LOUISVILLE, Ky. — In a state that has seen its cattle industry grow and prosper over the last several years, the downfall of one of the largest cattle brokers in the country has cause hardships for many producers and livestock markets.

That prompted ag leaders last week to address the bankruptcy procedure involving Eastern Livestock Co. (ELC). State Agriculture Commissioner James Comer, along with Kentucky Cattlemen’s Assoc. Executive Director Dave Maples and Bluegrass Stockyard’s Chief Operating Officer Jim Acres, slammed the two-year 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.”

It is estimated that ELC at one point purchased $10 million-$20 million in cattle a day, according to information listed in the federal indictment against ELC CEO and founder Thomas Gibson and 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. That included one count of criminal syndication, engaging in organized crime; 17 counts of theft of more than $10,000; 144 counts of theft less than $10,000 and more than $500; and 11 counts of theft of less than $500, according to information from the Kentucky attorney general.

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 reportedly ordered ELC to increase its bond amount, something the company did not do.

A chunk of that, $1.3 million, is owed to Bluegrass Stockyards, one of the largest livestock markets in the eastern United States.

Acres said the bankruptcy process is not working and needs to be taken into mediation and out of the hands of a court-appointed trustee. “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,” he said.

Fifth Third Bank closed the company’s accounts in November 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 former executives still face federal charges. Millions more have yet to be recovered and state 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 cannot 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 ELC did.

But the stockyards are obligated to pay the seller – leaving them vulnerable in a case like this.

Acres emphasized there have always been questions about ELC’s business, but the USDA was continually giving it 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 financially solid, helping it weather a storm such as this, he added. But it’s difficult for company to take a $1.3 million dollar hit. He also noted 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.

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 every day to represent them in bankruptcy court and go before a trustee,” he said.

The trustee is James Knauer, a partner in the Indianapolis law firm of Kroger Gardis and Regas. A post on the ELC Bankruptcy website’s Trustee’s Blog notes: “There is much maneuvering going on the Eastern 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 and unable to negotiate with the bank. But their motions ignore the fact that special counsel (an Indianapolis firm that 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 to be held Monday to hear the arguments for removing the trustee and taking the case to mediation. Acres said ag organizations through the Southeast supported this motion. Comer emphasized that had Bluegrass Stockyards not been as financially strong as it is, this event could have had the potential to take down the entire cattle industry in Kentucky, through a ripple effect.