Guest Post: Sixth Circuit Affirms $65 Million Plaintiffs' Judgment in Case Involving Fraudulent Mare-Leasing Scheme

The latest case featuring ClassicStar and GeoStar’s mare-leasing scheme featured the defendants leasing out mares they didn’t own and leasing less-valuable quarter horses and misrepresenting them to be Thoroughbred mares. On July 18, 2013, the Sixth Circuit Court of Appeals affirmed a $65 million award to victims of the scheme. In re ClassicStar Mare Lease Litig., --- F.3d ---, 2013 WL 3476220 (6thCir. July 18, 2013). Guest blogger B. Paul Husband wrote about ClassicStar’s litigation with the IRS in 2011.

In the recent case, a group of investors sued the ClassicStar defendants in federal district court in Kentucky. They alleged that the defendants had violated the Racketeer Influenced and Corrupt Organizations Act (“RICO”) by persuading them to invest in the mare-leasing program in order to profit from various tax deductions. They also asserted common-law fraud and breach-of-contract claims.

The basic tax concept was that investors would lease a breeding mare for a single season. The mare would be paired with a stallion for breeding purposes, and investors could keep any resulting foals. If investors kept their foals for at least two years before selling them, the sale would be taxed at the lower capital-gains tax rate.

The district court granted summary judgment for the plaintiffs, ruling that the undisputed facts established violations of the RICO statute, as well as fraud and breach of contract. The Sixth Circuit affirmed, noting that the investors did not know “that the assets which formed the basis of the touted tax deductions were dramatically undervalued and, in some cases, wholly fictitious.” 

The appellate court made the critical point that, “[a]lthough investors were repeatedly told that they were leasing actual horses, ClassicStar never owned anywhere near the number of horses purportedly being leased.” In other words, the defendants leased out horses they didn’t own or that didn’t exist. 

The court continued, “[t]o disguise the shortfall and convince investors that they were purchasing interests in actual horses, Defendants substituted less valuable quarter-horses for the Thoroughbreds that were supposed to be part of the packages, and in many cases, simply did not name the horses that investors believed they were purchasing.”

The Sixth Circuit affirmed the award of $49.4 million plus $15.6 million in prejudgment interest. The damages were three times the amount of the plaintiffs’ investments, as treble damages are available under the RICO statute. Collecting the judgment, however, may be complicated by ClassicStar’s bankruptcy and extensive other litigation against ClassicStar.

About the Author:   Toby Galloway is a partner in the Fort Worth office of Kelly Hart & Hallman LLP.  Before joining Kelly Hart, he served as an attorney for the United States Securities and Exchange Commission (the "SEC") for over 11 years.  Find Toby's full biography here.

Kelly Hart to Host Free Equine Law Webinar

On December 6, 2012, we will be putting on a free equine law webinar for clients and potential clients involved in the horse industry. Details are below.

Title: Top Three Things That Cause Equine Litigation & How to Avoid Them

Date: Thursday, December 6, 2012

Time: 12:00PM to 1:00PM CST

Those who wish to participate should click on this link to pre-register: Pre-Register for Webinar

 

Photo:  My husband Rick and I at Santa Anita for Breeders' Cup 2012

Court Rules Damages Award Against Dog Breeder Not Dischargeable in Bankruptcy

The topic of this week’s post is not a true “horse case”, per se, but horse dealers and those who purchase horses from dealers can certainly glean some valuable lessons from it. 

David and Lisa Moore were breeders and sellers of horses and dogs. Originally operating as “Kanes Lake Horse & Kennel” in Minnesota, they relocated to Magnolia, Texas, where they purchased about 25 acres of land and began “Brushy Creek Kennel”, where they also lived. 

The Moores sold at least 163 dogs to Lisa Bushman, who herself was a breeder and seller of rare dogs, including Cavalier King Charles Spaniels, West Highland White Terriers, and Jack Russell Terriers. 

 

Cavalier King Charles Spaniels

At some point after Bushman bought dogs from the Moores for a sum of $132,000, Bushman sued the Moores in the 155th District Court of Waller County, Texas alleging violation of the Texas Deceptive Trade Practices-Consumer Protection Act (“DTPA”), fraud, and breach of contract. 

In her lawsuit, Moore alleged that some of the dogs she purchased were sick, and that she had difficulty obtaining registration papers on the dogs. Moore claimed that she had been sued by some of her customers, that she to refund money on some of the sales to customers, and that she had to pay more than $10,000 in veterinary expenses to nurse the sick dogs back to health.

The court opinion makes no reference to any written agreement between the parties as to the terms of the dog sale. 

In his defense, David Moore alleged that the business arrangement with Bushman consisted of the Moores shipping dogs to Bushman via third-party breeders or brokers, without registration paperwork unless a higher price was paid.

Before the suit went to trial, Lisa Moore conveyed 18 of their 25 acres of land to Dalvis Enterprises, Ltd. (“Dalvis”), an entity owned almost entirely by the Moores. 

A side note that will prove relevant as you read on: in Texas, a husband and wife can claim up to 200 acres of rural land as their homestead, thereby shielding the land from creditors’ claims.

After a trial, the court found in Bushman’s favor, awarding her damages of approximately $350,000 against the Moores.

After Bushman attempted to levy execution of her judgment upon the 18 acres of land that had been partitioned from the 25-acre homestead and conveyed to Dalvis, Dalvis purported to convey the 18 acres back to Lisa Moore. Shortly thereafter, the Moores filed a Chapter 7 bankruptcy proceeding.

The bankruptcy court, and later the United States District Court for the Southern District of Texas on appeal, held that:

1) Bushman’s state court judgment was non-dischargeable in bankruptcy because the debt was incurred by fraud; and

2) the 18 acres of land was subject to execution on Bushman’s judgment, because the homestead exemption was lost when Lisa Moore transferred the property to Dalvis.

Surprisingly, the Moores claimed that the conveyance of land to Dalvis was a “pretend sale”, because it was allegedly made without consideration, in an attempt to hide the eighteen-acre tract from Bushman. The Moores made this seemingly self-defeating allegation in favor of their position that they never lost their homestead exemption on the 18 acres. Both the the bankruptcy court and federal district court on appeal found this argument unconvincing.

Take aways: Many or most of these issues could have been avoided, had the parties put the express terms of their purchase and sale agreement in writing. Further, an inspection of both the dogs and their registration paperwork before the dogs were accepted and paid for might have alleviated the situation. 

Case InformationBushman v. Moore, 2011 WL 7655696, Civil Action No. H-10-3045 (S.D. Texas, Sept. 14, 2011).  Hot off the presses from Westlaw this week (not sure why it took Westlaw so long to publish this opinion?).

Guest Post: Top Ten Pre-Purchase Exam Considerations

As a follow-up to last Thursday's post, Tips for Equine Pre-Purchase Exams, the following is a guest post by veteran Kentucky equine lawyer, Joel B. Turner, with valuable information concerning pre-purchase exams and other steps buyers can take to protect their interests in a horse sale transaction.

"As a 'horse lawyer', people usually do not call me to tell me how happy they are with their newly- purchased horses.

One of the most common calls from potential new clients (i.e. the variety that is extremely unhappy and ready to litigate) involves the post purchase discovery of a serious soundness issue. Recently during one such call I rudely interrupted the caller to interject, "Excuse me, but let me guess which joint is causing your horse an issue?" My guess was correct and the caller was dumbfounded. While it was the first for her, the same sorts of issues crop up time after time in my world.

How do you protect yourself in a situation like this? 

a) Have a veterinarian, your veterinarian, perform a thorough pre-purchase examination; and

b) have an experienced lawyer prepare a contract to close the loopholes by obtaining proper warranties/ representations from the seller. 

The combination of these two steps should provide adequate protection from the possible deceptions that so often turn an excited purchaser of a new horse into a disgruntled, if not disillusioned, victim and caretaker of an unsound horse.

Top ten pre-purchase exam considerations:

1.            Is the vet performing the exam absolutely free from any conflict of interest or possible undue influence? Make sure the vet (and any vet who is a member or employee of his/her group or practice) has never performed any services for the seller. Do not, under any circumstances, ask the seller to refer you to a vet to perform the pre-purchase exam or consult about radiographs, ultrasound images, etc.

2.            Is the veterinarian performing the pre-purchase exam willing to promptly (within 24 hours) provide a written report of his findings and make all radiographs and scans available digitally for the potential purchaser to use to obtain a second opinion, if necessary?

3.            Is the veterinarian willing to review all the vet records obtained from the seller and watch the horse being ridden (preferably by the potential purchaser) as part of the pre-purchase evaluation for soundness/coordination-neurological issues?

4.            Does the vet know how much money you intend to pay for and the purpose for which you are purchasing the horse? Share the purchase price with the vet and ask the vet to assume you are buying the horse for resale; if you want the highest level of scrutiny and are willing to pay for it, this request will put the vet on notice of your intentions and encourage a much closer look.

5.            Is the seller willing to provide all veterinary records (including all medications dispensed, radiographs, ultrasounds or nuclear scintigraphy, i.e. "bone scans" performed) for the last 18 months to two years as well as any other "therapy" records such as acupuncture, massage, shock wave, hyperbaric chamber, etc. for review by you and your vet prior to the purchase decision?

6.            Is the seller prepared to represent that, at the time of the pre-purchase exam, the horse is not under the influence of any medication, is not being treated with any substance to address any past or present physical condition experienced by the horse and is willing to allow the veterinarian to take a blood sample for drug testing to verify the accuracy of this representation?

7.            Has the horse been examined by a vet in connection with a potential purchase within the last year?

8.            Is the seller willing to represent that the horse has not had any surgery or any intra articular injections of any substance (including without limitation, corticosteroids, blocking agents or hyaluronic acid) during the seller's ownership, other than those disclosed by the seller, or if such surgeries or "joint' injections have been performed upon the horse and are disclosed, is the seller willing to identify all of the dates when such procedures were performed and what substances were injected into which joints?

9.            Is the veterinarian willing (and capable) to effectively communicate to the potential buyer the significance of the findings and provide an opinion as to the functional effect of these findings in writing promptly after the examination is completed?

10.          Is the veterinarian sufficiently experienced with the particular type of riding that the potential purchaser intends to do and the kind of work that the horse has been doing, to provide the potential purchaser with a high level of confidence that the vet understands the amount and level of work the horse will have to perform to fulfill the buyer's intended use?

This list is not exhaustive and does not address such issues as pre-purchase considerations for future breeding soundness of the horse. It is focused upon the veterinarian's performance of the pre-purchase exam for a performance horse, and the seller's willingness to make reasonable disclosures of the horse's condition. This list has a particularly narrow focus on determining if there are any pre-existing issues that could lead to unsoundness making the horse incapable in the future of performing the tasks for which it is being purchased.

In this era when aggressive veterinary intervention with lameness issues, (particularly with the prevalent use of intra articular injections of corticosteroids), is far more common, latent defects in horses may be hidden even from the experienced examining vet, if proper due diligence is not performed in conjunction with the pre-purchase exam. The combination of a) the seller's reasonable disclosures in response to the purchaser's requests coupled with, b) representations and warranties in a written purchase agreement, and c) a thorough pre-purchase veterinary exam performed by an unbiased, qualified vet working exclusively for the potential purchaser, may afford the best opportunity to avoid the heartbreak and financial loss caused by a post purchase discovery of a latent, undisclosed and undetected condition suffered by a horse after the sale is final."

 © Joel B. Turner of Frost Brown Todd LLC 2011

About the Author:  Joel B. Turner is a Kentucky attorney practicing equine-related law for the last 27 years. For Joel's full biography, click here.

Tips for Equine Pre-Purchase Exams

Having a thorough pre-purchase veterinary examination done prior to a horse sale is one of the best ways parties to a horse sale can prevent disputes and lawsuits. 

Dr. Camille Knopf, an equine veterinarian in Northern California, offered some excellent advice this week on the blog Ribbons and Red Tape:

Always, always, always have a pre-purchase exam performed. Regardless of length of familiarity with the horse or seller, there should always be a thorough pre-purchase exam performed to provide you with a complete understanding of the health of the animal you are purchasing.

Always have a veterinarian pull and store blood at the time of pre-purchase exam. This blood can be stored for several weeks. If you purchase the animal and later suspect the horse may have been under the influence of a medication at time of exam, the serum can be analyzed for medication and may provide you with legal recourse if necessary.

Be cautious in purchasing any horse where the current owner wants to choose the veterinarian for pre-purchase exam, discourages you from having a pre-purchase exam, or discourages you from using a veterinarian of your choice. Reason: Sadly, the horse business is not immune to fraud and neither is the veterinary world. By choosing a veterinarian that does not have a direct relationship with the seller, you can protect yourself from a potentially biased opinion."

Here are some additional tips for pre-purchase exams that can go a long way to help prevent litigation:

1.     Buyers will often ask sellers for a referral if they do not know any veterinarians in the seller’s area. It’s not always a sign that something is amiss if a seller recommends a veterinarian with whom the seller has a business relationship, as long as the seller discloses the relationship to the buyer. If a buyer asks a seller for a referral, the seller can provide buyers a list of veterinarians in the seller’s area and allow the buyer to choose from the list. If the seller has a relationship with any of the clinics or veterinarians on the list, the seller should disclose that fact to the buyer.

2.     Generally, sellers should not allow a buyer to take a horse off the seller’s property for a pre-purchase examination. The seller or their agent, employee, or representative should be the one to haul the horse to the vet for the exam, if necessary. If the buyer chooses a veterinarian that is so far away that this becomes unduly burdensome for the seller, the parties should work out an agreement on who will pay the transportation costs.

3.     As the term "pre-purchase exam" implies, it should be done prior to the purchase!  That is, a pre-purchase exam should be performed before any of the following occurs: a) the buyer takes possession of the horse; b) the buyer pays the purchase price for the horse; and c) the buyer receives a bill of sale from the seller. A seller can take a down payment on the horse to either refund or apply towards the purchase price, depending on whether the pre-purchase exam results are satisfactory to the buyer. However, it is not advisable for a seller to hold a check for the full purchase price and agree not to cash it while the buyer is inspecting the horse.

4.     Sellers should always encourage every buyer to get a thorough pre-purchase exam and to inspect horses either in person or through an agent prior to the purchase or delivery of the horse. This thorough inspection protects the seller just as much as it does the buyer.

5.     If the seller purchased the horse from a third-party, the buyer should ask the seller if the seller had a pre-purchase exam performed prior to the seller's purchase.  If the answer is yes, the buyer should ask the seller for a copy of the results of that exam.  

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The Dangers of Advertised Exchange Policies for Horse Sales

Some horse breeders, trainers, and consignors who are in the business of selling horses advertise “exchange policies” on their websites. The typical exchange policy contains language promising that a buyer can exchange a horse purchased from the seller for another horse owned by the seller of the same or lesser value within ___ days of the sale. Posting an exchange policy of this nature on the Internet is not a good idea, in my opinion.

Don’t get me wrong--good customer service is paramount to a seller’s reputation. Sellers can surely offer a buyer an exchange horse if a particular situation warrants it and a suitable exchange horse is available. But so much can go wrong if a seller offers each and every buyer the “right” to exchange a purchased horse. For instance:

1)         Some buyers do not get a pre-purchase exam. Even for buyers who do get a pre-purchase exam, they do not check for every malady, disease, or infirmity due to the expense involved. This is problematic when an exchange has been offered. It can be very difficult to tell whether the horse is returned in the same or better condition as when he left the seller’s property.

2)         Exchange policies may work great for retailers where there is price tag on each item in the store and the same items can be found on-line or in other stores. But establishing the value of the exchange horse can be difficult. The seller’s asking price is not always the horse’s fair market value. Reasonable minds can differ as to the value of a horse. Even professional equine appraisers may disagree. 

3)         A seller may not have an exchange horse that possesses all the same qualities as the original horse within the stated time frame. This leads to a lot of confusion. Does the buyer have to keep the horse until the seller obtains a suitable replacement? Does the seller have to keep and feed the buyer’s horse until a suitable replacement has been obtained by the seller? How long will it take the seller to find a suitable replacement?

4)         If a buyer thinks he can simply return the horse for an exchange after 30 days if it doesn’t work out, he may be encouraged to purchase a horse without first inspecting it or spending the money to have a thorough veterinary examination done. This is problematic for several reasons. First, as discussed above, a seller who has offered an exchange policy cannot establish that the horse is being returned in the same condition if no thorough pre-purchase exam was done. Further, a buyer may come back to seller after the exchange policy has expired and demand a refund or exchange because the horse has a soundness or health issue. The presence or absence of a pre-existing condition is then hard to prove because no pre-purchase examination was done.

Due to all of these issues, an exchange policy on horses cannot function as simply as a similar policy offered on household goods sold by Home Depot, Target, and other retailers. Instead of offering a blanket exchange policy on the Internet, sellers should take an “all sales are final” approach and encourage all buyers to get a thorough pre-purchase exam and to inspect the horse prior to purchase in person or via an agent. Taking this approach does not prevent sellers from providing an exchange horse after the fact where the circumstances warrant it. 

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International Horse Sales Part II: Terms to Include in Your Purchase & Sale Agreement

In addition to the terms usually included in a contract to buy a horse, a Purchase and Sale Agreement involving the shipment of a horse to another country should include the following terms:

1)                  Applicable Law: Will your country’s law, or the law of the other party’s country apply to the contract? This is important, considering that certain German-speaking countries have “minimum warranty” statutes applicable to horse sales (die Gewährsmängel). These minimum warranty statutes may make it virtually impossible for a buyer to resell a horse if it has any of the problems (such as cribbing) that do not meet the “minimum warranties” in those countries.

2)                  Terms for Delivery of Horse & Money: Your agreement should set for a specific protocol for when and where the horse, the bill of sale, registration papers and health certificates, and sales proceeds should be delivered.

3)                  Commissions: Your should specify which parties are receiving a commission (buyer’s agent, seller’s agent, or both?), the amount of the commission, and the protocol for the delivery of the commissions.

4)                  Disputes. How will disputes, if any, be decided?  Having to bring suit in another country in the case of a horse sale gone bad is time-consuming, expensive, and may be impossible. I recommend including a provision for alternative dispute resolution in international horse sales contracts, naming a reputable mediation or arbitration forum such as Equestes to settle or decide disputes.

Top 4 Things to Have When Buying or Selling a Horse Internationally

Before you buy a horse from someone in another country or sell a horse internationally, you must have the following four items in place to help avoid disputes and headaches:

1)         Written Purchase and Sale Agreement.  An international sale is typically not one where a buyer can show up with a trailer, hand the seller a check, and load up the horse.  In addition to the usual points typically covered in ordinary sales contracts (description of horse, price, warranties or lack thereof, pre-purchase exam conditions, et cetera), your international sales contract needs to address the logistics of how and when the horse, its papers, and the money will be delivered. Stay tuned, as I will do a post next week on the items your international sales contract should include.

2)         Escrow Service. The use of an escrow service to hold sales proceeds and commissions until certain terms of your Purchase and Sale Agreement have been carried out is a huge help in avoiding disputes and confusion. 

3)         Written Bill of Sale. Your bill of sale, and not the registration papers or health certificate, is the instrument that transfers title to the horse. Your Purchase and Sale Agreement should make clear when the bill of sale should be delivered to the buyer (usually, it is delivered with the horse together with registration papers and health certificates after the escrow account is funded).

4)         Identification of Quarantine Requirements. Identify quarantine and health certificate requirements, and find a reputable quarantine facility and shipper to handle your transaction. 

The last thing anybody wants is an international lawsuit on their hands.  Having the above items in place will greatly diminish the chances that you'll ever be involved in one.

It's About to Get Western--Increased Export of Quarter Horses

If you have exported a horse internationally, you probably already know about the international demand for nice American Quarter Horses bred in the US. If you have not yet sold a horse to an international buyer, you might start looking to the international market for sales possibilities. The AQHA’s international department reported to me today that the total dollar amount in bloodstock exported internationally has increased over the past few years, even in this depressed horse market. The AQHA is also looking to position someone in China to manage AQHA’s affairs in that country.

NRHA Reiner Online announced today that a “big money” reining event, the NRHA European Affiliate Championships is happening next week in Switzerland. The venue for the show is the CS Ranch in Givrins, Switzerland. If you don’t believe the Europeans are “getting Western”, check out the CS Ranch’s show and training facility in Switzerland.  Looks like they’re open for serious business. 

In other international news, the Americana, billed as “Europe’s #1 Western Horse Show” will take place in Augsburg, Germany beginning on August 31. I will be attending the Americana, so contact me if you’re going and I’ll meet you there!  The Americana will feature the European Championships for cutting and working cow horse. These international markets are moving into disciplines that involve working cattle in addition to reining and Western pleasure-type events.  

Stay tuned for a discussion of legal issues arising in international horse sales.

Enforcability of "Soundness Guarantees"

A Texas caller bought a horse without getting a pre-purchase exam. The caller has emails from the seller that say the horse “never took a lame step” and was “always sound” while the seller owned the horse. The horse became lame about two months after the caller got him home, and the caller’s veterinarian speculated that the lameness was due to a condition that pre-dated the caller’s purchase of the horse. The caller wants to reverse the sale because the seller “guaranteed” the horse to be sound.

First, the horse trade is one where the phrase caveat emptor (“buyer beware”) applies. It is the buyer’s responsibility to get a pre-purchase exam before buying a horse. Every pre-existing condition cannot be determined in a routine pre-purchase exam. Thus, it is the buyer’s burden to ask the seller specific questions about soundness and suitability for the buyer’s intended purpose, and obtain access to all prior veterinary records on the horse from the seller prior to taking possession of the horse.

Unless the seller expressly promises a refund if the horse is found to be lame, or otherwise expressly guarantees or warranties that the horse is sound, a court will likely not find an express warranty of soundness to have existed. There are no implied warranties on livestock or their unborn young in Texas, as provided in Texas Uniform Commercial Code Section 2.316.

In the absence of an express warranty of soundness, the buyer will have to pursue a fraud action against the seller. To prevail on a fraud claim, the buyer must prove (among other elements): 1) the condition causing the lameness was there when she bought the horse (through a veterinarian’s opinion); and 2) the previous owner knew about the condition at the time of the sale and intended to defraud her.

Plaintiffs lawyers also like to bring horse sale actions under the Texas Deceptive Trade Practices Act ("DTPA") or similar consumer protection statutes in other states.  The DTPA is attractive to plaintiffs because they allow for treble damages and attorneys' fees in some cases.

Fraud and DTPA cases are often "tough sledding'" because the buyer must prove the seller knew about the defect at the time the sale took place.  See Tex. Bus. & Com. Code Sec. 17.46(b)(24). 

Proving the seller knew about the defect is hard to do if there are no vet records or other evidence pre-dating the sale showing a diagnosis of the condition or treatments related to the condition.  

Take aways:  When buying a horse,

  • get a pre-purchase exam done by a vet you know and trust;
  • get a written Purchase & Sale agreement on each horse you buy. This agreement should contain a disclosure by the seller of all known faults with the horse;
  • and ask the seller specific questions about past injuries and illnesses;
  • ask the seller who their vets are and obtain releases from the seller so that you can get copies of prior vet records on the horse. Most veterinary practices adhere to confidentiality practices that prevent them from providing a buyer with acces to records that pre-date the buyer's purchase of the horse; and
  • if you think the seller is guaranteeing a horse sound, get the guarantee in writing.

 

Highlights from 2010 National Conference on Equine Law

I just returned from the 2010 National Conference on Equine Law , held last week in Lexington, Kentucky. This was my fifth year in a row to attend the conference, and it was a great year.  The conference had a record number of attendees--180 practitioners from all over the United States. This year's lineup of speakers and topics was the best I've seen so far in five years.

I was lucky enough to be invited to speak this year.  My topic was "A Multi-Jurisdictional Comparison of Equine Liens".  With only 30 minutes to speak, I only had time to cover Texas, Kentucky, and Florida.  However, I hope the materials are helpful by reference to every practitioner or horseman regardless of state.  My handout can be accessed in two parts: Part 1 and Part 2.  Click here for a copy of my PowerPoint presentation.

Takeaways from my presentation:  1) no matter what state you're in, and regardless of whether your state requires it, always send written notice directly to the debtor (if you can find them) before foreclosing on an equine lien; 2) if you want to do a private lien sale under the UCC foreclosure provisions, make sure you can prove to a judge or jury that your debtor was engaged in a "farming operation" (i.e. they are in the horse business--not just a hobbyist); and 3) there may be multiple liens on the horse at issue.  Be aware of which lien has priority.  The person in possession of the horse almost always has the most bargaining power, regardless of priority.

Ned Bonnie, a long-time Kentucky horseman, equine lawyer, and graduate of Yale undergrad and law school, told me he also attaches (seizes via court order) the original registration papers to a horse when a lien dispute arises.  I like this idea, though it requires filing a lawsuit in Texas.

Other highlights from this year's conference:

1) Frank T. Becker's annual Equine Case Law Update--The "case of the year" (the year's most wacky or novel case) was State v. Coates, 2009 WL 2414334.  Frank calls it a "silly case of no legal significance", but interesting nonetheless!  It involved a case of "road rage" between a jogger and a horseman fighting over who should yield a pathway.  The jogger intentionally startled the horse and ended up getting arrested.  Horsemen 1, joggers 0.

2) Ted Martin and April Neihsl talked about the recoverability of damages in equine cases.  Ted stressed the importance of determining the fair market value of the horse at issue and said it is usually determined by 1) expert testimony; 2) previous sales prices and offers to buy; and 3) the owner's testimony (in some cases).

April addressed the recoverability of lost profits, sentimental, and punitive damages.  April stressed that when proving up lost profits, it is essential that the plaintiff had income in the past and that the focus is on net profits rather than gross profits.  Also, while sentimental damages are rarely awarded in equine cases, some states (Colorado, Illinois, Oregon, Tennessee, and Utah) allow them by statute.  

3) Bob Webb and Chris Coffman discussed the IRS's "National Research Program" that is targeting many horse businesses.  The key issue to survive these audits is to prove that the horse operation is a for-profit business, or a trade at the very least.

4) Doyice and Mary Cotten discussed changes in the law affecting the enforceability of liability waivers.  The most frequent causes of liability waiver failure are, according to the Cottens: 1) statutory prohibition of waivers in some states (such as Montana and Louisiana); 2) lack of clarity in the waiver (use of phrase "all liability"); 3) inclusion of waiver in entry form or membership contract; 4) waiver is overbroad or too narrow; and 5) surprisingly--the party to be released is not named in the waiver!

5) Paul Husband presented on the law determining whether someone is an independent contractor or an employee.  Paul stressed the importance of this issue as 6,000 employment tax audits are planned as part of the IRS National Research Program.  The Obama administration has budgeted $25 million to target misclassification of workers as independent contractors.  If an employer misclassifies an employee as an independent contractor, they can receive the "100% penalty" (the person with signature authority on checks for the employer personally pays the employee's tax and serves time in jail).

6) Jay Hickey of the American Horse Council addressed current federal legislation affecting the horse industry.  The Economic Stimulus Bill contains at least one thing that might benefit horse owners--$1.7 billion that can be used for the maintenance and construction of equine trials.  The AHC encourages local organizations to contact district offices to make sure funds are appropriated to horse-related projects.

7) Julie Fershtman discussed liability issues surrounding equine shows and events.  Because most shows or rodeos do not get each spectator to sign a liability waiver, it is important that event sponsors ask their insurance company about insuring against spectator liability.  Furthermore, it was noted that many accidents at equine activities do not involve horses at all, thus bringing them outside the Equine Activity Acts.  Sponsor insurance should, if possible, cover all premises liability issues...not just accidents involving horses.

8) Krysia Carmel Nelson and Tamara Tucker addressed liability issues in boarding and training arrangements.  They suggested including the following clauses in some boarding/training agreements: 1) "training disclaimer" to protect against claim that bad training diminished value of horse; 2) "risk of loss/indemnity" provision to curtail claims that the trainer or boarding facility injured the horse; 3) "veterinary power of attorney" to protect boarding facility from claim that veterinary services were not authorized and ruined horse; 4) "abandonment clause" holding that after a certain period of time, a horse becomes property of the boarding facility/trainer if the owner doesn't pay, make contact, or move the horse.

9) Bruce Smith and Mike Meuser covered fraud in horse sales transactions.  They addressed the crucial issue of a seller's duty to disclose a known defect in a horse.  A duty to disclose can arise when 1) a sales contract requires it; 2) a seller voluntarily makes a partial disclosure that is misleading; 3) the seller knows the buyer has the wrong impression about something related to the horse; 4) a confidential or fiduciary relationship exists; and 5) the seller knows the horse has dangerous propensities.

10) Gregory Dennis, a practitioner who specializes in veterinary malpractice and disciplinary proceedings, discussed various issues surrounding veterinary malpractice cases involving horses.  His presentation highlighted the difference between general negligence in veterinary actions versus veterinary malpractice.

If you would like further information about this year's conference, please click on the individual presenters' names discussed above to find their contact information, or contact me for details.

Horse-Related Partnership Disputes

A lot of horse owners call in complaining of disputes with their partner in a horse.  Most disputes arise when a partner quits paying his or her share of the expenses on the horse, or when one partner wants to sell the horse and the other does not. Most predicaments arise when there is no written partnership agreement concerning the partners' rights and duties with respect to the horse.

I advise all of my clients who co-own a horse with another party to put their agreement in writing.  The agreement should include:

  • the partners' respective rights and responsibilities,
  • designate who is allowed to take possession of the horse and when,
  • a provision about what happens when one partner stops paying her share of the expenses,
  • who gets to decide the horse will be sold, and
  • how sales proceeds will be allocated between the partners.

Absent a written agreement, multiple owners of one horse will likely be viewed as a "general partnership" from a legal perspective if the parties intended to make a profit on the horse and share in the profit and expenses.  The rules governing all partnerships in Texas (including those with no written partnership agreement) are found in Chapter 152 of the Texas Business Organizations Code.

In order for a Texas partnership to sell 100% of a horse, the "majority-in-interest" must agree if the sale is in the "ordinary course of business," and all partners must agree if the sale is "outside the ordinary course of business."  Tex. Bus. Org. Code Sect. 152.209.  In the case of 50/50 owners, this default rule can result in a stalemate if the partners disagree on a horse sales transaction.  This highlights the necessity of a written partnership agreement.

In the case of a complete stalemate, a partner can bring a lawsuit against another partner under the Remedies Section (152.211) of the Texas Business Organizations Code for breach of fiduciary duty to the partnership (refusal to enter into a sales transaction to the detriment of the partnership) or breach of the partnership agreement (failure to pay their share of expenses).  A partner can also ask the court to dissolve the partnership and order the assets of the partnership sold or distributed to the partners.

In some cases, one partner will buy a horse with his/her own money before the commencement of a partnership relationship.  Later, the original owner might add partners by having them pay the original owner some portion of the purchase price and/or agree to pay a percentage of the expenses related to the horse.   In those cases, the bill of sale and registration papers will initially be in the name of the partner who originally bought the horse.  

It is important to note that horses acquired in the name of a partner will be presumed to be property of that partner, regardless of whether the property is used for partnership purposes, if the instrument transferring title to the horse (the bill of sale) does not indicate the owner's capacity as partner or the existence of the partnership, and if the horse is not acquired with partnership funds.  Tex. Bus. Org. Code Sec. 152.102(c).

The legal presumption cited above causes many problems in an unwritten partnership scenario.  If a horse is intended to be partnership property, partners should create a new bill of sale transferring the horse from the original owner to the partnership or the names of all partners, and transfer the horse's registration papers (if any) to the partnership. 

Partnership lawsuits are notoriously messy...especially when there is no written agreement.  Be very wary of entering into any kind of partnership on a horse unless you have an agreement in writing and you completely trust the other person.  Also be aware that if your partner is in possession of the horse, your partner may deny you access to it or even sell it and pocket the proceeds in the event of a dispute.  

Protecting Your Horse During a Dispute

Texas law provides liens for two specific types of services provided to horse owners: 1) the stable keeper’s lien, (Tex. Prop. Code §70.003) which secures payment for charges related to the care of horses; and 2) the stock breeder’s lien, which secures payment for breeding services. The stable keeper’s lien also applies to an animal fed in confinement for slaughter, and thus can also be asserted by feedlot operators. See Tex. Prop. Code §70.005(c).

Unlike many other states, Texas does not provide veterinarians or farriers with a lien on a horse to secure payment for professional services rendered. However, the stableman’s lien in Texas does provide a farrier or vet who had a horse in his or her care a lien on the animal for costs of boarding the animal.

Two things to be considered are that 1) a service provider may attempt to hold your horses for nonpayment, even though no statutory lien exists. This may result in the necessity to get a writ of sequestration to regain possession; and 2) horse owners need to be aware of the lien laws in other states when shipping their horses across state lines in the possession of a service provider.
When a service provider refuses to turn over the horses until the full amount of the bill is paid, the local sheriff’s department and the Texas & Southwestern Cattle Raisers will rarely assist the horse owner in regaining possession of his horses due to the civil nature of the dispute. Without the aid of law enforcement, a horse owner may decide to pursue a lawsuit for conversion asking for the return of the animals that includes an application for a writ of sequestration to regain possession of the horses and to seek damages.

A writ of sequestration will enable the owner to regain possession of the horses within a short time, without a trial on the merits, and maintain possession until the lawsuit is disposed.

In the context of horses, a writ of sequestration is available to a plaintiff in a suit if the suit is for possession of horses or for foreclosure or enforcement of a lien or security interest in horses, and a reasonable conclusion may be drawn that there is immediate danger that the party in possession of the livestock will conceal, dispose of, ill-treat, waste, or destroy the livestock or remove it from the county during suit. Tex. Civ. Prac. & Rem. Code §62.001 (Vernon 1997). The defendant’s use of the livestock while the suit is pending is not enough for a writ to be granted. The plaintiff must fear that the livestock will be sold, mistreated, killed, or concealed. Mere depreciation in the value of the livestock during the pendency of the suit probably will not constitute injury that would warrant the issuance of a writ of sequestration. Commercial Acceptance Trust v. Parmer, 241 S.W.586 (Tex.Civ.App.—Fort Worth 1922, writ ref.)(involving depreciation of motor vehicle).

“Sequestration” is not a cause of action, but rather, a remedy available after suit has been filed, but before a judgment has been obtained. Its purpose is to prevent the destruction or disposal of property until the court can reach a final judgment.

To avoid these situations, horse owners and service providers should put all terms of the service agreement in writing. The contract needs to specify what the service provider has been hired to do with the horses, where they will keep the horses, and the expected payment for the care and services provided. Horse owners should ask all service providers to send a detailed bill at least once per month and be sure to pay bills timely.

Owners should not entrust their horses to anyone in whom they do not have full faith and confidence, and should keep in close contact with the person or company in possession of the horses. Similarly, a service provider needs to check references to make sure they are not accepting a client who will not end up paying for the services.
 

 

Legal Documentation for Owner / Trainer Profit Sharing Deals

Profit-sharing arrangements between a horse owner and his or her trainer are commonplace in the horse industry. They are often referred to as “partnerships,” but a written contract is seldom used. I strongly advise my clients against doing any kind of profit-sharing or partnership arrangement without putting the terms in writingI have seen countless relationships between owners and trainers break down over a profit-sharing deal, and it generally happens because the parties had a different idea about what the agreement was supposed to entail. These disputes can get ugly, and sometimes law enforcement even becomes involved in disputes over possession of the horse. 

Usual Scenario. The typical profit-sharing arrangement usually arises when the owner and trainer agree that the trainer will train, board, and promote the horse free of charge or at a very discounted rate to the owner in exchange for an increased percentage of the horse’s racing proceeds or a percentage of the proceeds from selling or breeding the horse.

 

Essential Documents. The following documents should be drafted to fit your specific terms and executed by the appropriated parties:

 

* A purchase and sale agreement between the owner and seller;

* A bill of sale transferring title of the horse from the seller to the owner; and

* A profit-sharing agreement between the trainer and owner.

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What if Potential Buyer Does Not Return Horse After Trial Period?

An attorney called me last week to ask what her client, a trainer, should do about a prospective buyer who had picked up a horse from the trainer to "try out" but failed to bring the horse back after the trial period.  The trainer had been hired by the horse's owner to find a buyer for the horse.  After months of trying to make contact with the prospective buyer, the trainer finally made contact to learn that the horse had allegedly died of colic while in the prospective buyer's care.  There were no written agreements between the owner and trainer or owner/trainer and prospective buyer.

The first thing I asked was whether they called the police or sheriff when the horse was not returned.  In potential theft situations, it is always advisable to call law enforcement and get a copy of their report.  I also suggested a bit of investigative work to determine if the horse was, in fact, dead.  They had called the vet the prospective buyer usually uses, but the vet had no record of seeing the horse.  I suggested that they send a letter to the prospective buyer asking for proof that the animal was euthanized and asking him to pay the asking price for the horse.  The next step was to file suit if he did not pay (I suggested that she make the trainer and owner joint plaintiffs).

Under Texas law, the trainer and owner in this situation have a colorable claim for conversion and theft under the Texas Theft Liability Act (the "TTLA") against the potential buyer.  People with ownership or possessory rights have standing on both claims. And assuming the trainer spent money to take care of the horse while in her care and was going to get a commission on the sale, the damages element is also satisfied as to the trainer.  Attorneys’ fees and costs are recoverable by the prevailing party under the TTLA.

Is the trainer liable to the owner in this situation?  The trainer would only be liable to the owner under the “principal-agent” theory if the trainer acted without actual authority when she gave the horse to the prospective buyer to try out.

What's the lesson here?  The trainer and owner would have been in a better position if they had obtained a written agreement with the prospective buyer containing a "risk of loss" provision, whereby the prospective buyer would agree to pay the owner if the horse died or was injured in the prospective buyer's care.  The trainer could have also required the prospective buyers to make payment in escrow for the horse, and agreed to return the money if and when the horse was returned.

Horse Seller Ordered to Pay Trail Riding Camp $100k in Damages

It pays to get your horse sale agreements in writing.  Both buyers and sellers should pay careful attention to the "warranties" section of any agreement. 

The Equine Law & Business Letter reports that a federal court in Arkansas ordered a seller to pay almost $100,000 in damages for breaching warranties in connection with the sale of 30 horses.

The court's opinion states that the owner of a riding camp in Colorado contracted with a rancher in Arkansas for the purchase of 30 trail riding horses that would be suitable for inexperienced riders and children.  The camp operator reached an oral agreement with the rancher that was later reduced to writing.  The written contract provided for the rancher to deliver 30 horses, all geldings, to the camp at a total cost of $30,000, and that the horses would be in excellent condition and trained as trail horses.

According to the opinion, all but four of the horses that were delivered were either unsuitably trained, too young (25 of the horses were 2 years old and one of the horses was 17 months old), or stallions.  Allegedly, only 2 of the 30 horses were suitable for trail riding.  The camp operator ended up selling 22 of the unsuitable horses, and one of the horses died.  She sued the rancher for breach of warranties, breach of contract, deceptive trade practices, fraud and deceit.

After a two-day bench trial, the court found in favor of the camp operator.  Specifically, the court concluded that at the time the contract was formed, the rancher "knew of the particular purpose for which the horses were required.  He knew that [the camp operator] was relying on his skill and judgment to select and furnish suitable horses."  Because the implied warranties of merchantability and suitability for a given purpose were not excluded from the written contract, the court found that the rancher breached both warranties.  

The court awarded the camp operator $9,914.61 for her net loss on the sales transaction, plus $3,276.60 for incidental damages (including transportation, wormer and veterinary expenses).  The camp was also awarded $71,700 in lost profits attributable to not having enough horses to operate the business at full capacity for one season.    Lost profits attributable to later years were disallowed because the court reasoned that one year provided the camp operator "ample time to buy horses."

The case is Manula, et al v. Wheat, No. 4:06CV01107JLH, in the U.S. District Court for the Eastern District of Arkansas, Western Division, October 5, 2007.

For more information, see the November-December 2007 issue of Equine Law & Business Letter.

Legal Advice for Sellers at Horse Auctions

1. Avoid Undisclosed Dual Agency Problems.   Sellers should enter into written agreements with their consignors or other agents, and agree upon commissions, reserve prices, and how disputes will be handled. You should also get an agreement from the consignor that all commissions will be fully disclosed to you.  If a bloodstock agent, trainer, or someone else acting on behalf of a buyer approaches you or your consignor and asks for a commission, do not pay it.

2. Avoid Turnback. The prospective buyer has the right to ask the consignor anything relative to the horse’s condition and ownership. Be truthful and straightforward in your answers to avoid problems. Read the Conditions of Sale with your consignor. If a buyer purchases your horse and it does not pass the post-sale veterinary exam within the give time frame (24 or 48 hours), if the problem with the horse one of the conditions warrantied in the Conditions of Sale, the buyer has the right to return the horse to you (otherwise known as “turnback”), and you will not be able to keep the sales proceeds.

To avoid turnback, it is advisable to negotiate with the buyer and reach a mutually-acceptable agreement. One strategy is to reduce the price of the horse, or offer to pay for surgery if the problem is operable. A consignor might also offer to give the buyer some compensation for the risk of surgery.

3. Bidding on Your Own Horse.  Although some people view consigned bidding as unethical, the rules and the law clearly permit it. The practice of bidding on your own horse has also been approved by the Sales Integrity Program. Note, however that if you bid on your own horse and are the final bidder, you will remain the owner of the horse but still owe a commission to the sales company (generally 5% of the final bid).

Legal Tips for Purchasers at Horse Auctions

You do not have to risk being the victim of fraud or other legal issues when you set out to buy a horse at auction. Listed below are some ways prospective buyers can protect their interests and their equine investments:

1. Choose the Right Agent.  No license is required for bloodstock agents to conduct business. Therefore, literally anyone who wants to call themselves a bloodstock agent can do so. It is thus essential that you check references before enlisting a bloodstock agent.  Any auction company issuing a catalog will be willing to offer names of trusted agents in the area. You can also screen agents through an advocate organization, such the Texas Thoroughbred Association, by requesting references. Finally, ask others in the industry about the reputation and character of your candidates. There will be reluctance on the part of many in the industry to make less than complimentary remarks about an individual. Instead, they may refer you to someone else or offer an evasive answer; which can provide you some clues.


2. Establish Agreement with Trainer or Other Advisor Before the Sale.  Trainers or boarding farm managers often provide advice to buyers in selecting racing or breeding prospects. Once a sale is consummated, however, the buyer does not always guarantee that the trainer or breeding farm manager will have the opportunity to train or board the prospect.  If you call upon a trainer or breeding farm manager to provide advice with respect to a racing or breeding prospect, you should provide, and follow through with, an agreement with such advisors before the sale as to what the compensation and/or boarding or training opportunity is implicit in the business arrangement with the advisor.

3. Avoid Undisclosed Dual Agency Problems.  “Dual Agency” is defined by TOBA’s Sales Integrity Program as, “the practice of an agent accepting a commission from the buyer for purchasing/bidding on the horse on the buyer's behalf and also accepting any commission or other commercial benefit from any party involved with the selling/consigning of the same animal, without disclosing this.”   The most common dual agency practice is a pre-arranged agreement between the agent for the buyer and the agent for the seller that establishes a secret price for a horse prior to the sale, and then bidding up the price and dividing any overage between the agent and the consignor.   Avoid dual agency by getting a written agreement with your agent, or use the forms posted on the Sales Integrity Program website at: www.salesintegrity.org. Your agreement should include amount of commissions, and an agreement that the agent will fully disclose all commissions for every transaction.

4. Familiarize Yourself with Limited Warranties in Conditions of Sale.  Major Thoroughbred auction companies recognize extenuating circumstances that allow buyers to return a horse if the horse has a condition or conditions of which the buyer was unaware at the time of purchase (“limited warranties”). The limited warranties are stated in the front of each catalog under “Conditions of Sale.”   Some examples of conditions auction companies might warranty include: breathing problems, vision problems, pregnancy (if mare declared to be in foal), cribbing, and spinal ataxia (a/k/a “wobbler syndrome”) in yearlings or weanlings, and bone warranties.

The warranties in the sales conditions have a very strict time limit which expire at different times (either 24 or 48 hours) after the sale or upon removal from the grounds (whichever comes first).
Make sure you are aware of all the sales conditions and limited warranties for a particular auction prior to bidding on a horse, as you will be bound by the conditions of sale whether you have read them or not. You should also listen to all announcements made from the auction stand prior to the sale of the horse, as there are also some conditions and warranties that must be announced at the time of sale.

5. Know When Title and Risk Pass to You.  Both title and risk pass to the winning bidder at the fall of the auctioneer’s hammer. The winning bidder becomes responsible for the horse and its actions at that moment. Horses must be removed from the sales grounds within 24 to 48 hours, depending on the sale. Taking possession of the horse constitutes delivery and acceptance. Under most conditions of sale, the purchaser’s right to rescind a sale pursuant to the warranties in the conditions of sale is prefaced upon veterinary examination occurring on the grounds.  Consequently, it’s imperative that before moving the horse, a veterinarian determines that the horse does not have any conditions that would allow the sale to be rescinded under the conditions of sale.

Transfer of Horse's Papers After Lien Sale

When you sell a horse at a lien foreclosure sale, you will want to transfer its registration papers into the name of the buyer at auction, whether that be you or a third party.  Most breed registries have policies and procedures relating to horses purchased in a lien foreclosure. Depending on the breed registry, you will be asked to provide certain items such as a notarized affidavit stating that the stableman has complied with the law relating to the foreclosure; a copy of the written notice of the foreclosure sale; a copy of the statute by which the foreclosure was conducted; and a notarized bill of sale from the stableman. If you can provide all of the items requested by the breed registry, you will most likely be able to get the horse’s papers transferred into your name.