New legislation seeks to help stockyards survive dealer defaults
DICKINSON, N.D.—When Eastern Cattle filed for bankruptcy in 2010, it left hundreds of businesses and individuals high and dry. At the time, it was among the largest cattle dealers in the nation. Its owners were convicted for fraud in federal court years later, but the damage was already done.
Current laws see banks get priority over cattle auction houses and stockyards when it comes to being compensated for dealer defaults.This means that if a sale is completed, but the checks bounce, the bank gets to recuperate its losses—and folks like owner/operator of Stockmen's Livestock Exchange Larry Schnell of Dickinson end up with nothing to show for it.
"Because of how our laws are set up right now, when a dealer defaults the bank has a right to grab all of the assets in their account," Schnell said. "That may even include, if a dealer would buy cattle at an auction market or a rancher ... if the rancher and market hasn't been paid yet, the bank can still grab the assets."
Cattle dealer bankruptcies can be potentially devastating to stockyards, Schnell said.
"When they're big, they're really big," he said. "It's one of those things where almost no one knows how that's the way it's set up ... I don't think anybody thought about the ramifications. When the law was written, it probably just said 'the lender has the right to the money the guy defaults.'"
Schnell hopes for a legislative solution, and Sen. Heidi Heitkamp, D-N.D., is co-sponsoring what she says is just such a fix, S3140, known as the SALE Act.
"What this would do would ... if a farmer sold directly to a dealer or a sales barn has liabilities out to a dealer, if a dealer goes bankrupt it puts the dealer in a number one position in priorities to get paid," Heitkamp said. "What it does is adds a bankruptcy protection for giving a much higher priority to sales barns. So they can sleep easier at night knowing their priority is higher than the banks."
It isn't merely unpaid assets at risk either—Schnell said that the current priority allows banks to not only seize assets ahead of the auction houses, but they can even go into the auction houses and claim the money paid to them.
"Even if they were paid, the bankruptcy law allows them to go back 90 days and take (the money)," Schnell said. "The intent is to change the law to where an unpaid seller would have first right ... to the assets to that dealer. In other words, if a dealer defaults, the unpaid seller would either be able to get the cattle or the money ahead of the bank. It would also do away with the 90-day thing."
Heitkamp said that protecting stockyards helps to protect the local cattle market.
"This is not a high margin business—and it's so important that we keep those local livestock barns and sales barns in our community so we don't have to haul our cattle so far, so we can have a local market," she said. "As that liability gets greater and greater, there is the uncertainty—and if you look at the risk, you may have people who say 'I don't want to take that much risk.'"
Cattle can't be titled, like cars can be, Schnell said—the cattle industry is perhaps the only one that doesn't have paperwork of ownership.
The bill is sponsored by Republican Sen. James Inhofe of Oklahoma and co-sponsors include Democrats like Sen. Jon Tester of Montana as well as Republicans such as Sen. John Thune of South Dakota.
"There's a companion piece in the House that's moving through. This is something to me that should be a no-brainer," Heitkamp said. "The only opposition you could potentially see would be the bankers, but I think with a good bipartisan move we'll try and push this thing forward—but as you know, even common sense things sometimes get hung up in this place."