Eastern Livestock raises questions about too big to fail
November 26, 2010
OMAHA (DTN) – USDA has pegged the losses of unpaid cattle sales at more than $131 million involved in the Eastern Livestock Co. financial collapse. However, people in the cattle industry haven’t seen a plan on how to untangle the mess of cattle sales, or heard just how Eastern Livestock began its spiral downward.
What’s clear, however, is that a company many people in the livestock industry used to clear buyer orders and mitigate counter-party risk instead led to its own bank default and frozen assets.
The Indiana-based Eastern Livestock worked with ranchers. They were in the sale barns. They contracted with truckers and they bought for and delivered to feeders. The company operated as livestock buyers in sale barns and had feeder-cattle delivery and collection points mainly in 11 states. People relied on the company to buy, sell, forward contract and move cattle around the country. Eastern Livestock also bought on order, cleared other order buyers and acted as a dealer where the company would purchase and sell cattle.
Eastern Livestock was certainly one of the largest feeder-cattle buyers in the country and may well have been the largest, said Bill Bullard, chief executive office for R-CALF USA
“This is an example of a too-big-to-fail entity failed and it’s going to cause a disaster for many people in this industry,” Bullard said.
Thomas P. Gibson, majority owner of Eastern Livestock, has not spoken publicly on the situation. Contacted at home in Indiana, Gibson’s wife said Tuesday that the couple is not commenting at this time. Besides running Eastern Livestock, records show the Gibson family also operated a Kentucky livestock market.
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People within the industry are still trying to piece together how to sort out payments and movement of cattle caught in the middle of the financial insolvency. Ranchers want their cattle back, or to get paid, and feeders aren’t giving up the cattle sent to them, until they get paid. Various livestock auctions and truckers also face a large amount of unpaid debt.
The Livestock Marketing Association (LMA) sent a proposal and met with Ohio court receiver Elizabeth Lynch last week. Lynch, who works for a firm specializing in financial insolvencies, was appointed by an Ohio judge to take over operations at Eastern Livestock earlier this month. Lynch was appointed after the Ohio-based Fifth Third Bank filed a suit to freeze Eastern Livestock’s assets, claiming the company was kiting checks and had defaulted on a $32.5 million loan.
LMA has offered help facilitate movement of cattle and money between ranchers, livestock auctions, buyers, feedlots and trucking companies affected by the frozen accounts and bounced checks.
“Those recommendations were submitted to Fifth Third Bank,” said Mark Mackey, chief executive officer for LMA. “Of course, at this point in time, Fifth Third is still trying to get an understanding of the transactions and has a forensic data-recovery team trying to rebuild and restructure the transactions.”
GIPSA held a conference call with various stakeholders on Tuesday, Nov. 23, regarding Eastern Livestock. Mackey said much of the call explained USDA’s complaint that was filed.
“We asked some specific questions and we’re waiting for them to get back to us,” Mackey said. “They did make the statement that there is the possibility of some low-interest loans to those affected by this Eastern episode.”
LMA later stated on its Web site that the group believes “GIPSA should be able to tell us the exact amount owed Fifth Third Bank, and the amount of funds in the Eastern account when it was frozen.” GIPSA has agreed to confer with its auditors and discuss LMA’s request, LMA stated.
USDA filed a Packers and Stockyards Act complaint against Eastern Livestock last Friday (Nov. 19), as well as against majority owner Thomas P. Gibson. GIPSA estimates that Eastern Livestock Co. owes more than $130 million to 743 sellers in 30 states. More than $81 million of returned checks have already been documented. USDA also has bond claims from 74 sellers amounting to $1.58 million in unpaid transactions.
USDA’s Grain Inspection, Packers and Stockyards Administration also sent Eastern Livestock a letter in June stating that the company needed to increase its surety bond to $1.15 million from $875,000, but Eastern Livestock continued to operate without maintaining an adequate bond, USDA stated. Eastern Livestock’s bonding company also now is cancelling its bond at the end of the year. Eastern Livestock has less than a month to answer USDA and likely faces penalties.
The complaint, with attached schedules, lists some businesses and people with unpaid claims and bounced checks for as little as $300, but also reaching into millions for a few.
“According to the complaint, they could take some sale barns down with them, because there are some sale barns that have received bad checks or no checks and we’re talking in some instances hundreds of thousands of dollars,” Bullard said. “This could be devastating to some of our local sale barns.”
Bullard said one of the problems with the case is that the Packers and Stockyards Act doesn’t have the same protections for producers selling to order buyers and dealers, versus selling to packers. Under the Act, a producer moves to the front of the line in payment from a packer in such a circumstance, but that isn’t the case with a dealer such as Eastern Livestock.
“Under this kind of a situation, the banks will be first in line, because there isn’t that kind of protection with dealers,” Bullard said.
Further, Mackey said GIPSA officials have acknowledged the situation is causing the agency to review its bonding requirements and regulations.
Lynch was appointed by an Ohio state judge to act as receiver over all of Eastern Livestock’s assets, largely at the request of Fifth Third Bank. Besides giving Lynch full control over managing the business, the Ohio state court also asserted control over any disputed liens and proceeds from sales. The state judge also said in the order that all creditors or claimants are enjoined from taking action against Eastern Livestock in any other court.
Yet, two of the largest cattle feeders in the country have filed suit in Texas federal court. Friona Industries, LP, and Cactus Growers Inc., filed suit against Eastern Livestock and Fifth Third Bank for a breach of contract. Friona and Cactus Growers stated they each are owed several hundred thousand dollars in down payments for undelivered cattle, plus each feedyard has several hundred cattle at their feedlots from sellers around the country. The sellers who state their cattle were delivered to Friona and Cactus now want to either be paid or have their cattle returned.