OMAHA (DTN) -- Rabo Agrifinance is alleging "massive fraud" involving a Kentucky-based cattle business and its Texas feedyards that are now closed following the death of the owner and a bankruptcy filing.
Rabo Agrifinance, in both a civil case and a bankruptcy filing, accused Brian McClain of Benton, Kentucky, and his two Texas feedyards of engaging in a fraud that drained its bank accounts and cleared out tens of thousands of cattle from the feedyards, leaving Rabo with roughly $50.6 million in unpaid loans.
The operation's collapse may have affected dozens of other cattle producers and lenders as well.
Rabo's court filings cite McClain Feeders may have sold or transferred nearly 78,000 cattle since the start of the year without paying on their loans.
The alleged fraud, losses and legal battles have an extra layer of sensitivity because McClain, 52, also took his own life on April 18 as the finances of his cattle operations collapsed.
McClain Feed Yard Inc and 7M Feeders, all with common ownership, filed for Chapter 7 liquidation bankruptcy in the U.S. Bankruptcy Court for Northern Texas on April 28. McClain's feeding operations listed as many as 200 creditors and as much as $100 million in liabilities. McClain Feed Yard, a 3,000-head operation, is based in Hereford, Texas, while 7M Feeders -- a 115,000 head capacity yard -- is based in Friona, Texas.
NEED TO FILE CLAIMS QUICKLY
On May 3, USDA's Agricultural Marketing Service cited that livestock producers should file a Dealer Trust claim if they had cattle and had not received payment from McClain Farms Inc., 7M Cattle Feeders Inc., McClain Feed Yard Inc., or Brian McClain. USDA cited that unpaid sellers need to act quickly because claims have to be filed with 30 days of payment due, or 15 days after a payment such as a check did not clear.
DTN reached out to USDA seeking more detail over whether agencies are investigating the situation for Packers & Stockyards violations, but AMS did not have a statement before deadline.
The Kentucky Department of Agriculture stated it is assisting USDA's AMS Packers and Stockyards Division on an investigation into the McClain operations "as it relates to businesses and clients in Kentucky." KDA is directing inquiries about the investigation to USDA.
In its battle to search for cattle and funds, Rabo stated it has first security interests and liens on personal property for the McClain cattle operations. Rabo filed a motion with bankruptcy court in Texas on Tuesday asking for authority to issue subpoenas to third parties that may have information on the McClain's financial affairs. Along with bankers, business associates and accountants, Rabo also wants authority to examine records for the Texas and Southwestern Cattle Raisers Association (TSCRA), stating that TSCRA "oversaw, authorized and assisted with the removal by various third parties of thousands of head of cattle" from the Hereford and Friona feedyards in the weeks leading up to the bankruptcy filing.
Rabo cites that "special rangers" from the TSCRA removed more than 3,000 cattle from the McClain feedyards in Hereford and Friona between April 18 and April 21.
Asked about its role in the case, a spokeswoman for TRCSA stated, "TSCRA special rangers assisted in an inspection report for cattle moved from these locations at the request of cattle owners. We are not involved in the investigations; this case is under the jurisdiction of the FBI."
In a statement Wednesday, Rabo Agrifinance noted, "The courts will ultimately have the final say regarding this tragic and unfortunate situation. Rabo AgriFinance will not be commenting further as that legal process unfolds." The spokesperson added, "Separately, Rabo AgriFinance remains strongly committed to providing financial solutions to U.S. cattle producers, feedlots, and processors."
Rabo isn't the only financier that is a creditor in the case. McClain feedyards lists 11 other banks, Farm Credit lenders and other finance companies that could be creditors as well, though none of those lenders so far has filed specific debts owed in court.
The attorney for McClain Feed Yard and 7M on Wednesday also asked the bankruptcy court for more time to file a statement on financial affairs and other documents required by bankruptcy rules.
DTN also reached out to the bankruptcy attorney for the feedyards for comment but did not receive a response.
Rabo started out okaying a $332,500 real-estate loan for McClain in May 2018, which grew to a line of credit of $54 million at the beginning of this year.
That last line of credit was based on McClain's feedyard businesses listing cattle inventory of 89,522 head and a "borrowing base value" of $97.2 million. However, by the end of this past February, McClain feedyards reported they had only 37,992 cattle on hand and a borrowing base of $36.7 million. Rabo noted that McClain companies reported 52,350 fewer cattle and a value decline of more than $60 million.
When loan payments were missed in early April, Rabo staff conducted an audit of McClain's cattle operations and found 7,481 head in Texas and 3,094 head in Kentucky for a total of 10,575 head. Rabo stated in bankruptcy court that the bank staff could not verify the whereabouts of more than $33 million for more than 20,000 head that the McClain feedyards had sold.
Rabo cited that McClain's accounts at Mechanics Bank on April 7 held a balance of more than $22.369 million. Yet, by April 11, McClain's accounts at Mechanics Bank were overdrawn by $7.4 million.
McClain's operations also had close business ties to a couple of companies in Mayfield, Kentucky -- Wildforest Cattle Co. and MAP Enterprises, along with another farm, 2B Farms, a ranch near Snyder, Texas.
At the end of March, Wildforest, MAP and 2B Farms reportedly owed McClain's businesses more than $25 million and the companies were involved in transactions involving "many tens of millions of dollars." Rabo alleges the companies are tied to accounts that drained McClains' accounts at Mechanics Bank and put it $7.4 million overdrawn in just four days.
Rabo also wants to subpoena a Mayfield accountant who worked on the books for MAP Enterprises and Wildforest Cattle, as well as signed checks for MAP Enterprises.
At least 27 different cattle feeders, companies and individuals in Texas may have had some claim to cattle that had been held at the Hereford or Friona feedyards. Rabo listed more than 100 people overall that may have information on the movement of cattle from the feedyards, including two TRCSA special rangers.
Dozens of cattle feeders and ranchers in Kentucky and Texas are listed as potential creditors, as well as producers in Mississippi, Oklahoma, Ohio and Alberta, Canada.
OTHER MAJOR CATTLE FRAUDS IN RECENT HISTORY
History has shown the cattle industry has a pattern of complicated cases over missing cattle involving tens of millions of dollars, even hundreds of millions in some cases.
In eastern Washington, rancher Cody Allen Easterday now is serving an 11-year prison sentence on wire fraud charges, after pleading guilty to operating a so-called $244 million ghost-cattle scheme. The Easterday Ranches Inc. received payments from Tyson Fresh Meats and another company to buy and raise cattle Easterday never actually bought. Easterday also was ordered to pay the money back to Tyson Fresh Meats.
From 2004 to 2010, the owners and operators of Eastern Livestock in Kentucky were involved in a check-kiting scheme that led Fifth Third Bank to release $32 million in a line of credit to the livestock broker, which operated in 11 states. The founder of Eastern Livestock, Thomas Gibson, and Michael McDonald, the chief operating officer, were each sentenced to federal prison in 2013 for mail fraud "that caused the loss of millions of dollars to hundreds of businesses and individuals, including approximately 200 sellers of cattle located in Kentucky, who did business with Eastern Livestock in 2010," the U.S. attorney in the case stated.
In 2003, Missouri cattle broker George Young and his accountant, Kathleen McConnell, each pleaded guilty and were sentenced to federal prison for a Ponzi scheme involving a feedyard in Iowa. The feedyard held roughly 17,000 head, but investors who believed they owned cattle at the feedyard put the number on paper at nearly 344,000 head. The losses were estimated at more than $182 million. The scheme collapsed in 2001 when two Omaha banks each realized they had each loaned Young between $40 million and $50 million so the banks had tried to audit the feedyard and its records.
USDA notice to sellers and details on filing a claim: https://www.ams.usda.gov/…
Kentucky AG consumer office: https://secure.kentucky.gov/…
Chris Clayton can be reached at Chris.Clayton@dtn.com
Follow him on Twitter @ChrisClaytonDTN
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