USA - US$130 million in bad cheques for cattle

26 Feb 2011

The $130 million of bad checks issued by Eastern Livestock Company drained the books of many small ranchers and livestock markets and turned the old adage urging buyers to be cautious on its head. Ranchers at this year's National Cattlemen's Beef Association convention discussed steps they can take right now to protect themselves in case a buyer can't pay.

"Even if it's someone you know in the local community, assume there's no iron-clad assurance of being paid later with the market's volatility," said Van Dewey, Rabo Agri-Finance managing director for the central region. "In other words, guys can be solvent today and broke tomorrow with the volatility in the market."

Dewey and Kansas Livestock Association attorney Allie Devine emphasized the protections and pitfalls of paper. A paper trail of contracts and invoices protects the seller if the seller doesn't get paid and ends up taking the buyer to court. Paper checks expose the seller to a long float period -- the time between when the check is written and when the bank deposits the funds -- and replacing them with electronic or certified payments reduces the opportunity for fraud while testing the buyer's capital position.

In a business that's been done on a handshake for more than a hundred years, changing the culture in cattle country is an uphill battle. Devine has worked for the cattle industry for more than 15 years, and when people call and tell her they haven't been paid for their cattle, her first question is if they have a contract.

"And, literally, more often than not the answer is 'no,'" she said. Often the rancher responds that he or she has been doing business with this person for a long time without a problem.

Thomas Gibson did business without a problem for a long time, too. Eastern Livestock Company started up in 1982, and estimates of the cattle dealer's daily business ranged from $4 million to $6 million a day. Then in late October, his bank detected an alleged check kiting scheme and froze his accounts, and 734 producers received bad checks.

"My point to you is it's OK to have paper," Devine said at the Livestock Marketing Committee meeting at the NCBA convention. "It's OK to have invoices, and what we see in failed transactions is no paperwork to follow up on the deals that were done. One of the things that attorneys will tell you is agriculture continuously wants to stay outside of the Uniform Commercial Code."

The Uniform Commercial Code regulates sales transactions across all states, although agriculture is exempted in some. The UCC lays out how security interest should apply and ranks the priority of secured interests. In the case of Eastern Livestock, several contracts transferred interest at different times. The bankruptcy court has final say on who holds the secured interest on contested cattle. Fifth Third Bank has said in court documents that they do. Jim Odle, general manager of Superior Livestock, says his contracts state that he has secured interest until payment is made in full, but that his lawyers are unsure if that will hold true in court.

Devine said a common theme was that the dealers had several affiliated entities. The Gibsons' personal bankruptcy records show Gibson and his wife, Patsy, were involved in 17 companies.

"It seems to be one of the triggering points in the stories that came out in the bankruptcy proceedings was an undercapitalized company that could not meet prompt payment requirements," she said. "Where we saw mistakes happening and trouble starting to unfold is when they were transferring dollars from one entity to another to cover prompt payment provisions."

The complaint filed by Fifth Third Bank alleges the Gibsons moved almost $20 million each day between Eastern Livestock's account at Fifth Third and Gibson's personal account at Your Community Bank in New Albany, Ind. The bank also alleged Eastern Livestock was sending money between the bank accounts of other affiliated entities by writing checks.

Co-owner of Joplin Regional Stockyards Steve Owens explained in a panel discussion at NCBA that the float time between when he received an Eastern Livestock check and when the money hit his accounts was sometimes as long as 10 days.

Owens said Eastern bought cattle on a Monday and was supposed to mail the check within 24 hours. Owens received the check on Thursday and deposited it with his bank, but said he didn't find out the check was bad until the following Wednesday. And by that time, Eastern had bought more cattle.

"I think it's critical for the industry to change the way cattle are paid for," he said. Electronic banking technology reduces the float to two or three days from the nine or 10 it took to clear Eastern's payments.

Dewey, of Rabo Agri-Finance, suggested that sellers ask to be paid by wire transfer, cashiers check, certified check or ACH transfer, which goes through an automatic clearinghouse. The goal is to test the capital position of the buyer...


Source: DTN Progressive Farmer

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