Trustee: Likely Fraud in Cattle Case

Unpaid Claims by Producers Against Bankrupt Cattle Feeder Top $122 Million

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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A satellite image of 7M Feeders, a 115,000-head-capacity feed yard near Friona, Texas, one of two Texas feed yards tied to McClain Farms in Benton, Kentucky. USDA has at least 96 claims from cattle producers or livestock businesses for more than $122 million in losses involving the McClain feeders. (Satellite image from Google)

OMAHA (DTN) -- At least 96 cattle operations and individuals have filed claims with the U.S. Department of Agriculture under the Packers and Stockyards Act totaling nearly $122.4 million in unpaid cattle sales against a bankrupt Kentucky business and its Texas feed yards.

Court filings in the case show the court-appointed bankruptcy trustee agrees with Rabo AgriFinance that there was likely "massive fraud" involved with McClain Feed Yard and 7M Feeders, and McClain Farms in Benton, Kentucky.

Bankruptcy reports filed this week in the U.S. Bankruptcy Court for the Northern District of Texas reported the feed yards had $175 million in liabilities. That includes at least 96 claims filed by cattle producers with the U.S. Department of Agriculture under the Packers and Stockyards Act totaling $122.38 million. USDA had issued a notice on May 3 calling on producers who had sold cattle to quickly file claims with USDA against McClain's operations for payments not made or not honored.

Of those unsecured claims, 14 of them are for $1 million or higher and most involve feeders or livestock businesses in Kentucky and Texas. Four livestock-related businesses around Mayfield, Kentucky, are listed with unsecured losses reported to USDA totaling more than $85.6 million.

USDA's Agricultural Marketing Service (AMS) and the bankruptcy court are sorting through the losses and claims by creditors including Rabo AgriFinance which claims roughly $50.6 million in unpaid loans. Rabo had claimed McClain's feeding operations may have sold 78,000 cattle earlier this year without paying on their loans.

Brian McClain, 52, died on April 18 from apparent suicide just days after turning over his business operation to a third-party financial management company. McClain Farms, McClain Feed Yard and 7M Cattle Feeders filed for Chapter 7 bankruptcy on April 28.

An attorney representing the McClain feeding operations has not responded to DTN about the case.

Kent Ries, an attorney in Amarillo, Texas, appointed as trustee for the bankruptcy, on Friday filed a response to a motion from Rabo over selling some of the feed yards' assets. A hearing is also scheduled for creditors on June 14.

As trustee, Ries stated, he has been learning facts about the case that come from meeting with numerous parties, including staff from USDA. USDA has asserted that any cattle proceeds and other assets tied to the feed yards are subject to a "Dealer Trust" under the Packers and Stockyards Act.

The feed yards do not have anywhere near the value to pay the claims against them, Ries stated. The trustee reported $175 million in liabilities. That breaks down to $52.6 million in creditors with secured claims on property as well as the $122.38 million in unsecured creditors.

Total property listed as personal property valued at $545,619, which includes $350,000 in equipment and $195,619 in a checking account.

"The allegation by Rabo that massive fraud occurred in these cases unfortunately appears to be true," Ries added in the court motion.

Pointing to records kept by McClain's businesses, Ries stated in the motion that the trustee has access to the McClain companies' bank records, but the businesses' financial records "appear to be in complete disarray, for at least the past year."

Ries agreed with Rabo that the real estate and equipment tied to the feed yards should be promptly liquidated. The trustee agreed it appears most of the assets are pledged as collateral to Rabo and other secured creditors.

While Rabo may have a lien, Ries pointed to the USDA claims and recommends any funds from the sale of land or equipment be put into escrow until further orders from the bankruptcy court.

Rabo in May had filed claims with the court and was granted subpoena power to seek records from several businesses and banks tied to McClain.

Meanwhile, AgTexas Farm Credit Services, AgTexas PCA and Thorlakson Diamond T. Feeders filed their own requests for a subpoena Friday against Rabo AgriFinance seeking records. While Rabo claims priority on thousands of cattle that have been sold, AgTexas and Thorlakson claim the McClain feed yards held 9,605 cattle belonging to Thorlakson. AgTexas has an $8 million claim and Thorlakson has a $9 million claim against the McClain feed yards.

AgTexas and Thorlakson cited their belief that Rabo and a third-party firm started liquidating the cattle and other assets, as well as taken custody and control of records owned by the McClain businesses.

Also see, "Missing Cattle Case Leads to Tragedy,"…

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Chris Clayton