specializes in business and financial law and has overseen many financial fraud and Ponzi scheme cases, but this is his first foray into the beef business.
The alleged check kiting scheme involved Eastern and at least five different entities including branch managers, subsidiary companies and Gibson’s personal accounts. “It was a very difficult scheme to orchestrate,” Knauer said. “I don’t know how anyone could do that without another set of books,” which Knauer said he hasn’t found. The FBI is investigating the check kiting scheme and could file criminal charges against participants.
In addition to unraveling the financials, part of Knauer’s task is to enforce Eastern Livestock’s contracts to recover as much of the company’s assets as possible so the court can divide it among creditors. His down-to-business, straight-shooting attitude made it hard for Knauer to disguise his disgust at Eastern’s business practices.
“We’ve spent four months, roughly, getting records, putting together information and collecting, what some would say, the low-hanging fruit,” of Eastern Livestock accounts receivables, Knauer said.
The company reported assets of more than $80 million on its bankruptcy schedules, including $30 million in accounts receivable and $35 million in cattle inventory.
“But there wasn’t remotely that much,” Knauer told creditors and lawyers. Currently, Eastern Livestock has $8 million in cash. The FBI has determined $4.7 million it seized from Gibson’s personal accounts belongs to Eastern, but Knauer is unsure when the bankruptcy court will get those funds.
Feedlots in four states deposited a total of $13 million with courts in Colorado, Kansas, Texas and Wisconsin, asking for a judge to decide whether Eastern, the ranchers or the feedlots have a rightful claim to the money. Knauer said he believes Eastern is “entitled to the bulk of the funds.”
Knauer said most of Eastern’s assets are in more than a dozen types of cattle contracts with feedlots and ranchers.
This “small universe” of people Eastern did business with have, for the most part, been honest and helpful in tracking down who still owes Eastern money, he said.
Now, Knauer is shifting from that low fruit to the more aggressive pursuit of assets from those who have tried to hide it or avoid payment. He recently filed a $1.2 million lawsuit against a former Eastern Livestock branch manager who deposited checks payable to Eastern in his personal account during the scandal’s breaking days. Knauer intends to file several similar legal complaints through April and May.
“It’s one thing to make claims, it’s another to collect,” he told DTN. “You can’t collect if they don’t have the money or if they’re hiding it.”
Eastern has several pieces of real estate without any equity, interest in a feedlot that the trustee is trying to sell and shares of U.S. Premium Beef that Knauer hopes could bring in $700,000.
Fifth Third Bank, Eastern’s primary bank, holds a $32.3 million lien on Eastern’s assets after the cattle brokerage defaulted on a loan, Knauer said, making it the largest creditor with security interest and the most likely to be paid. Eastern owes its bank about $10 million more than what the trustee can currently account for.
Fifth Third’s role in Eastern’s collapse also is being investigated by an independent law firm, Knauer said. Superior Livestock and Blue Grass Stockyards have alleged that Fifth Third Bank management knew or should have known about Eastern Livestock’s check kiting long before taking action, and by allowing Eastern to continue to operate, the bank put the cattle industry at risk. If the investigation finds that Fifth Third ignored its fiduciary responsibility, the bank it could lose its spot as a secured creditor, Knauer said, making it more likely cattlemen would be paid.
During the court meeting, Jim Akers, chief operating officer of Blue Grass Stockyards, took notes. Superior Livestock’s general manager Jim Odle sat with his hands in his lap.
Eastern owes Superior Livestock more than $19 million, but Odle also sees a silver lining. Right after Eastern collapsed, he saw an increase in buyers, a trend that’s continued and added competition to the market. Akers said his company’s six locations and Internet auction have seen a “flood of new buyers.” And the company’s new policy requiring valid payment before livestock leave the facility has gotten few complaints. About a third of their payments are now made by wire transfer, up from almost none prior to November.
“The financial hit was significant for us,” Akers said. “But with the cattle market the way it has been, business has been good. And luckily it (Eastern’s collapse) happened when the market was high. That helped us incredibly in weathering this thing. It’ll be interesting to watch the dynamics as this plays out.”
For more background on the Eastern saga, see the DTN/Progressive Farmer In-Depth web page at http://www.dtn.com/ag/indepth.