Frankfort, KY – Kentucky has seen its cattle industry grow and prosper over the last several years, but the downfall of one of the largest cattle brokers in the country has caused undue hardships for many of its producers and livestock markets.
That has prompted agriculture leaders to address the bankruptcy procedure involving Eastern Livestock Company (ELC).
It is estimated that ELC at one point purchased $10 to $20 million worth of cattle a day, according to information listed in the federal indictment against ELC Chief Executive Officer and founder Thomas "Tommy" Gibson, and the company’s former Chief Financial Officer Steve McDonald. Both pled guilty to all counts against them. The two were accused of theft by falsely inflating the company’s balances thus buying cattle without the funds to do so.
Those counts included one count of criminal syndication, engaging in organized crime; 17 counts of theft over $10,000; 144 counts of theft under $10,000/over $500; and 11 counts of theft under $500, according to information from the Kentucky Attorney General’s office.
Agriculture Commissioner James Comer, along with Kentucky Cattlemen’s Association Executive Director Dave Maples and Bluegrass Stockyard’s Chief Operating Officer Jim Acres, held a press conference on the opening day of the Kentucky State Fair and slammed the two-year long effort to get money back in the hands of the farmers, markets, truckers, veterinarians and others in the industry.
“The farmers who fell victim to this scandal depended on this income to pay their employees and feed their families,” Comer said. “It is a travesty that, after almost two years of legal wrangling, they are still being held hostage in this bankruptcy process. The payments to the victims are long overdue.”
The USDA estimates ELC, doing business in as many as 30 states could owe more than 700 producers approximately $130 million. The Grain Inspection, Packers and Stockyards Administration (GIPSA) reportedly ordered ELC to increase its bond amount, something the company did not do.
A chunk of that, $1.3 million in fact is owed to Bluegrass Stockyards, one of the largest livestock markets in the eastern U.S. Acres said the current bankruptcy process is not accomplishing its intended purpose. He believes the action should be taken out of the hands of a court appointed Trustee and into mediation.
“We need a different approach, getting it out of bankruptcy and getting it into mediation where we can deal with the bank’s role and equitably get this negotiated and over with. That’s what needs to happen,” he said.
Fifth-Third Bank closed the company’s accounts in November of 2010 just after ELC had purchased approximately $800,000 worth of cattle in Metcalfe County causing checks issued to farmers to bounce. Most of that money has been recovered and paid back to farmers. Both Gibson and McDonald received 10-year sentences in Circuit Court for their role in the scheme.
But the case in Metcalfe is just the tip of the iceberg and both ELC executives still face federal charges. Millions more have yet to be recovered and Kentucky ag leaders said the money being eaten up in legal fees will likely keep full restitution from happening if something isn’t done soon.
“Knowing what we know today, there was enough real money in circulation to take care of all the legitimate business that was going on,” Acres said. “If we can get this thing in the appropriate arena, to where it can be dealt with fairly and equitably then I think we all certainly deserve and should expect to get some of our money back if not most of our money back.”
Under federal regulations, Bluegrass and other stockyards can not demand payment the same day of a sale from companies like ELC as long as those companies have the proper credentials from the USDA, which Eastern did. But the stockyards are obligated to pay the seller thus leaving them vulnerable in a case like this.
"They utilized the understanding that markets are vulnerable (because) we're required to pay the farmers, but cannot require licensed dealers to pay our business on the day of the sale," Acres said.
He emphasized that there have always been questions about ELC’s business but the USDA was continually giving them the proper credentials to operate in the marketplace. “From a legal standpoint, if the USDA is willing to give a business a clean bill of health and continues to come back year after year and says yes they’re solvent and yes they are compliant with our regulations, it’s extremely difficult for a business like ours to go to those guys and say, you can’t buy cattle in our market,” Acres said. “If the regulatory folks won’t step to the plate and identify people like this as bad players, I’m almost forced to do business with them.”
Fortunately Bluegrass is a well established company and solid financially, helping it to weather a storm such as this, he added. But it’s hard for anybody or any company to take a $1.3 million dollar hit.
He also noted that there are 16 different lawsuits connected with the ELC case with well over 200 attorneys participating “as best as we can tell.”
A motion has been filed to remove the Trustee. Acres said he doesn’t think the matter can be resolved through bankruptcy proceedings.
“This was a crime. The bank had knowledge of what their customer was doing, clearly. It’s well documented in the court records. They wrangled internally for months if not years about what to do,” he said.
And when the bank did act, it came in the middle of one of the busiest times of the year for cattle sales, noted Acres.
Comer said he has no confidence in the Trustee or the bankruptcy court handling the proceedings and thinks there has been ample time to take care of the situation. Two years of waiting is completely unacceptable to Kentucky farmers, he said.
“In addition to them not receiving their money through the bankruptcy court, they are paying a lawyer everyday to represent them in bankruptcy court and go before a Trustee,” Comer said. “For one thing, it’s taking too long and for another it just appears to be conflicts of interest all around this case with that Trustee.”
The Trustee in the case is James Knauer, a partner in the Indianapolis law firm of Kroger Gardis and Regas.
A posting on the ELC Bankruptcy web site’s Trustee’s Blog notes, “There is much maneuvering going on the Eastern's case over the terms of my plan. Several parties, mostly whom I am suing, or who are claiming funds belonging to Eastern, allege that I and my counsel should be removed from this case. They claim that since my law firm and my main counsel's law firm have represented another bank who invested in Fifth Third’s loan, we are biased an unable to negotiate with the bank. But their motions ignore the fact that special counsel (an Indianapolis firm who never had dealings with Fifth Third) was engaged by me to investigate the bank and analyze potential claims. That firm agrees with me that we should settle now and avoid the costs and risks of litigation.”
A hearing was scheduled last Monday to hear the arguments for removing the Trustee and take the case into mediation. A decision is forthcoming.
Acres said that ag organizations all over the Southeast have support the motion to have this done.
Comer emphasized that had Bluegrass Stockyards not been as financially strong as it is, this event could have had the potential to have taken down the entire cattle industry in Kentucky through a ripple affect.