Trustee in 'ghost cattle' suit files motion to reconsider after judge dismisses fraud claims

LUBBOCK, Texas — In late March, a federal bankruptcy judge in Texas dismissed fraud claims against several banks and lenders accused of enabling a large cattle‑industry Ponzi scheme with ties to Kentucky. In early April, the trustee filed a motion to reconsider.

Brian McClain is alleged to have orchestrated a Ponzi and check‑kiting scheme involving fictitious cattle inventories through three interconnected businesses across Texas and Kentucky: McClain Feed Yard Inc., McClain Farms Inc., and 7M Cattle Feeders Inc. McClain allegedly used the businesses to solicit investments from hundreds of individuals and businesses pursuant to written or verbal partnership agreements.

McClain died in April 2023, and the businesses filed for bankruptcy after his death.

After the companies entered bankruptcy, court-appointed Chapter 7 Bankruptcy trustee Kent Ries sued multiple financial institutions, alleging the institutions knowingly facilitated the fraud.

However, the U.S. Bankruptcy Court for the Northern District of Texas held that the common‑law tort claims were barred by the doctrine of in pari delicto or, in layman's terms, that there was equal fault.

Special council to the trustee then argued in a motion to reconsider that the court should vacate the order and deny the banks' motion to dismiss or grant the trustee leave to amend his common-law claims.

In pari delicto

In the motion, the trustee argued that an opportunity to amend the claims would be fair, writing "the Fifth Circuit instructs that 'dismissing an action after giving the plaintiff only one opportunity to state his case is ordinarily unjustified.' "

The trustee further argued that, if granted leave to amend, they can allege additional facts or claims that are not defeated by the in pari delicto defense.

The motion added that while in pari delicto might bar the trustee's claim, Texas substantive law supersedes that: "even where a plaintiff is as culpable as defendants, in pari delicto will not bar the plaintiff's claims if (i) affording relief on the claims is in the public interest (including by benefitting innocent creditors and discouraging future wrongdoing and (ii) denying relief would not benefit the plaintiff-wrongdoer."

The motion stated that even if McClain were still alive, in pari delicto would not defeat the trustees' claims for several reasons:

There is little to no chance it will be a "100% case," as all recoveries would be distributed to the "innocent, defrauded" creditors who invested in the businesses rather than remaining with the bankrupted businesses, also referred to as the debtors.The motion argues that the above instance would be just, as in that case the "wrongdoing will not be rewarded but remedied."Furthermore, the court denying the in pari delicto defense would "discourage banks and lenders from reckless practices and intentional misconduct, which would protect the public from frauds such as this one."Similarly, the document argues that if the case dismissal stands, it allows the defendants — the banks: Rabo AgriFinance, HTLF Bank, Mechanics Bank, and Community Financial Services Bank — to escape accountability. "100% liability is shifted to the debtors while the wrongdoer defendants escape accountability-the exact opposite outcome that in pari delicto is intended to achieve," the motion stated.

The motion added that as McClain is dead and "cannot possibly benefit from any recoveries, there is no public interest in denying the trustee relief; the public's interest is furthered only by denying its (in pari delicto's) application here."

Banks as "insiders"

The motion further argued that the defendant banks, specifically Rabo, could be considered insiders and thereby cannot invoke in pari delicto.

The document stated that the trustee has alleged sufficient facts at least as to Rabo to qualify for two separate "exceptions" to the in pari delicto defense. The trustee alleged that Rabo "exerted excessive control" over debtors, giving rise to the possibility that "Rabo, as the party in control, was more culpable than debtors and therefore cannot invoke in pari delicto to defeat the trustee's claims."

The document argued Rabo's "excessive control" culminated in the removal of McClain, the debtors' sole owner and longtime sole manager. Rabo's alleged control included "regularly commanding some of the debtors' cash transactions on a near daily basis and extracting the DACAs (Deposit Account Control Agreements) and broad releases and waivers of claims preceding McClain's removal."

The motion stated that at a minimum, prior to the petition date, Rabo "clearly qualified" as an insider pursuant to 11 U.S.C. § 101(31)(B)(iii) — "a party that can force out the sole owner and manager from three of his companies against his preference controls those companies and is an therefore an insider."

The motion added that, if afforded leave to amend, the trustee could allege facts to render the other involved defendant banks — CFSB, HTLF and Mechanics — as insiders of the debtors.

McClain appeared to have two children, Meagan and Kinsey, with Leslie White, an employee of CFSB. The document stated that White regularly serviced debtors' accounts — including sending private text messages to Brian, Meagan and/or Kinsey about overdrafts and the need for deposits — while "running cover" for them internally at CFSB. The motion stated White mused, as early as Jan. 1, 2020, that it was "partially Chase's [i.e., the CFSB account manager] fault too . . . . He always lets him [i.e., McClain] get away with stuff and would blow it off like it's nothing when it really was a big deal." By the end, the debtors had been paid and had paid out approximately $330 million to investors and family members who also banked at CFSB, the motion alleged, putting CFSB on both sides of the transaction they internally doubted.The motion argued that HTLF controlled blank, signed checks of the debtors, and thus had control over the debtors, with the power to empty their accounts at any time. The trustee argues that the use of the blank checks "cannot be considered 'arms-length' given the only justification for the transactions was to fraudulently kite checks."The motion argued that Mechanics could potentially be insiders of debtors via Rabo, as prior to Mechanic's acquisition of Rabobank, N.A., the debtors' deposit accounts and loan accounts were managed by Rabo or its affiliate. "Management of the accounts generally remained the same from the debtors' perspective, with Mechanics instructing Rabo what to command McClain to deposit or transfer on any particular date or time," the document stated. "Rabo maintained such control that Mechanics executed the DACAs (Deposit Account Control Agreements) against their own interest, with nothing to gain, days before the Petition Date."

Adverse Interest

If granted leave to amend, the trustee could potentially incorporate facts that would support finding the "adverse interest" exception to the in pari delicto defense, the document stated. One of the proposed facts pertains to ownership and representation — McClain's ex-wife, Crystal McClain, was a 50% owner of at least McClain Farms, Inc. and McClain Feed Yard, Inc., while Meagan, Kinsey and/or others also served as representative of the debtors. The document argues that at no time was McClain the sole representative of debtors, and thus the adverse interest exception is available to the debtors.

The second proposed fact is that under the Ponzi-scheme presumption, every transfer is considered presumptively fraudulent "because each is designed to perpetuate, and unavoidably grow, the fraud, harming the debtors and their creditors." As such, McClain's conduct was predominantly adverse to the debtors' interests and his wrongdoing should not be imputed to the debtors, thereby defeating in pari delicto, the motion stated.

The trustee further noted that if granted leave a statutory claim could be added for contribution, which would not be subject to the defense of in pari delicto as a matter of law.

The motion ultimately argues that the court should reconsider and vacate its order, deny the defendants' motion to dismiss on in pari delicto grounds, or grant the trustee leave to amend.