SUMMARYProducers and auction markets sell livestock to dealers. When these livestock dealers fail to pay, the sellers are left financially devastated. Dealer bonds under the Packers and Stockyards (P&S) Act are designed to protect against buyer payment default. However, dealer bond payments average less than 15 cents on the dollar. The creation of a Dealer Statutory Trust would greatly improve financial recovery. A statutory trust would give unpaid sellers of livestock first priority in livestock and accounts receivable in the event of a dealer default. At the same time, a Dealer Statutory Trust would be simple and efficient because it would not require a separate account or changes to current business practices.

BACKGROUNDFarmers and ranchers (producers) make a living selling the livestock they raise. They sell directly to other producers, livestock dealers, feeders, and packers. They often also sell through the use of a local auction markets, where livestock are sold on a commission basis through a competitive bidding process to get the highest price. Buyers at livestock markets include producers, feeders, packers, and dealers.

Under the P&S Act, markets are required to maintain a custodial (trust) account and pay sellers for livestock promptly, even if the buyer does not pay the livestock market.

When a producer sells directly to dealers, the producer bears the risk of payment default.

Dealers are in the business of buying and reselling livestock, often grouping them to meet volume and type needs of their customers. P&S Act prompt payment rules allow dealers to take possession of livestock and pay for them later by placing a check in the mail the next day. With a slowing mail system, it often takes several days before the producer or auction market receives the dealer’s check or finds out that a check is not coming. Unlike markets, dealers do not maintain a custodial or trust account to guarantee payment.

Protecting Unpaid Sellers of Livestock Against

Buyer Payment Default

If a dealer takes delivery of a seller’s livestock and fails to pay (either because the dealer’s check is returned unpaid or the dealer never sends a check), what can an unpaid seller do? Unfortunately, under current law, not much can be done to recover livestock or funds.

• The original seller typically has no legal ability to reclaim the livestock. If the dealer has resold the livestock to a good faith purchaser, that second purchaser has clear title to the livestock, even if the dealer has not paid for them.

• The dealer’s bank will have priority over the unpaid seller if the bank has a blanket security interest that includes livestock the dealer has or might acquire. The bank’s priority exists even if the dealer hasn’t paid for the livestock.

WHAT HAPPENS IF A DEALER FAILS TO PAY?

During the past 10 years, there have been dozens of dealer defaults: ranging from relatively small ones to ones involving millions of dollars. The biggest dealer default in recent history involved Eastern Livestock. In 2010, Eastern Livestock was forced into bankruptcy owing approximately $112 million to creditors, including hundreds of livestock producers, other dealers, and markets.

HOW BIG IS THE DEALER DEFAULT ISSUE?

When producers sell to a packer, the P&S Act provides two means of protection: a bond and the Packer Statutory Trust. When they sell their livestock through an auction market, the P&S Act provides two means of protection: a bond and a custodial account, which is a trust account. When they sell to a livestock dealer, the P&S Act provides only one means of financial protection: the bond.

Typically, claims against the bonds of defaulting dealers recover only about 15 cents on the dollar. In the Eastern Livestock default, the recovery was less than 5 cents on the dollar.

ARE THERE DEFAULT PROTECTIONS IN THE CURRENT LAW?

The P&S Act should be amended to better protect livestock markets and producers from dealer defaults by adding a Dealer Statutory Trust modeled after the existing Packer Statutory Trust.

A Dealer Statutory Trust would give unpaid cash sellers (producers or markets) first priority in livestock and related proceeds or accounts receivable prior to other creditors. By adding a Dealer Statutory Trust to the P&S Act, business would continue as usual until a dealer defaults on payment for livestock. In the event of a default, the priority would help ensure the producers and markets that have sold to the defaulting dealer are paid first.A Dealer Statutory Trust would not change how the dealer conducts business or any other requirement of the P&S Act.

For example:• A dealer trust would not change a dealer’s bonding requirements.• A dealer trust would not require dealers to maintain a separate bank account. • A dealer trust would not affect any of the dealer’s other assets, besides livestock and accounts receivable for

livestock. • A dealer trust would not require a government account be set up for payment of claims.

WHAT IS THE ANSWER?

QUESTIONS?Contact LMA Vice President of Government and Industry Affairs, Chelsea Good cgood@lmaweb.com (816) 305-9540

LIVESTOCK MARKETING ASSOCIATION 10510 N Ambassador Drive • Kansas City, MO 64153-1278

(816) 891-0502 • (800) 821-2048 • Fax (816) 891-7926LMAinfo@LMAweb.com • www.LMAweb.com

example dealer default recovery with one potload of cattle

LOAD COST OF $80,000 (50,000 LBS. AT $1.60)15% RECOVERY FROM DEALER BOND (AVG. WITHOUT EASTERN LIVESTOCK)

$12,000

5% RECOVERY FROM DEALER BOND (EASTERN LIVESTOCK)

$4,000

AVERAGE BOND RECOVERY

LOSS

EASTERN BOND RECOVERY

LOSS