Bankruptcy System Provides Means to Shut Down Massive Cattle Fraud Case

On June 19, 2001, Walter J. Hoyt III was sentenced to more than 19
years in prison for his role in a massive fraud scheme that resulted in losses
exceeding $100 million to thousands of investors from more than 40 states.

Hoyt and his office manager, Phyllis M. King, were convicted of multiple counts
of bankruptcy fraud related to the involuntary chapter 7 bankruptcy cases of W.J.
Hoyt Sons Management Co. Ltd. and W.J. Hoyt Sons Ranches MLP, two partnerships
that Hoyt controlled. David R. Barnes, a general partner in one of the
partnerships, pleaded guilty to bankruptcy fraud. Hoyt and three other co-defendants
also were convicted of, or pleaded guilty to, other charges. The criminal convictions
of Hoyt, King and co-defendant David L. Cross are currently on appeal to the
Ninth Circuit Court of Appeals.

Despite an exhaustive investigation, the millions of dollars that were lost have
not proven recoverable. However, the bankruptcy court and the U.S. Trustee
ultimately halted Hoyt's fraudulent scheme by taking actions that cut off the
solicitations and investor payments—which had continued secretly even after orders for
relief were entered in the involuntary bankruptcy cases.

Cattle Investment Scheme

Hoyt bred and raised cattle and sheep. In fact, he claimed to have the largest
Shorthorn breeding operation in the country. By the early 1970s, Hoyt was
soliciting investors who were told they could shelter income from taxes by purchasing
interests in Hoyt livestock. He prepared tax returns claiming large deductions that
flowed through to investors and initially resulted in substantial tax refunds.
Seventy-five percent of the refunds were automatically funneled back into Hoyt's
operation.

Unfortunately, Hoyt's operation did not own anywhere near the thousands of cattle
that Hoyt claimed, and the livestock owned were far less valuable than Hoyt
represented. To make the herd appear larger, false computerized book entries were
created. These book entries were so unreliable that in some instances the records
showed calves giving birth to their mothers.

Hoyt devised a complex web of more than 270 entities that made it difficult for
investors, the Internal Revenue Service (IRS) and others to learn the true state
of his assets and financial affairs. In addition to creating scores of investor
partnerships, Hoyt formed master limited partnerships to manage the overall operation,
partnerships to manage livestock, partnerships to own real property, partnerships to
operate feedlots and prepare tax returns, and a bewildering array of other entities.
These entities inexplicably appeared, disappeared, changed names, changed functions, and
lost or gained assets and partners.

In 1995, a group of investors obtained a multimillion-dollar judgment against
Hoyt and various Hoyt entities. The investors eventually filed involuntary chapter 7
bankruptcy petitions against W.J. Hoyt Sons Management Co. Ltd. and W.J. Hoyt
Sons Ranches MLP, the two partnerships at the center of Hoyt's operation. In June
1997, orders for relief were entered against the two debtor entities in the
Portland Division of the U.S. Bankruptcy Court for the District of Oregon.

Administration of the Bankruptcy Case

All of the chapter 7 trustees in the district declined appointment in the Hoyt
bankruptcy cases—an unprecedented event in the District of Oregon. It was clear that
the cases involved hundreds of interrelated entities with confusing schedules of assets
and liabilities, and offered little likelihood of recovery for creditors. When he could
find no private trustee willing to serve in the cases, Jan S. Ostrovsky, the Region
18 U.S. Trustee, appointed himself chapter 7 trustee pursuant to 11 U.S.C.
§701(a)(2).

Ostrovsky assembled a multi-state team from his region to administer the case. The
primary members of the team were attorney Neal G. Jensen, the Assistant U.S.
Trustee in Great Falls, Mont.; attorney Pamela J. Griffith, the Assistant U.S.
Trustee in Portland, Ore.; and Allen C. Painter, a certified public accountant
who is the bankruptcy analyst in the Portland office.

To gather information about the business operations, Jensen questioned Hoyt at the
meeting of creditors. Hoyt confirmed the sworn statements in the bankruptcy schedules,
signed by general partner Barnes, that the debtors had virtually no assets. He also
testified that the debtors had not been in business since 1995.

After the meeting of creditors, the trustee directed the U.S. Post Office to
forward the debtors' mail to him. The mail contained numerous checks from investors
payable to one of the debtors, contradicting Hoyt's testimony that the debtors were
not in business and that the livestock purchase notes from investors were uncollectible.

The trustee demanded an explanation for these payments and the turnover of any
similar payments. He instructed the debtors that they were not authorized to continue
their operations and advised the parties that conversion of bankruptcy estate property
could have serious consequences, including criminal liability.

The trustee did not receive a direct response to his demands, nor were the assets
or requested information turned over. Instead, the mail and checks soon diminished
to a trickle. The trustee later learned that, shortly after the redirection of the
debtors' mail, office manager King wrote an urgent letter to investors advising them
to mail their payments to a different Hoyt entity due to a "problem with the mail."
Painter later calculated that more than $1.6 million in investor payments was
diverted by Hoyt and his associates after the entry of the orders for relief.

The trustee also discovered that Hoyt was still operating a livestock investment
business. The trustee pursued injunctive relief against the Hoyt principals and related
entities, obtaining temporary restraining orders and permanent injunctions that precluded
the sale of or interference with livestock and investor payments. Notwithstanding these
efforts, Hoyt continued to direct the operation of the debtors' business and divert
estate assets.

Once it became evident that Hoyt was still collecting money from investors and
running the livestock operation, the trustee formulated three goals for the administration
of the bankruptcy case:

1. Shut down the Hoyt business operation to preserve bankruptcy estate assets and
   prevent further harm to investors;
2. Collect as much money as possible for creditors through asset liquidation; and
3. Refer and assist in a criminal prosecution of Hoyt and others involved in the
   fraud.

The goal of shutting down the ongoing business was complicated by the proliferation
of entities that Hoyt had formed, including an entity under whose guise Hoyt
continued to operate. Jensen and Painter traveled to the business premises in remote
Burns, Ore., and ultimately obtained an agreement that called for the cessation of
operations, the liquidation of assets, and the determination of asset ownership at a
later date. The Hoyt operation finally terminated in February 1998.

The trustee's immediate concern after the business shut down was to locate and sell
livestock. Hoyt was evasive about the livestock's location, and continually insisted
that they were owned by entities or individuals other than the debtors. Nonetheless,
the trustee eventually sold around 1,500 cattle for approximately $800,000,
after hiring cowboys to round them up in California.

Identifying other assets was difficult because the debtors' schedules and Hoyt's
testimony were unreliable. Jensen and Painter retrieved from offices in Burns, Ore.;
Orovada, Nev.; and Elk Grove, Calif., thousands of boxes of records containing
millions of documents. The two men loaded documents into a rental truck and hauled
them to Portland, where Painter reviewed them. Jensen, with Painter's assistance,
conducted scores of Fed. R. Bank. P. 2004 examinations of Hoyt principals and
former employees. The examination of Hoyt alone lasted nearly a month.

It became evident that the many entities in the Hoyt organization had not acted
independently since at least 1995. The trustee therefore filed a complaint for
substantive consolidation, which sought to combine all of the assets and liabilities of
the debtors with those of the related entities. In November 1998, Bankruptcy
Judge Elizabeth L. Perris entered a judgment of substantive consolidation that
consolidated all of the entities as of the date that the involuntary petitions were
filed.²

To date, the trustee has collected more than $2.8 million from the liquidation
of assets, including livestock; hidden cashiers' checks; and fraudulent conveyance,
malpractice and avoidance actions. Impediments included confusing or contradictory
information about asset ownership, causes of action ostensibly beyond the statutes of
limitation, and property with seemingly impossibly clouded titles. Although the trustee
hired an expert to track the flow of monies and the movement of cattle, little of the
invested money could be recovered. The trustee is still collecting assets.

Criminal Case

In pursuit of the third goal, the trustee made a criminal referral to the U.S.
Attorney's Office and the FBI. The referral included allegations of asset
concealment, false oaths and false statements. The bankruptcy fraud charges became part
of a superseding indictment returned against Hoyt and five other defendants in June
1999.

Assistant U.S. Attorney Allan M. Garten pursued the case, which was the
largest financial fraud case ever prosecuted in the District of Oregon. Painter
provided almost full-time assistance in the criminal case during the year preceding the
trial.

After a five-week trial, a federal jury convicted Hoyt and two associates on
multiple criminal counts. Hoyt was convicted of conspiracy, mail fraud, bankruptcy
fraud and money laundering. David L. Cross, a former general partner of one of
the debtors, was convicted of conspiracy and 11 counts of mail fraud. Former office
manager King was convicted of bankruptcy fraud and money laundering. Three other
defendants who were indicted pleaded guilty prior to the trial.

All of the defendants received significant prison sentences. Hoyt is likely to
spend the rest of his life in jail.

Conclusion

In this case, the trustee's first goal has been accomplished: The Hoyt operation
has been shut down in order to preserve estate assets and protect future investors. The
second goal, the liquidation of assets, continues. The third goal, the prosecution of
Hoyt and other principals for bankruptcy crimes, has also been met through the combined
efforts of the trustee and the U.S. Attorney.

While the huge size and complicated facts of this case make it unique, its resolution
came about through the use of procedures available to the U.S. Trustee and private
trustees in every bankruptcy case. The trustee's ability to take control of business
operations, seize assets, conduct discovery of records, use Rule 2004 exams to
question principals and employees, and obtain an order for substantive consolidation of
related entities enabled the trustee to untangle Hoyt's complex business operations. All
in all, the bankruptcy system provided an effective framework for halting the ongoing
fraud.

Footnotes

¹ All views expressed in this article are those of the author and do not necessarily represent the views of the U.S. Trustee Program
or the U.S. Department of Justice. The author wishes to thank the following colleagues for their assistance in preparing this article: Jan
Ostrovsky, U.S. Trustee for Region 18, Seattle, Wash.; Neal Jensen, Assistant U.S. Trustee, Great Falls, Mont.; Allen Painter,
Bankruptcy Analyst, Portland, Ore.; and Jane Limprecht, EOUST. Return to article

² The Ninth Circuit later affirmed a similar substantive consolidation of non-debtor entities in In re Bonham, 229 F.3d 750 (9th Cir 2000). Return to article