Eastern Livestock Bankruptcy

In every bankruptcy case, after the listing of the debtor’s liabilities and assets is completed and filed with the Court, the law requires that creditors be sent notice of a meeting at which the debtor answers questions about their financial affairs and conduct. This meeting is called the First Meeting of Creditors.  If you are a creditor of Eastern, you should have received such a notice. In Eastern’s case, that meeting is scheduled to occur in New Albany, Indiana on April 5th at 10am EST.

In the case of Tom Gibson’s voluntary bankruptcy, the First Meeting of Creditors has already occurred and we have posted a transcript of Gibson’s testimony on the website which can be found here.

In a corporate bankruptcy, a representative of the debtor testifies at the First Meeting of Creditors.  Normally, that is the president of the company, which would be Tom Gibson.  Unfortunately since Eastern’s bankruptcy was involuntary, Mr. Gibson will not be representing the Debtor, so that role falls to me as the Bankruptcy Trustee.

I am writing this in case some of you had planned to attend in the hope of questioning Mr. Gibson about Eastern matters, since that will not occur on April 5th.

That day will come soon, just not next week.

We filed suit today against Willie Downs, a former branch manager of Eastern Livestock.  Our suit alleges that in the waning days of Eastern’s operations, Downs converted more than $1.2 million dollars of checks payable to Eastern by having them endorsed to him.

This is our first - there are many more lawsuits to come.

To those of you who made USDA Bond claims, the 60 day filing period expired at the beginning of March.  We have made arrangements with the bonding company to turn over the bond funds and we are preparing a proceeding to address the claims process.  Obviously the $875,000 bond that Eastern was required to post is far less than the total claims, so when we have completed the claims review process, those will claims that are allowed will receive a prorated payment based on the percentage that the amount of their claim bears to the total of all claims.

To speed up the process, we will likely handle this process outside of Eastern’s bankruptcy proceedings, since the USDA bond money is not part of Eastern’s bankruptcy estate.

On March 14th, I commented that our analysis of sales activities of Eastern seemed to indicate that the phony sales which were used to prop up the cash flow started occurring in at least 2009.  As we have continued to investigate, it now seems apparent this was going on in 2008 as well, just not on the same scale as in later years.

We continue to review Eastern’s books to find out the depth and breadth of the fraud as well as who was involved.  One of our initial questions has been answered. That is, did it start last year, or was it going on in 2009 too? 

Our financial advisors prepared information reviewing sales by month in 2009 and then separated the sales by purchaser.  We instantly saw a pattern in which sales to Gibson affiliates in 2009 were enormous, but then reduced dramatically at the end of Eastern’s fiscal year.  Eastern had a requirement in their bank financing that restricted credit for affiliated company receivables at year end, hence the need to get them paid (which was not possible since much of them were phony) or to create other receivables which would allow the affiliate receivables to be reduced. This appears to have been accomplished by booking year end sales to other Gibson affiliates whose connection was not known to Eastern’s senior bank, so those amounts were counted and the level of account receivables was then maintained.

One of the things that is done early in a bankruptcy case is to analyze transactions which occurred within 90 days preceding bankruptcy.  In many instances payments that were made by an insolvent company can be recovered under bankruptcy laws which deem those payments to be preferential or “preferences.” 

As many of you have read, Eastern’s finances were being pumped up by what is commonly called a check “kite.”  A check kite occurs when a check drawn on another bank is deposited into a checking account and the deposited check is no good.  The banking system will provisionally clear this check for a couple of days which gives the maker of the check time to deposit another check into its own account equal in value to the check they just issued so the bad check presented for deposit appears to be covered by the new deposit. 

A kite can occur between two banks where the holders of checking accounts issue NSF checks to each other, timing the deposits so that each check is covered by a check from another bank.  Typically these deposits are required to be larger and larger hence the use of the term kite is applied to describe how the amounts involved get higher and higher. 

In the case of Eastern, our preliminary analysis has identified a multi-party check kiting scheme.  During the 90 days preceding bankruptcy, Eastern issued $8.8 million dollars of checks to Ed Edens, IV, $237 million worth of checks to GP Cattle, $7.7 million worth of checks to Gary Seals, $11.6 million worth of checks to J & L Cattle and $365 million worth of checks to Thomas Gibson.  Obviously, each of these checks were drawn on Eastern’s account and had to be covered by a legitimate check or a fictitious deposit before it was honored by Eastern’s bank.            

We are in the process of analyzing deposits to Eastern’s accounts and once that process is completed we will have a better idea of which checks and deposits were legitimate and which checks and deposits were fiction.  We have initially concluded that most of the above described transactions were phony.