Eastern Livestock bank account November 2010 reconciliation analysis by DSI
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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.
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."
At the time Eastern Livestock went into bankruptcy it owned another company called Okie Farms, LLC. Okie, in turn, owned approximately 48% of Cattlemen’s Feedlot, Ltd. which is a Texas limited partnership.
Since Eastern (through Okie) owns less than the majority of Cattlemen’s, Eastern has virtually no ability to exercise any control over Cattlemen’s business operations or to even demand a distribution of profits, which is typical of any minority ownership interest. For months we have been negotiating to sell Okie’s interests back to Cattlemen’s (or its principals) and we recently reached an agreement to accomplish this, subject to the approval of the Bankruptcy Court.
On Wednesday we filed a motion to sell the Okie interests to Cattlemen’s (or its principals) for a cash payment of $3 million dollars. The agreement also provides that Okie will receive a special allocation of Cattlemen’s income and gain for tax purposes of approximately $8.8 million dollars. However, the affect of this provision is mostly bookkeeping insofar as Eastern Livestock is concerned, since we believe that neither Okie nor Eastern Livestock will incur any tax consequences as a result. As part of the deal Eastern will give up certain claims that it might assert on behalf of either ELC or Okie against Cattlemen’s. The net result then, is that Eastern will receive $3 million dollars for the sale of its Okie interests. We believe that is a very good result given that the investment was highly illiquid and the alternatives for realizing on its value in other ways were very limited. We have asked the Court to conduct an expedited hearing on approving the settlement so that the sale can be concluded before the end of this year (which is a requirement of the buyer).
Today we filed a Complaint against People’s Bank and Trust Company of Picket County. The Complaint alleges that in September of 2008 Eastern Livestock gave the Bank a mortgage on approximately 89 acres of Eastern’s real estate in Lanesville, Indiana as security for a loan to Thomas and Patsy Gibson in the amount of $1,500.000 dollars. The property in Lanesville has a value of approximately $750,000.00. At the same time as Eastern gave its mortgage, Tom and Patsy Gibson mortgaged additional real estate owned by them personally. Our Complaint alleges that Eastern received no consideration in exchange for mortgaging its three quarter of a million dollars worth of real estate which solely benefited the Gibsons. The Bank claims, alternatively, that some, if not all the money it loaned to the Gibson’s was used by the Gibson’s to repay loans they owed to Eastern. Our response to that argument is essentially that money was flowing in and out of Eastern to Tom Gibson and his affiliated companies so rapidly at that time (and after that) that any actual value received by Eastern was illusory because the money ended up right back in Gibson’s hands. It will be up to the Court to decide which of us is correct.
Agenda for Meeting with
Eastern Livestock Creditors
on November 22, 2011
1. Update regarding the status of the Chapter 11case receipts and disbursements.
a. Recoveries to date of funds from various sources, and planned efforts to make additional recoveries.
(A) preference analysis
(B) collection actions
(b) Expenses to date in administration of the case.
b. Status of negotiations with the United States Attorney about the seized funds in the Your Community Bank account
c. Report on the GIPSA bond funds.
2. Changes in the Reporting of Accounts Receivable.
a. Discussion of changes that have occurred based on the discovery of additional ELC purchase, sale, and shipping records
b. Other changes reflect DES’ characterization of recoverable amounts with respect to amounts that were not paid to ELC.
3. Discovery Repository. The Trustee has established an online repository for discovery requests, responses, and produced documents. Access to the site is limited to those who provide a signed Acknowledgement of the terms and conditions of the Confidentiality Stipulation and the Court's order on Discovery Protocols. Training sessions for using the site are scheduled for 4 p.m. (EST) on November 16 and 29. The Trustee urges all those who have produced discovery responses and documents to send their materials to Harmony Mappes (firstname.lastname@example.org, (317) 237-8246) at Baker & Daniels who will coordinate uploading them to the website.
4. Superior Litigation. A brief discussion of the Superior Livestock litigation.
5. Discussion of potential claims against Fifth Third Bank. One or more representatives of the Trustee's special counsel at the Hoover Hull law firm will address the current status of their investigation and assessment of potential claims against Fifth Third.
6. Mediation. Discussion concerning a mediator and procedures to expedite the resolution of claims in litigation.
7. Claims. A preliminary analysis of claims filed.
8. Chapter 11 Plan Negotiations. A discussion of what form a possible Chapter 11 liquidation plan could take.
NOTICE OF EASTERN LIVESTOCK LLC CASE STATUS UPDATE CONFERENCE CALL
TUESDAY, NOVEMBER 22, 2011 10:30 A.M. EST
The Trustee will hold a Case Status Update Conference on Tuesday, November 22, 2011 beginning at 10:30 A.M. EST. Participation may be by telephone using the following conference participant phone number:
Participants, US/CANADA 888-466-4587
Please dial in 5 to 10 minutes prior to the scheduled start time of the call so that an operator may receive your name and put you into the conference call. If you have any questions, please contact counsel for the Trustee, Terry Hall, at 317-237-1230 or at email@example.com. If you are interested in participating via Microsoft LiveMeeting or video conference, please call or email Terry Hall before Monday at 10:00 am EST on November 21. In order to participate in a video conference you will need to have your IT people coordinate no later than noon Monday with Kent Karlsson, Audio Visual Specialist, Baker & Daniels LLP, 317.237.1308 (firstname.lastname@example.org).
We will be holding an open call to discuss many aspects of the Eastern Livestock Bankruptcy on November 22nd, 2011 from 11 am to approximately noon EST. We will publish an agenda and a dial in number in a future blog entry at least 24 hours prior to the call, so check back here if you have an interest in listening to the call. All information which is discussed on the call will be deemed to be subject to Rule 408 of the Federal Rules of Evidence which prohibits some types of disclosures from being used in as evidence for purposes more particularly described in the Rule.
Shortly after being appointed as the Bankruptcy Trustee for Eastern, I learned that “hundreds” of Eastern’s contracts had been purportedly “assigned” to Superior Livestock Auction the day before an Ohio Court put Eastern into receivership. In many instances the cattle had already been delivered to Eastern’s buyer and all that remained was for Eastern to collect the sale proceeds. In at least one instance the delivered receivable was more than a million dollars.
Initially (and for some time thereafter) I understood the number of attempted contract assignments to Superior was somewhere between 500 and 550. I have been trying to get the exact number of contracts involved and the value of those contracts ever since.
Yesterday we learned that Superior claims the number of contracts which were assigned to it is in the “thousands” and that the amount involved is $19 million dollars. We are in bankruptcy court contending that those attempted contract assignments were not valid for a number of reasons, not the least of which is that it allowed Superior to come out far better than other creditors such as those who got bad checks from Eastern and were never paid. Superior, not unexpectedly, claims that the assignments were valid, again for a variety of reasons I will not attempt to detail here. Suffice it to say, the outcome of this litigation will have a very material effect on the Eastern’s bankruptcy case.