Eastern Livestock Bankruptcy

It turns out that the Eastern Livestock’s banking problems were not the first time that Tom Gibson was involved in issuing checks that were not covered by funds on deposit at the time of issue.  

In a reported legal case, First National Bank of Sikeston v. Transamerica Insurance Company, 514 F2d 981 (1975), Tom Gibson was part owner of a business operated as Gibson Livestock Company in Marion, Kentucky.  Tom Gibson owned the business with the president of First National Bank, one Donald Bohannon.  In 1970 and 1971 Gibson Livestock was using First National as its bank and Bohannon as president had authorized Gibson Livestock’s deposits to have immediate credit without waiting for the checks to clear.  This practice had been criticized by the Comptroller of Currency both because it violated banking law and also because it represented a conflict of interest for Bohannon as president of the bank and an owner in the cattle company.  Bohannon subsequently arranged for a line of credit at Union Planters Bank guaranteed by a third party trust and the proceeds from the line of credit at Union Planters would be used to make sure that deposits at First National were covered.  Bohannon then went to yet another bank (Providence Bank) and told them about the arrangement with Union Planters Bank and First National and requested Providence give immediate credit to Gibson Livestock checks since they would always be covered by the arrangement between First National and Union Planters. 

Relying on the arrangement from Bohannon, Providence Bank began giving immediate credit for checks deposited from Gibson Livestock and checks issued by Gibson Livestock for cattle purchases.  Providence then sent the checks to First National through the Federal Reserve System which, in 1971, took four to six days for the check to arrive at First National.  Since Bohannon was still an officer of First National, each day he would determine the amount necessary to cover checks presented to First National and then transfer money from the Union Planters credit facility to cover the checks.  As the Court later noted, the problem with this arrangement was that the Gibson Livestock credit line at Union Planters was being used to cover checks presented at First National which, but for the daily transfers in from Union Planters were insufficient funds.  Ultimately the arrangement blew up and at the time Gibson Cattle was processing about Thirty Million Dollars a year through First National.  Checks honored by Providence Bank cause the bank to loose approximately $340,000.00 and Providence Bank sued First National claiming that it relied on the promise of First National’s president, Bohannon, that the checks would always be covered.  

There have been several requests by Creditors of Eastern Livestock and its affiliates for prior budgets.   They now can  be found by clicking, HERE.

Please note, prior to the period beginning  July, 2011, ELC operated on an “actual” basis, with periodic reporting to Fifth Third.

Thank you.

Below please find a link for:

Eastern Livestock bank account November 2010 reconciliation analysis by DSI

Companies fail for all sorts of reasons, including bad decisions, product obsolescence, mismanagement and sometimes fraud. When a company fails, whatever the reason, it usually manages to tread water for a while before its problems close its doors.  During the days or weeks before closure, some creditors get paid and some don't.    Eastern Livestock was no exception. In its final days there were tens of millions of dollars of transactions.  Cattle sellers who dealt through livestock auctions got paid by the auctions, but the auctions ended up as large Eastern creditors.  Many cattle sellers who sold directly to Eastern ended up holding bad checks when Eastern's bank shut off its account. 

When Eastern's bank account was frozen, millions of dollars of funds sent to Eastern's office were diverted by some of its management and never deposited into Eastern's account. Some of the diverted funds were sent to cattle sellers, so they got paid while others didn't. Some of the auction houses swooped in and got Tom Gibson to assign outstanding cattle contracts to them in an effort to recoup their losses. These Eastern contracts were used to collect monies owed to Eastern, but the funds went to the auction houses to reduce or eliminate their losses. 

Some of the auction houses and feed yards that owed Eastern money were concerned that if they paid Eastern, they might have to pay twice, so they paid their money into court instead. These payments into courts in different states are known as "Interpleader Actions".  The Interpleader Actions joined unpaid sellers, shippers and others inviting them to make claims against the money.  We eventually moved all of these actions into the Bankruptcy Court where Eastern's case is pending. 

Most, if not all of the cattle sellers have tried to claim that they should be paid directly from the funds in the Interpleader Actions instead of those funds going into Eastern's bankruptcy and made generally available to all of Eastern's creditors. The most popular legal theory being used by cattle sellers and auction houses in the Interpleader Actions is that the cattle sale proceeds due Eastern are held in "Constructive Trust" by the feed yards. Constructive Trust law varies from state to state making the problem even more complex. Generally, the theory says that a trust is created whenever the right to property (the right to the sale proceeds) is held by a person (Eastern) who, in fairness, should not be permitted to retain it.  The unpaid sellers argue that Eastern should not be permitted to collect from the Interpleader Actions for cattle it delivered and sold unless the sellers are paid first.  At first blush this approach sounds simple and fair.  It is designed to prevent an unscrupulous business from getting paid at the expense of those who didn't.  

The problem arises when the company that committed the wrongdoing is in bankruptcy.  Then, the persons who caused the loss will no longer benefit by it.  Our bankruptcy claims are to recover money on behalf of everyone who didn't get paid, not just those in the Interpleader Actions. Eastern's claims now are on behalf of all innocent sellers and others who got stuck and didn't get paid by auction houses or from diverted funds.  That is the conundrum.  A theory that is designed to prevent fraud doesn't always work when applied to bankruptcy when the persons who will benefit from its denial are innocents.    

This past Friday, the bankruptcy judge issued a lengthy, important ruling.  In essence, he said that unpaid sellers are not entitled to claim that the funds in the Interpleader Actions are held in constructive trust for the unpaid sellers.  In its most simplistic explanation, he held that the payment in full of one creditor at the expense of other creditors goes against the concept of equal treatment for creditors which is at the root of bankruptcy theory.  This ruling does not end the Interpleader Actions (there are other types of claims to be resolved), but it is an important step in recovering the funds due Eastern to try and create a pot of money that will benefit everyone.  

On December 19, 2011, we filed an action in the US District Court for the Southern District of Indiana (New Albany Division) to have the claims against Eastern Livestock’s USDA Bond determined.  In an effort to avoid joining all 375 bond claimants as parties, particularly those whose claims are not objectionable (which constitute the majority of the claims) we only joined 4 claimants initially as a means to get the case into court.  We have asked the judge for a status conference to try to work out a process to resolve the claims we do object to.  The status conference will be held on March 1, 2012, and we will post an update within a few days after the status conference with the judge.  If you filed a bond claim, you should have received a notice from GIPSA some months ago informing you of the approval of, or any dispute with your claim.  If you have not received any notice whether your claim is allowable, you may contact Tammy Froelich of my office for more information at 317-777-7423.

UPDATE:
In reference to the below comment regarding "Is this a meeting claimants can join via conference call?" 

The Trustee's response is:  "The status hearing is for attorneys for the parties only.  As noted in the blog post, there are only 4 parties at the moment."