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Lawsuit against Nebraska Brand Committee paints background of brand law discussion

By Spike Jordan
for The Fence Post

ALLIANCE, Neb. — The brand law working group met for its final session in North Platte on Wednesday, Nov. 18, to finalize discussions about LR 378 proposals which cattle industry stakeholders brought to the table last month. The current Nebraska Brand Act has undergone several tweaks over the years; however, the last significant overhaul of the act was in 1999, more than two decades ago, when the legislature passed LB 778.

However, as these working group discussions have progressed, in the background one of the state’s largest cattle feeders has taken legal action against the Nebraska Brand Committee in Box Butte County District Court over a nearly decade-long agreement regarding brand inspection exemptions.

Adams Land and Cattle Co., a registered feedlot in Broken Bow on the east edge of Nebraska’s brand inspection area, filed the lawsuit on Aug. 31, with a subsequent amended complaint filed on Sept. 1, seeking to maintain a 2009 agreement it brokered with the Nebraska Brand Committee to exempt cattle from being brand inspected when moving from background facilities into its registered feedlot (RFL).

That deal potentially saved Adams hundreds of thousands of dollars in inspection fees over the last decade; however, the brand committee has argued in a series of letters that the agreement was not authorized under statutes and that it should have never entered into it in the first place.

The lawsuit indicates that Adams is being represented by attorneys Gregory C. Scaglione and Adam J. Wachal of Omaha’s Koley Jessen. A motion to dismiss the lawsuit was filed on Oct. 2 and shows that the Brand Committee is being represented by Assistant Attorneys General Joshua E. Dethlefsen and Justin D. Lavene. They argue that Adams “fails to state a claim upon which relief can be granted.”

The brand committee’s motion to dismiss is set to be heard in Box Butte County District Court by Judge Travis O’Gorman on Dec. 16 at 10 a.m.

INTO FOCUS

The Fence Post learned of the lawsuit’s existence at the last brand law working group meeting in North Platte on Tuesday, Oct. 20, during an exchange between John Sennett, a Broken Bow attorney who represents a feedlot group which calls itself The Nebraska Beef Producers Committee, as well as Adams Land and Cattle Co., who is also a member of the Beef Producers, and Jeff Metz, a Morrill County cow/calf rancher representing Nebraska Farm Bureau members. Metz had previously served an appointment to the Nebraska Brand Committee. Metz asked specifically what Sennett and the Beef Producers objections were to section 54-1,122 of the current Nebraska Brand Law.

Normally, livestock have to undergo a brand inspection prior to being placed into an RFL, however under 54-1,122, cattle originating in a state with a brand inspection agency can be moved directly into an RFL without having to undergo an inspection, so long as those cattle are accompanied by a brand clearance or inspection certificate. However, the interpretation of that section has led to the litigation by Adams Land and Cattle, Sennett said.

“For a generation — for over 10 years — Adams Land and Cattle Company would buy cattle from Kansas, or wherever they’re bought, take them to a backgrounding facility, and then as they needed cattle in the finishing facility, they’d simply move them,” Sennett said responding to Metz. “There was an agreement between Adams Land and Cattle and the Brand Committee that said that as long as we had proof of ownership and could show — you know, the string that those cattle came here, health papers and brand certificate or whatever — that we could then move those cattle from the backgrounding facility to the feedlot, and there would not be any brand inspection charge.”

While Adams would have to still pay the roughly $100,000 annual fee for its Registered Feedlot permit, Sennett said that under the agreement Adams would not have to pay the per head fee to have the cattle re-inspected when they moved from backgrounding lots into the RFL.

“These guys…,” Sennett said, pointing to Jack Lawless and Jeremiah Rieken of Gottsch Cattle Co. and Pete Lapaseotes, who are fellow Nebraska Beef Producer Committee members, “…it didn’t work that way for them, but we had this agreement with the brand committee. The brand committee has now said, ‘we don’t interpret,’ this statute that you were asking about, ‘we interpret it differently than they do.’”

“And there’s a lawsuit right now going on to decide how to interpret that statute, and I’m not here to argue that interpretation,” Sennett continued. “This is an inappropriate place to do that. But I can tell you there is a disagreement as to the interpretation of that statute. But during that 10 years, Adams Land and Cattle did not pay to have those cattle brand inspected from the backgrounding lot to the registered feedlot.”

Metz asked if Sennett would agree that cattle going into the RFL needed some sort of identification or proof of ownership.

“Absolutely,” Sennett said. “All of that was part of the deal was that we had. We transported cattle out of that backgrounding lot to the registered feedlot, it had to be accompanied by evidence of ownership… satisfactory evidence of ownership, then that paperwork showed up at Adams Land and Cattle so that when the inspectors came by on a quarterly basis or whatever, they would see the paperwork that showed the ownership of those cattle.

A DECADE OF EVENTS

There’s a somewhat complicated timeline of events that led to the lawsuit, but here is a rough outline based on meeting minutes, court documents, interviews with past brand committee staff and board members, legislative transcripts, public records, and attorney general opinions.

• In August 2008, Adams entered into a Registered Feedlot Agreement with the Nebraska Brand Committee when it applied for its permit to operate its RFL. Adams argues in its lawsuit that it didn’t think the agreement was necessary, but past committee staff said that such agreements were a standard part of the RFL permit process.

• Based on interviews with past committee members and staff, sometime during the year that followed the 2008 RFL agreement, Adams approached the Brand Committee with concerns about the amount of fees it was paying to have cattle re-inspected when moving cattle from growyards into its RFL, and asked if there was any way it could be given a more reasonable work-around.

• According to the Sept. 17, 2009, brand committee meeting minutes, then-committee Executive Director Steve Stanec “had reviewed the registered feedlots acceptance of ownership upon entry,” with specific regards to the feedlot’s point of origin requirement under 54-1,122.

The action taken by the brand committee allowed an RFL to move cattle from a backgrounding lot into an RFL without an inspection, provided that 1) the integrity of the cattle remain intact, 2) there is no change of ownership, 3) documentary evidence of ownership accompany the cattle, and 4) the cattle must be owned by the feedlot owner.

A motion was made to accept that proposal by then-board member Jim Lee and seconded by then-board member John Warren. After discussion, the motion was amended to include “Upon approval of the Committee’s legal counsel,”

The motion was carried by a unanimous vote of Lee, Warren, then-member Linda Andersen, and then-chairman Gary Darnall. Then-vice chairman George Cooksley was recorded as absent and excused.

• In October 2009, a “Registered Feedlot Addendum,” which modified Adams 2008 RFL agreement to contain language similar to what the brand committee board of directors had approved at its September 2009 meeting, was signed by Stanec and Dean Miller, Adams’ director of cattle procurement.

Adams has attached that agreement to its lawsuit as an exhibit; however, the addendum contains an interesting line at the end which is part of the ensuing controversy:

“This Addendum shall be subject to review upon the original Application and Agreement for Permit to Operate a Registered Feedlot Permit renewal date in September of 2010.

All other requirements and stipulations outlined in the original agreement shall remain unchanged and in effect for the duration of the agreement.”

•September 2010 came and went, and while Adams was granted a registered feedlot renewal permit, the committee argues today that the 2009 RFL addendum had expired because it was not renewed at that time.

• In subsequent years, Adams continued to apply for and receive its RFL renewal permits; however, as that happened several brand bills worked their way through Nebraska’s unicameral.

• In 2014, the legislature passed LB 768, a bill introduced by then-Sens. Ken Schilz of Ogallala and Al Davis of Hyannis. According to a transcript of the ag committee hearing for that bill, in 2013, the state auditor discovered a conflict in the brand law. When the legislature enacted LB 441 in 2005, it increased the per-head inspection fee from $0.65 per head to a maximum of $0.75 per head, and set the fees for registered dairies and feedlots were set at $700 per thousand head and $750 per thousand head respectively. However, the auditor found a discrepancy where in one part of the law, the $650 per thousand cap was still referenced.

The legislature’s intent was to tie the per thousand head fee for RFLs to the per head inspection fee, and that’s important because it comes up later in the discussion.

• In 2015, the legislature passed LB 85, introduced by Davis. LB 85 raised the statutory cap for inspection fees from $0.75 per head to $1.10 per head, with corresponding increases to the per thousand head rate for RFL fees.

• On Jan. 22, 2016, then-director Shawn Harvey, who followed Stanec as the committee’s chief executive, received an opinion from the attorney general’s office as to whether the committee had statutory authority to set the RFL fee at $0.75 when the per head inspection fee had increased to $1 per head.

“Our opinion is that currently the Act does not provide the Brand Committee with the authority to vary the inspection and registered feedlot enrollment fees,” Attorney General Doug Peterson and Assistant AG Emily K. Rose wrote.

The opinion cites its basis as the discussion from the LB 768 ag committee hearing, however, the AG’s opinion goes one step further.

“…for registered feedlots, the Brand Committee inspectors still travel out to the feedlot, but instead of doing a physical inspection, they perform a quarterly audit of records to verify ownership. The inspections performed at registered feedlots, therefore, are merely a different method of doing the inspection, not a Brand Committee designated time and location that reduces the cost of an inspection.

It should also be noted that this auditing method of inspection for registered feedlots is precisely one of the main benefits of the registered feedlot program. Such method gives the registered feedlots flexibility in how they do business because they are not required to submit to a physical brand inspection before selling the cattle and can, therefore, move cattle more efficiently, at any time of day, without inspection.”

• On July 19, 2016, the brand committee sent a letter to Adams informing it that the inspection fee had increased to $1 per head and that a new application and agreement would need to be filled out with the brand committee. The 2009 RFL addendum was not mentioned in the 2016 agreement, and the copy of the application which Adams attached as an exhibit to its lawsuit does not contain Harvey’s signature.

• On July 26, 2016, Nebraska State Auditor Charlie Janssen released a scathing audit which found a number of irregularities with the brand committee, which lead to Harvey’s resignation on Aug. 9, 2016.

• In the fall of 2016, the Brand Committee hired Bill Bunce as executive director to lead it through the transition period as it sought to correct the deficiencies discovered by the audit.

• On May 30, 2017, while Bunce was barely five months into his tenure as director, a group of feedlot owners calling itself “The Nebraska Beef Producers Committee” filed a lawsuit in the U.S. District Court of Nebraska against Bunce and the Brand Committee alleging that Nebraska brand committee violated the dormant Commerce Clause and Equal Protection clause of the U.S. Constitution, and sought an injunction from the court to prevent the brand committee from collecting both the annual RFL and per head inspection fees. They also argued that the brand laws were obsolete.

At the time of the lawsuits filing, the Beef Producers Committee members were not publicly known. We know today that Adams, Gottsch and Lapaseotes are members, and have contributed to litigation, lobbying efforts, as well as providing legislative testimony in an attempt to either overturn the Brand Law or exempt the RFL segment from collection of inspection fees.

•In August of 2017, Bunce resigned as executive director and the committee appointed brand investigator Dave Horton as its interim director.

• On Feb. 5, 2018, U.S. District Judge John Gerrard dismissed the Beef Producers lawsuit, writing that, “whatever flaws there might be with the Brand Act, it does not violate federal law.” In his order, the judge also said that he didn’t doubt the Beef Producers claim that the brand law has outlived its usefulness, but that the place to decide that lied in the legislature.

•During the course of reporting this story, it was learned that at some point during the 2017 Beef Producers litigation, the attorney general’s office discovered the 2009 RFL addendum; however the AG’s office declined to comment citing active litigation.

•On June 14, 2018, Horton sent a letter to Adams as interim director to inform it “by its own terms, that (2009) Addendum expired in September 2010 and was never renewed, and more importantly, that Addendum was not and is not authorized by state law.”

Horton wrote that while the brand committee was not under a legal obligation to provide Adams with a transition period, it was prepared to allow the company to have until Aug. 31, 2018, to come into compliance with the inspection requirements for RFLs.

The letter stated that Adams needed to comply with the requirements contained in the brand statutes governing registered feedlots, assumedly that cattle moving from background lots into its RFL would need to be inspected, and that Adams would need to pay the $1 per head inspection fee.

The letter copies members of the brand committee and Lincoln Attorney Mark A. Fahleson, who represents the committee as a special attorney general with regard to certain issues.

•On July 13, 2018, Adams sued the Brand Committee in Box Butte County District Court in response to Horton’s June letter.

•On Aug. 2, 2018, Horton sent a second letter to Adams stating, “Based on our recent discussions, the Nebraska Brand Committee is rescinding our June 14, 2018 letter until further notice to allow for additional review by the Committee of its statutory authority, rules and regulations regarding satisfactory evidence of ownership in relation to registered feedlots.”

That letter copies the committee members, Fahleson, and Assistant AG Josh Dethlefsen.

•Adams then dismissed that lawsuit without prejudice, and in September 2018 it received a RFL renewal permit from the brand committee.

•In September 2019, Adams states that the committee did not renew its RFL permit, however it argued that the committee and Adams continued to interact in accordance with the terms of the 2008 and 2016 agreements.

•In February 2020, the Nebraska Brand Committee hired then-chairman John Widdowson as its first permanent executive director since 2017.

•On June 1, 2020, Widdowson sends a letter to Adams containing nearly identical language to the 2018 letter that Horton sent, with a new paragraph.

“You were initially informed of our position on the Addendum and plan for inspections in June 2018. Following the lawsuit you filed in July 2018, we entered into settlement discussions. We consider those discussions to have ended.”

The letter stated that Adams had until Aug. 31, 2020, to comply with the Brand Law.

The June letter copied Fahleson and committee members.

•On July 29, 2020, Adams sent an email to Widdowson stating, “ALCC is preparing to respond, but it would be helpful in crafting ALCC’s response to know exactly what the Committee expects ALCC to do or refrain from doing after August 31, 2020, to comply (in the view of the Committee) with the Nebraska Livestock Brand Act and to continue to qualify for the statutory exemptions from the inspections (and associated fees/surcharges).

That letter requested a response by Aug. 3.

•No response was given by the brand committee, so on Aug. 4, Adams attorneys with Koley Jessen sent a letter to Widdowson advising him that firm represents Adams, and demanding that the brand committee, among other things, either rescind Widdowson’s June letter by Aug. 11, or prepare for litigation.

•On Aug. 31, 2020 Adams sued Widdowson and the Brand Committee.

ANALYSIS

This story is a long and tangled thicket of litigation, legislation, and letters sent back and forth, but ultimately it will be for the courts to decide. However, in the meantime, it would be wise to consider a few thoughts.

Most registered feedlots in Nebraska background their cattle on either cornstalks or graze pastureland on ranches either owned or leased by the same entity in order to put weight on their cattle before moving them into the RFL for finishing. However, under current law, those cattle must be re-inspected when going into an RFL due to the potential of estrays and comingling with livestock from neighboring properties. An RFL that wants to graze its own cows on a field of barley directly adjacent to the lot would still, in theory, need to have an inspection before returning those animals to their respective pens. They were not able to take advantage of the same deal Adams had, so the frustrations of those RFL owners are understandable in some regard.

Adams’ business model more closely resembles how cattle are raised and finished in southern states. Adams relies on a network of affiliated grow yards and smaller feedlots, where its cattle are backgrounded before being sent to the RFL for finishing. An argument has been made that Nebraska’s brand laws aren’t compatible with that business model, but bending the law and making concessions for one party — even if they are the biggest — only smacks of the same entitlement mentality we point to elsewhere as being “what’s wrong with this country.”

It’s important to look at the past legislature’s intent behind the fee structure. It reflects the belief that a per-head fee across the board is the most equitable way to carry out transactions and protect the integrity of the market place. Whether you’re a 100,000 head feeder operation or a part-time granger who runs a few head here and there — you’re still going to pay the same rate. “Equality before the law” is Nebraska’s motto, and it is what guards the family farmer and rancher against the “get big or get out” mentality, and prevents situations where operations become “too big to fail.” The independence of producers in the cattle business also provides safeguards against the kinds of vertical integration which has beguiled the pork and poultry sectors.

A persistently vocal minority of RFLs complain that they’re subsidizing the cow/calf producer’s inspection service. While the bigger the feedlot, the more fees it incurs, that’s the price of being big. Besides, the brand law existed in Nebraska long before the feedlots did.

In fact, the RFL program came about in the 70s at the request of larger feedlots in the inspection area because those feedlots wanted to be able to ship cattle to slaughter at will. From the 2016 AG opinion, the RFL program provides a huge benefit to the feeder segment of Nebraska’s cattle industry by offering the convenience to ship cattle from the RFL without having to incur shrink and the risk to animal welfare that can be associated with running those cattle past a brand inspector.

The cow/calf rancher receives no such perks, and in the eyes of those in the western part of the state, if the RFLs want that convenience, it’s a convenience that sector ought to be willing to pay for.

LB 1200, which Widdowson and the brand committee drafted after a lot of contemplation and Sen. Tom Brewer of Gordon introduced last spring, would have provided a path forward to alleviate at least some of those RFL issues for Adams and others experienced by allowing growyards to take advantage of a permitting scheme similar to the RFLs. LB 1200 would have also given a significant discount to RFLs by changing the terminology of the service that the Brand Committee from “inspection” to “audit.” Under that plan, a feedlot of Adams’ size would have seen its annual permit fees plummet from $100,000 a year to $7,500 — roughly a 92.5 percent discount.

But the Beef Producers balked at that, and testified against it during the ag committee hearing last spring, instead favoring Sen. John Stinner of Gering’s LB 1165, which would have ended brand inspection and done away with the brand committee. Yet, when the Beef Producers came to the table last month, they proposed that RFLs pay $0.10 per head. Doing the math, per 100,000 head capacity lot, Adams would have wound up paying around $10K per year, or $2,500 more than the already generous schedule the brand committee proposed in LB 1200.

To the casual observer, it would appear that Adams for a decade benefited from what could only be characterized as “a sweetheart deal” with the brand committee, and a far better deal was on the table for them this past spring. Ironically, Adams would potentially be ahead today had it not been for its stubbornness and efforts to litigate and lobby its way out of paying inspection and RFL fees outright.

 


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