July 2013

Today, a 10-person jury in the U.S. District Court for the Northern District of Texas, Amarillo Division ruled that AQHA Rule REG106.1, which prohibits the registration of cloned horses and their offspring in AQHA’s breed registry, violates federal and state anti-trust laws. The jury awarded no damages.

In a statement published today on AQHA’s website, AQHA Executive Vice President Don Treadway, Jr. said,

When individuals with shared interests, goals and values come together to form a voluntary association to serve a common purpose, the members have a right to determine the rules for their association. The wisdom of our membership –which is largely not in favor of the registration of clones and their offspring—has not been upheld by this verdict.

Whether nor not clones will be able to be registered with the AQHA in the foreseeable future is still up in the air. According to AQHA President Johne Dobbs,

We will meet with our legal counsel and executive committee regarding our appeal options in continuing to fight for our members’ rights and announce our decision in that regard in the near future.

The plainitffs in the case have requested injunctive relief, in which they have asked the court to order the AQHA to register their cloned horses.  They have also requested that the court order the AQHA to pay at least a portion of their legal fees.  A hearing on the injunctive relief and fees request has not yet been held.  The jury’s verdict has not been reduced to a final judgment, nor has the court issued an opinion in the case at this time.  

Case InformationAbraham & Veneklasen Joint Venture, et al v. American Quarter Horse Association; Cause No. 2:12-CV-00103-J in the U.S. District Court for the Northern District of Texas (Amarillo Division)

Related Post

Federal Lawsuit Alleges AQHA Cloned Horse Registration Policy Violates Antitrust Law

On July 18, 2013, the Austin Court of Appeals issued a memorandum opinion affirming in part a trial court judgment which held that a stable employees’ smoking while working in the barn was a material breach of the boarding agreement, allowing several boarders to move out without notice.

After a boarder saw and photographed a stable employee smoking while working in the barn, several boarders removed their horses from the stable. They did not give 30 days notice before leaving, and did not pay for the month after removing their horses as prescribed by their boarding contract with the stable.

The court of appeals upheld the trial court’s decision that the employee’s smoking in the barn was a material breach of the agreement that excused the boarders from further compliance with the boarding contract. In its materiality analysis, the court pointed out that the stable owner agreed when testifying that her “sole job in taking in other’s animals for boarding is to give those animals a safe place to live,” and agreed that “fire is a danger to the care and safety of horses.” Further, the stable’s barn rules, which were incorporated into the boarding contract by reference, included the statement, “No smoking in the barns”.  The smoking ban was included in a rule entitled “Safety”. The court found that this general prohibition banned everyone in the barn from smoking, not just the horse owners.

The court reversed and remanded the remainder of the suit, which had to do with the stable owner’s riding instructor agreement with Amber Ross. Ross had given riding lessons at the stables for the boarders involved in the suit who had left the barn with their horses. Ross’s lessons were covered by a written riding instructor agreement that required Ross to pay a fee when she taught a lesson at the stables. Ross did not pay the stable owner any fees for lessons conducted during March 2009, though there was evidence that Ross gave lessons during that month. The court of appeals reversed the trial court’s decision that Ross did not breach the riding instructor agreement, and remanded that portion of the case to the trial court to determine the amount of fees Ross owed to the stable owner.

Take Aways:  Owners of boarding stables should take care to ensure that all stable employees, as well as friends and guests of the stable ower, comply with all written rules and regulations prescribed by the stable.  If a stable employee or a guest or friend of the stable owner violates barn rules, boarders may be legally entitled to terminate their boarding contracts immediately under certain circumstances.  This may be true even if the stable’s rules do not mention whether or not the stable owners are subject to the rules.

Case InformationRamaker v. Abbe, 2013 WL 3791491 (Tex. App.—Austin, Jul. 18, 2013)(mem. op.)

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.