A dealer statutory trust signed into law in late December will now offer protection against dealer defaults when selling livestock, similar to protections already offered for packer defaults. A COVID-19 relief package passed by Congress Dec. 20 and signed by former President Donald Trump Dec. 27 included a bill to create a statutory trust under the Packers and Stockyards Act.
The dealer trust prioritizes unpaid sellers for livestock, or the proceeds from livestock if resold, in the event of a dealer default. Under the previous law, a buyer’s bank typically had priority over the unpaid seller, with a blanket security interest that could include cattle acquired later by their customer. Ultimately, this meant the bank got paid while the producer who sold the cattle was left high and dry.
SALE Act
The legislation that created the new dealer statutory trust, Securing All Livestock Equitably (SALE) Act, was introduced by Reps. Roger Marshall (R-KS-1) and Jim Costa (D-CA-16) in the House of Representatives and Sens. Jim Inhofe (R-OK) and Tina Smith (D-MN) in the Senate last spring. The trust is modeled under the currently existing packer statutory trust, which was created by Congress in the 1970s.
A dealer statutory trust concerns dealers, who are individuals in the business of buying and then reselling cattle in a quick turn-around. They often put cattle together in uniform loads and then sell to customers who could be a feedyard, stocker or packer. Only dealers purchasing $100,000 or more of livestock annually are included under the trust.
A dealer is not to be confused with an order buyer, which is sometimes interchangeably used in the industry but is legally a different entity. An order buyer acts on behalf of someone else, and then bills their customer. A dealer owns the purchased cattle.
Need for the trust
Chelsea Good, Livestock Marketing Association (LMA) vice president of government and industry affairs, told WLJ that in a typical year, there could be a half dozen to a dozen dealer defaults. However, about every five years, there would be a multi-million-dollar dealer default, which is why LMA has pushed for this legislation.
One of the most substantial examples of a dealer default occurred with Eastern Livestock in 2010. As the largest cattle dealer in the U.S., it seemed impossible for the entity to fail. However, Eastern was forced into bankruptcy after it owed about $112 million to creditors, including producers, dealers, and auction markets.
Most producers didn’t experience a loss after the default because they sold their livestock at a local auction market. Livestock markets are federally required to have custodial accounts, and to pay producers regardless of whether the market has the funds or not.
Unfortunately for the auction markets and the ranchers who sold directly to Eastern, they ended up unpaid for the full price of the cattle sold. And under the previous law, the sellers were unable to simply reclaim their livestock or the livestock’s proceeds, as the buyer’s bank was first in line.
USDA conducted a study over what would have happened if a statutory dealer trust had been in place during Eastern’s default. According to their findings, Eastern had more than $74 million in assets that could have been deemed trust assets and “could have easily paid all of the unpaid livestock sellers’ claims.”
With the new dealer statutory trust, day-to-day business isn’t altered, Good said. The only change is if a livestock dealer sends a bad check or no check and defaults, then the unpaid seller is given first priority for the livestock or livestock earnings and has 30 days to file a claim.
“We think this is a great new law that really addresses the specific challenge that we have seen in recovery and livestock dealer defaults,” Good said. However, she noted that while the trust is a step forward and a great tool, “It’s not a guarantee you’ll be made whole again—you will just have another recovery tool and probably made a lot closer to whole than you would under the previous law.”
She added that some LMA members wish the trust was broader, and offered protection no matter who they are selling to, whether it be a producer or a feedyard. However, Good doesn’t see broader coverage coming in the short-term future. The Packers and Stockyards Act only regulates certain types of entities, and there has been historic pushback from producers and feeders anytime there is conversation about falling under the Packers and Stockyards Act, she said.
How the trust affects you
The LMA staff recently held a webinar over the new dealer statutory trust, and Good said one of the main questions attendees had was how the trust was going to affect them. For example, there was the question of whether a feedlot buying cattle from a dealer was going to have to pay for the cattle twice. Good said the answer to that question was 100 percent no; the feedlot would receive the clear title and the proceeds they paid the dealer would become the trust assets.
There were also questions about whether the trust would impact credit availability for dealers. USDA has found that a dealer statutory trust would be unlikely to significantly impact credit availability or lender behavior.
To recap, the following is how entities will be impacted by the dealer statutory trust.
Unpaid seller — Under the new trust, an unpaid seller is given additional protection, but only if they sell to a dealer (they are also previously protected when selling to packers under the Packers and Stockyards Act);
Dealer — Day-to-day business does not change, and will not change if payments continue to be made. There is no requirement to have a separate bank account for different business dealings (i.e., purchasing cattle for own herd versus purchasing cattle to sell), but it is recommended to show distinct separation between business types;
Feedyard — As long as a feedyard is a buyer in the ordinary course of business and is paying for their animals, clear title is given and the funds paid to the dealer become trust funds—not the livestock themselves. When there is a dealer default, the dealer statutory trust will make it clearer who should be paid, therefore reducing litigation expenses for feedyards; and
Lender — If a lender’s client is an unpaid seller, there is more protection. If the client is a dealer and the dealer fails to pay, only trust assets are set aside and looked at and only the amount needed to fulfill trust claims. The lender also retains their existing priority in all non-trust assets.
Good emphasized that producers selling their cattle at a livestock auction have always had good protection, and selling through a livestock auction remains the safest form of selling livestock. The new dealer statutory trust will help auction businesses and large producers who sell directly to dealers. — Anna Miller, WLJ editor
