Providing better protection for sellers when a livestock dealer goes broke is one of the top policy priorities of the Livestock Marketing Association.

That and other topics will likely be discussed when the livestock marketing council of the National Cattlemen's Beef Association meets in conjunction with NCBA's summer conference at the Gaylord Rockies Resort in Denver July 28-31.

Livestock auctions, as opposed to dealers, sometimes run into financial problems of their own, as a recent case in Northwest Kansas makes clear.

An estimated 40 livestock producers from multiple states are awaiting restitution after the Plainville Livestock Commission declared bankruptcy on March 1, reportedly with more than $14 million in outstanding debt. The facility has since been sold at auction and is now operating as Heartland Regional Stockyards.  

But there's an important distinction between what happens when auctions fail as opposed to livestock dealers. Under provisions of the Packers and Stockyards Act, auction markets are required to keep a custodial account separate from the operating account to insure livestock sellers are paid in a timely manner.

In the Plainville case, money was reportedly transferred out of the custodial account and into the operating account before the bank froze both accounts. At that point, producers who had sold through the auction were left with checks that would no longer cash due to insufficient funds.

Aaron Popelka, vice president of legal and government affairs for the Kansas Livestock Association, explains that when livestock are sold through an auction, the auction keeps a small percentage as commission, which gets deposited into its operating account, but the bulk of the money is required to go directly into a custodial account.

That money always belongs to the seller, he said. If the auction owner takes that money, they are essentially stealing from the seller.

If the bankruptcy court's appointed creditors and trustees can trace where the money went from the sale of the livestock, the money will be returned, because it is considered the sellers' rather than collateral belonging to other creditors or lenders.

Dealers, on the other hand, who act as brokers buying and selling livestock, don't have the same requirement to put money aside.

"Right now there's nothing to protect someone who sells to a dealer," Popelka said. "The seller simply becomes an unsecured creditor. The bank could get all of the money available and leave me as the seller with nothing.

"We don't think that's right. The seller is not in a position to know a dealer's financial situation. Banks, on other hand, are in the position to demand financial records and do a credit report."

According to LMA, dozens of dealer defaults have occurred over the past 10 years, in some instances involving millions of dollars. Probably the best known is the collapse of Eastern Livestock, which happened back in 2010, sending shock waves through the industry. Even though the brokerage was based in Indiana, it did business with producers in all 48 states, including Colorado.

In that case, around 200 producers were ultimately left holding bad checks.

In a more recent case, a dealer in Nebraska bought $1 million worth of livestock from an auction in St. Marys, Kansas, and $3 million through another auction in Ogallala, Nebraska, before running out of credit to operate.

While Oklahoma and Florida have lien laws that give producers the ability to reclaim livestock (or funds equal to their value) in cases like these, most states don't.

In the case of Eastern Livestock, approximately $112 million was owed to creditors, and livestock sellers ended up receiving less than 5 cents on the dollar.

"Unfortunately what we've seen happen in some of these situations is that the lender gets made whole, but the people who sold livestock don't," said Chelsea Good, LMA's vice president of government and industry affairs from her office at LMA headquarters in Kansas City.

Changes backed by LMA, KLA, NCBA, the Farm Bureau, U.S. Cattlemen's Association and other groups would remedy that.

Last year, the Securing All Livestock Equitably (SALE) Act was introduced, which would have amended the Packers and Stockyards Act to create a dealer statutory trust requirement.

The dealer trust idea is modeled after an existing packer statutory trust, which Congress created to address similar issues with packer defaults in the 1970s.

"In some rare situations the livestock auction may still have the physical cattle, but more often than not they will have resold those livestock and in that case, rather than the livestock, the producer could claim the proceeds from that livestock," Good explained.

When the Eastern debacle occurred, the level of bonding that dealers and auctions are required to maintain was widely questioned. But the reality of today's high volume fast paced marketing system makes it difficult to set the bonds high enough to cover the potential damage done in a check-kiting scheme.

"In the case of Plainville, the bond is equal to about ten cents on the dollar," Popelka said. "The flip side of that is what level do you want the bond set at? Whether a dealer or auction, it will cost them more capital and if it increases their cost, that would cause them to increase their sales commission, so we feel like we need to have some give-and-take on the bond requirement."

When Eastern defaulted, John Stulp was Colorado's Commissioner of Agriculture. "Today $1 million bonds are not unusual," he said at the time. "But you have companies literally handling millions of dollars in transactions at a time."

Back then, LMA CEO Mark Mackey used the occasion to stress the benefits of doing business through a livestock auction, noting that no producer who sold to Eastern through a livestock market received a returned check stamped NSF for non-sufficient funds.

"One thing about the livestock markets, and something so many producers don't realize, they are assuming a large risk for a very nominal fee," he said at the time. "That's the bottom-line of what we are seeing here. The livestock markets take on the responsibility for collecting payment."

The dealer trust provision introduced last year did not make it all the way through Congress, but the 2018 Farm Bill required a related feasibility study, which is due for completion at the end of the year.

LMA, KLA and other groups supporting the measure have filed comments with USDA.

KLA's written comments simply state that the group supports federal legislation "to give unpaid cash sellers first priority in livestock and the proceeds or accounts receivable from the sale of such livestock prior to other creditors."

The document goes on to say, "This policy is in direct response to a livestock dealer defaulting and leaving a KLA member without payment on nearly $1 million worth of livestock. According to the information made available to KLA, the dealer's lender, which had a perfected security interest, chose a point in time to call its loan and freeze the dealer's assets in such a way to maximize the lender's recovery, and subsequently, maximize the losses to unsuspecting auction markets and producers."

LMA also filed comments and is continuing to monitor the issue.

"We're optimistic. We're going to keep working on this, because we think it's really important," Good said.