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.

Today, the Supreme Court of Texas denied review in Hilz v. Riedel, a Fort Worth Court of Appeals decision reversing a summary judgment granted pursuant to Chapter 87 of the Texas Civil Practice & Remedies Code. 

As such, the Fort Worth Court of Appeals’ opinion will stand and the case will proceed to trial on remand to the trial court.

A detailed discussion of the Fort Worth Court of Appeals’ opinion is contained in this prior post.

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

Are your liability release contracts sufficient to sustain a successful motion for summary judgment? Texas courts generally hold releases of liability to fairly high standards. Release cases are very fact specific, and often come down to extremely technical points about the contents of the release document. As such, the proper drafting of these contracts is a must. A recent case gives us a glimpse into how Texas courts interpret liability releases.

A man by the name of Revel Thom decided to ride the mechanical bull while he was hanging out at Rebel’s Honky Tonk, a country bar on 5th Street in Austin. Before riding the bull, Mr. Thom signed a document entitled “PARTICIPANT AGREEMENT, RELEASE AND ASSUMPTION OF RISK.” The release had Thom acknowledge the risks of riding the mechanical bull, disclose any pre-existing health conditions, and release and indemnify Rebel’s and related parties. 

Unless you’re Ty Murray, don’t expect to stay on one of these things…especially if you’ve been drinking!

However, Mr. Thom failed to inform the mechanical bull operator that he had suffered from chronic back pain for four to five years requiring him to receive annual epidurals to numb the pain. Mr. Thom fractured his T-12 and L-1 vertebrae in his back as a result of being bucked off the mechanical bull. Thom subsequently sued Rebel’s Honky Tonk for his injuries. 

The honky tonk filed a motion for traditional summary judgment, arguing that they conclusively established the affirmative defenses of release and assumption of the risk. The honky tonk also sought a no-evidence summary judgment on Thom’s claims of negligence and negligent supervision. The trial court granted the honky tonk’s motion for summary judgment without stating the basis for its ruling.

Overruling all of Thom’s points of error, the Austin Court of Appeals affirmed the trial court’s dismissal of Thom’s case on summary judgment. 

The court of appeals found Thom’s argument that he did not read the release to be unconvincing, stating,

It is well established that one is presumed to know the contents of the contract that they are signing and are bound by its legal effects.

The court of appeals also found that the release language was sufficiently conspicuous, because the release was contained in a stand-alone document, was not written in minuscule font, and contained bolded and underlined warnings.

The language listing Rebel’s Honky Tonk and its “owners” as released parties was upheld by the court of appeals to be specific enough to release additional defendants Rainbow Cattle Company, Inc. (the honky tonk’s owner) and Zack Truesdell (Rainbow’s president). The court found the the case cited by Thom inapplicable, as the release at issue in that matter purported to release an “unlimited, general class of potential defendants.”

Hat tip to Nick Farr over at Abnormal Use for the heads up on this case.

Case Information:

Thom v. Rebel’s Honky Tonk, No. 03-11-00700-CV, 2012 WL 3793181 (Tex. App.—Austin, Aug. 30, 2012, no pet. h.)

Last Friday, the Supreme Court of Texas denied Brenda Young’s petition for review. The 14th Court of Appeals’ holding that Chapter 87 can immunize defendants against suits brought by independent contractors will stand. 

The Court’s notice regarding the denial of the petition for review can be downloaded here.

The Supreme Court did not give a reason for denying the petition. One reason could have been that the Court found no reversible error in the 14th Court’s opinion. As such, the denial may be yet another indication that the Supreme Court agrees with me and other practitioners who believe Chapter 87 applies to suits brought by workers (both independent contractors and employees), subject to its exceptions.

As far as I know, no court of last resort in any state has ever taken up the issue of whether an equine or farm animal immunity statute applies to suits brought by workers.

Related Posts:

Young v. McKim Appealed to Supreme Court of Texas

Texas Supreme Court May Be Inclined to Grant Chapter 87 Immunity to Employers

Another Appellate Court Holds Chapter 87 Immunity Act Applies to Suits Brought by Independent Contractors

Yesterday, counsel for Brenda Young filed a petition for review of the 14th Court of Appeals’ decision discussed in this prior post.  This will be the first time the high court has ever been given the opportunity to decide whether or not Chapter 87 immunity applies to claims brought by workers.

A copy of Young’s petition can be downloaded here.

In her petition, Young contends that the 14th Court of Appeals committed error in holding that:

1.  non-consumers of equine activities (i.e. people who are paid to work around horses) qualify as participants under Chapter 87; and

2.  the posting of warning signs under Chapter 87 was a defense and not an element of proof (i.e. Young asserts that the McKims had the burden of proving that they had posted the Chapter 87 warning signs in order to be afforded immunity under Chapter 87, and that they did not meet that burden).

While I agree with the 14th Court of Appeals’ decision and do not wish to see it reversed, I am pleased that the Supreme Court now has an opportunity to review whether or not Chapter 87 applies to claims brought by employees or other workers.  This issue is currently somewhat “murky” under Texas law.  Clarification is needed because there seems to be a conflict of authority on this issue among the intermediate courts of appeals.  In that respect, I am pleased that Young requested review of the first issue discussed above.

Related posts:

Update on Young v. McKim

Another Appellate Court Holds Chapter 87 Immunity Act Applies to Suits Brought by Independent Contractors

Texas Supreme Court May Be Inclined to Grant Chapter 87 Immunity to Employers

If the Texas Workers’ Compensation Act and the Texas Farm Animal Limitation of Liability Act got into a fight, who would win?  The Supreme Court of Texas might have just metaphorically placed its money on the farm animals.

The Court held last week in Texas West Oaks Hosp. v. Williams, that an employee of a nonsubscriber hospital employer must comply with the procedures set forth in the Texas Medical Liability Act (i.e. the progeny of the 2003 tort reform movement), and barred the employee’s claims against his employer.

If I haven’t already lost you, you are probably thinking,

Wait a minute, what is a “nonsubscriber”, and what does a case about a hospital employee have to do with the horse industry? 

Bear with me, this material is sort of complicated, but I hope the point of this post will be clear to you by the time you get to the end (if you in fact make it that far!)

Nonsubscriber Status. Are you a nonsubscriber?  Most Texas horse industry employers are “nonsubscribers”, at least for some of their employees.  If you have employees or so-called “independent contractors” who might really be employees under the true legal definition, you should be aware if you are or are not a nonsubscriber. 

Why does it matter? The Texas Workers’ Compensation Act allows employers to elect whether or not they will subscribe to worker’s compensation insurance.  If an employer does subscribe and an employee is hurt during the scope of their employment, the employee is generally precluded from filing suit, and must instead pursue administrative remedies for benefits under the Workers’ Compensation Act. 

But if an employer elects to forego workers’ compensation coverage, it is subject to suits at common law for injuries suffered by employees on the job. Not only that, nonsubscribers are generally not able to avail themselves of many common-law defenses to negligence claims in suits brought by employees. See this prior post for more details. 

That said, I should note as an aside that some “farm or ranch employees” are excluded from the provisions of the Workers’ Compensation Act altogether (did I mention before that this is complex stuff?).

So here’s the question that remains unsettled: What if a nonsubscriber employer is sued by an employee, and the employee’s injuries arose from dangers inherent in an equine activity? Can the employer invoke the immunity from liability granted to virtually all people in the Farm Animal (formerly Equine) Limitation of Liability Act (um…we’ll just call it Chapter 87)? 

As we have discussed at length, the Supreme Court has not yet decided this issue. Two appellate courts have indicated a willingness to apply Chapter 87 to bar suits brought by horse industry independent contractors, but one court of appeals refused to apply Chapter 87 to bar a suit brought by a horse industry employee. 

Plaintiffs’ lawyers who represent injured employees generally assert the argument that Chapter 87 was intended to apply to tourists or consumers, and not workers. They further assert that Chapter 87 cannot bar employees’ suits because it would abrogate employer duties under the Workers’ Compensation Act.  The employee’s lawyers in Williams made similar arguments about the Medical Liability Act.

The Williams DecisionWilliams is significant to the equine industry, at least in my mind, because it shows a willingness on the part of the Supreme Court to allow “tort reform” type statutes to bar an employee’s claim against a nonsubscriber. Not unlike the Medical Liability Act, Chapter 87 is another law that was passed to limit liability for certain types of claims. Furthermore, the plain language of Chapter 87 itself does not exclude suits brought against nonsubscriber employers (though it does expressly carve out other stuff, such as activities regulated by the Texas Racing Commission).  As such, I predict that if the Supreme Court of Texas ultimately takes up the issue, it is inclined to rule that Chapter 87’s immunity provisions apply to employees and other workers (subject to its exceptions, of course) .

Related posts:

Are Employers Immune from Liability for Employees’ Horse-Related Injuries in Texas?

Another Appellate Court Holds Chapter 87 Immunity Act Applies to Suits Brought by Independent Contractors

Update on Young v. McKim

Yesterday, the Fort Worth Court of Appeals handed down an opinion in a case styled Hilz v. Riedel, reversing the trail court’s summary judgment granted in favor of a defendant based on Chapter 87 of the Texas Civil Practice & Remedies Code (the “Act”).

Case Background: Thirteen-year-old Ciarra Hilz was injured at her friend Steven’s house while riding a “five-year-old male quarter horse” by the name of “Logan.” Logan belonged to Steven’s dad, Richard Riedel. 

Ciarra’s father, Greg, claimed that he told Richard not to allow Ciarra to ride outside of the round-pen located on Richard’s property. Richard claimed that Greg never said anything about where he wanted Ciarra to ride horses.

Ciarra started her ride in the round pen, but then rode out into the pasture afterwards. While Ciarra was riding in the pasture, Logan “bolted” and ran Ciarra into a tree, causing a tree limb to impale Ciarra’s side. Ciarra was hospitalized for a week and had multiple surgeries.

Greg sued Richard Hilz on his own behalf and on behalf of Ciarra. Richard filed a motion for summary judgment under Section 87.003 of the Act, which, prior to its amendment in 2011 stated,

 

[e]xcept as provided by Section 87.004, any person…is not liable for…damages arising from the personal injury or death of a participant in an equine activity…if the…injury results from the dangers or conditions that are an inherent risk of an equine activity.

Richard’s motion further addressed the reasons why he was not liable under the exceptions to the Act provided in Section 87.004(2) [failure to make a reasonable and prudent effort to determine the ability of the participant to engage safely in the equine activity] and 87.004(3) [dangerous latent condition of the land].

However, Greg had amended his petition to add an allegation that the exception provided in Section 87.004(4) [commission of an act or omission with willful or wanton disregard for the safety of the participant] before filing his summary judgment response.

The Appeal: The Fort Worth Court of Appeals reversed the trial court’s summary judgment in favor of Richard, holding that:

1) a fact issue precluding summary judgment existed as to the exception found in Section 87.004(2) because Greg claimed that he told Richard not to let Ciarra ride outside the round pen; and

2) Because Richard did not amend his motion for summary judgment to include the exception found in Section 87.004(4), summary judgment was improper on that claim.

Take Aways: Defendants relying upon the Act in a motion for summary judgment should 1) include arguments as to why each and every pleaded exception to the Act does not apply; and 2) have parents and minors sign carefully-drafted liability waivers prior to allowing guests to ride; and 3) have parents put all specific instructions regarding their child’s participation in equine activities in writing.

Case Information: Hilz v. Riedel, No. 02-11-00288-CV, 2012 WL 2135648 (Tex. App.—Fort Worth Jun. 14, 2012, no pet h.)

Photo:  In celebration of Father’s Day this Sunday, today’s photo is of my dad, Chuck McCormack, and me riding at Bardwell Lake.  Have a great Father’s Day everyone!

As we discussed in this prior post, the Supreme Court of Texas has not yet addressed the issue of whether Chapter 87 of the Texas Civil Practice & Remedies Code (the “Act”) shields defendants from liability in suits where employees or independent contractors are injured while engaging in an equine activities. Up until last week, we only had two opinions—both from intermediate appellate courts—addressing this issue. 

In the first case—Johnson v. Smith (Corpus Christi 2002)—the court held that independent contractors were participants under the Act, and therefore the Act shielded defendants in suits brought by independent contractors from liability. In the second case—Dodge v. Durdin (Houston [1st] 2005)—the court held that employees are not participants under the Act, and therefore defendants in suits brought by employees are not immune from liability.

As of last Thursday, we now have a third appellate case that sheds light on this issue. The Fourteenth Court of Appeals in Houston recently held that the Act immunizes defendants from liability for claims brought by independent contractors.

The case, styled Young v. McKim, represents the first equine employee negligence suit addressed by a Texas court of appeals since Loftin v. Lee was handed down by the Texas Supreme Court in April of 2011. 

Case Background: Brenda Young had posted a flyer at Ravensway Stables advertising her ability to assist owners in the care of their horses. Tisa McKim and her daughter, Jackie, hired Young to care for their horses—Jasper and Butch—at Ravensway. 

About two months after Young started caring for Jasper (a rescue horse), Jasper kicked Young and injured her. The injury occurred while Young was talking to another boarder at Ravensway while Jasper grazed beside her.

Young sued the McKims for negligence, and the McKims moved for summary judgment under the version of the Act in existence in 2010 (i.e. before the Act was amended in 2011). The trial court granted the McKims’ motion for summary judgment. 

The Appeal: The Fourteenth Court of Appeals affirmed the trial court’s summary judgment in favor of the McKims. On appeal, Young alleged that the Act did not shield the McKims from liability.  Among the reasons Young gave were 1) only “tourists and other consumers of equine activities” qualify as participants under the Act; and 2) Young was an employee of the McKims, not an independent contractor.  Young relied heavily on the First Court of Appeals’ opinion in Dodge on appeal.

The Fourteenth Court of Appeals determined that Young was an independent contractor, not an employee.  The court did not reach the issue of whether the Act would have applied had Young been an employee. The Fourteenth Court disagreed with the discussion in Dodge suggesting that the Act only applied to “tourists and other consumers of equine activities.”

Citing Loftin, the Fourteenth Court held,

“The Equine Act is a comprehensive limitation of liability for equine activities of all kinds…The Equine Act applies to all ‘participants’”. [Emphasis supplied].

It remains to be seen whether Young will be appealed to the Supreme Court of Texas. Given the Supreme Court’s expansive view of the Act set forth in Loftin, the Supreme Court might disagree with Dodge’s holding that the Act does not apply to employees.

Case Information:  Young v. McKim, No. 14-11-00376-CV, 2012 WL 1951099 (Tex. App.—Houston [14th] May 31, 2012, no pet h.).

Related Posts:

Are Employers Immune from Liability for Employees’ Horse-Related Injuries in Texas?

Victory for Horse Industry in Texas Supreme Court

Does Your Farm Need to Purchase Worker’s Compensation Insurance?

Time to Get New Warning Signs: Equine Activity Act Amended in 2011

Are you thinking about buying a ranch through an informal seller finance deal? If so, beware.  Andalusian breeder Rancho Mi Hacienda and owner Gilda Arana learned the hard way the pitfalls of doing this type of deal “on the fly”.

Rancho thought it had an enforceable written agreement whereby Coy Lynn Owens and his wife Linda agreed to sell Rancho 126 acres of land in Hopkins County, Texas. After all, Rancho did have a letter signed by Coy Lynn memorializing the parties’ verbal agreement concerning the ranch sale. 

In reliance, Rancho transported its seventy-three Andalusian horses from California to Texas and moved them onto the property. Further, Rancho paid Coy Lynn $25,000 and gave the Owenses’ daughter an Andalusian horse of her choosing. Rancho also expended substantial sums on a log cabin, shelter for the horses, and utilities for the premises. It was Rancho’s understanding that the $25k and the horse constituted the down payment, and that an additional $200,000 was to be paid to the Owenses at the end of a five year term.

Photo:  a very majestic Andalusian mare

Around the time Rancho took possession of the property, Coy Lynn Owens went to federal prison for mail fraud. Linda filed for divorce soon after Coy Lynn was incarcerated. In an agreed divorce decree entered by the divorce court, Linda was awarded the realty in question and Coy Lynn was divested of any title to it. 

Shortly after the divorce decree was entered, Rancho sued Coy Lynn, Linda, and L&L Investments (a holding company) seeking, among other things, specific performance of the ranch sale agreement, and damages related to the horses such as vet bills, the cost of five horses who died, and lost earnings for one year’s breeding season.

Rancho had Coy Lynn served with the lawsuit at the prison. When Coy Lynn did not file an answer, Rancho took a default judgment against Coy Lynn and nonsuited Linda and L&L Investments.  After the jump, you’ll see why this was a costly mistake.

Rancho (apparently still in possession of the property) later tried to levy execution on the 126-acre tract to satisfy its judgment against Coy Lynn. In response, Linda obtained a judgment from a JP Court ordering Rancho evicted from the property.

Linda also filed suit in district court against Rancho seeking a declaratory judgment that, among other things, Linda was the sole owner of the property and that it was not subject to execution. The trial court and the Texarkana Court of Appeals agreed with Linda on these points.  The Court of Appeals held that because Rancho’s suit was filed after the divorce decree divested Coy Lynn of all interest in the property, it was no longer community property subject to execution on a judgment against Coy Lynn alone. 

In hindsight, Rancho probably realized that nonsuiting Linda was a terrible idea.  According to the Court:

Although Rancho’s suit originally included [Linda] as a defendant, it made the choice not to pursue an action against [Linda] and filed a nonsuit as it pertained to her, electing to pursue judgment only against [Coy Lynn], who was apparently perceived to be the low-hanging fruit.

Case informationRancho Mi Hacienda v. Bryant, 2012 WL 952853, No. 06-11-00080-CV (Tex. App.—Texarkana, Mar. 22, 2012). The full text of the opinion can be found here.