by Katie Micik, DTN Staff Reporter
ROSCOE, Ill. (DTN) — A former Eastern Livestock Company branch manager allegedly received and deposited $1.24 million of checks that customers made payable to the cattle broker in the days immediately following a bank’s hold on Eastern’s accounts, a lawsuit filed Tuesday in federal bankruptcy court alleged.
Eastern Livestock’s bankruptcy trustee told DTN on Wednesday that this is the first of many similar lawsuits he’s going to file, including one against another branch manager for a larger amount.
According to court documents, Eastern Livestock employees signed over 28 checks to Lexington, Ky., branch manager Willie Downs instead of depositing them in the Fifth Third bank account. Downs then endorsed and deposited the checks, roughly half of which cleared, according to Jim Knauer, the court-appointed bankruptcy trustee. Knauer said it’s likely companies that wrote the checks put stop payments on them once Eastern Livestock’s bad checks hit cattle country.
“Anytime you have a company that owes creditors and you take money from the company to pay someone else, that’s fraud,” Knauer told DTN. “That’s especially true when the company is insolvent and doesn’t have assets left to pay everyone.”
The lawsuit alleged Downs received and endorsed a fraudulent transfer of funds under bankruptcy code and committed criminal conversion of the checks under Indiana law. The lawsuit seeks return of the funds, attorney’s fees and punitive damages.
Downs could not be reached for comment. A Kentucky business license for Willie Downs Livestock of Bardstown, Ky., shows a change of address two years ago, but there was no phone listed for the company or its registered agent.
Fifth Third Bank froze Eastern Livestock’s accounts on Nov. 2, 2010, after uncovering an alleged check kiting scheme and as much as $2.5 billion in fictitious sales to related entities in a lawsuit filed in Hamilton County, Ohio, court. Knauer’s investigation has also found evidence of the check kiting scheme that involved several other Eastern Livestock branch managers and has determined that Eastern Livestock has been writing checks for fictitious transactions since at least 2008.
As a result of Fifth Third’s freeze, 743 ranchers and livestock businesses received bad checks totaling $130 million. The staggering losses could put some out of business since claims on Eastern Livestock’s $875,000 federal bond are expected to pay just pennies on the dollar.
The transfer of $1.2 million of checks signed over to Downs took place just days before an Ohio court appointed a receiver to take control of the business on Nov. 9, 2010, and ordered the cattle brokerage’s management staff and owner, Thomas Gibson, to cease all involvement.
According to the court complaint, Pam Gibson, an Eastern Livestock employee and family member, endorsed the checks and “At the instruction of Steve McDonald (“McDonald”), ELC’s chief operating officer, and Thomas Gibson, ELC’s sole member, Pam deviated from her normal practice of depositing the checks at Fifth Third and, instead, after endorsing the checks, gave them to McDonald,” the complaint stated. McDonald then gave the checks to Downs, who deposited the checks.
Eastern Livestock Co. acted with the intent to hinder, delay or defraud by this transaction, the lawsuit states, because the check transfer “was a secret transaction that took place outside the usual mode of business and in a manner different than ordinary methods” and the company was insolvent at the time of the transfer.
“Downs knowingly and intentionally exerted unauthorized control over ELC’s property when he took, endorsed, and negotiated checks made payable to ELC,” which harmed Eastern Livestock’s creditors, the court documents allege. Downs is listed in bankruptcy documents as a creditor to Eastern Livestock, but the amount was listed as unknown. Knauer’s lawsuit against Downs states the amount paid to him was in excess of what he would be paid under bankruptcy proceedings and was paid within 90 days of the petition for bankruptcy. In bankruptcy cases, payments made within 90 days of the bankruptcy are called preferential payments and can be rescinded.
The lawsuit also alleged that Downs converted the checks criminally, and under Indiana law, the trustee could be entitled to treble damages — an award three times the monetary damages, about $3.73 million — in addition to recovering the $1.2 million plus interest.
BRANCH MANAGERS GET BIG PAYMENTS
An 89-page list of payments made to Eastern Livestock insiders filed as part of Eastern Livestock’s bankruptcy schedules shows Eastern wrote checks worth at least $2.78 billion to members of the Gibson family, employees, employees’ businesses and enterprises related to Eastern Livestock. It also included payroll information, but that was a small portion of the overall figure.
More than $1.1 billion in checks were written to Thomas Gibson.
Eastern paid more than $542 million to Willie Downs Livestock, Inc., from Dec. 7, 2009, to Oct. 29, 2010, but it’s not clear whether the payments were for cattle.
Several branch managers received unusually large amounts compared to others. Six employees listed as managers or branch managers were paid between $18,000 and $45,000 compared to a branch manager from Oklahoma who received almost $10.7 million, a Tennessee branch manager who received $20.3 million and a Mississippi branch manager who was paid $44.6 million.
Knauer said his staff is reviewing all of the transactions with employees. According to Knauer’s blog, two branch managers received checks that were linked to Eastern’s alleged check kiting scheme in the 90 days before the bankruptcy petition was filed. The blog states that Eastern issued $8.8 million to one manager and $7.7 million to another.
A kiting scheme takes advantage of the time between when a check is deposited and when the bank receives the transfer of funds from the other bank. The blog states that the investigation into Eastern Livestock’s check writing is ongoing 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.”
Katie Micik can be reached at email@example.com
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Posted with DTN Permission by Haylie Shipp