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.

Next Wednesday (November 9, 2011) the U.S. Supreme Court will hear oral arguments on a case where the main issue is States’ rights to impose their own regulations on federally-inspected slaughterhouses. The case is National Meat Association v. Harris (Docket No. 10-244). Though the case involves swine instead of horses, the Court’s decision might ultimately affect the horse slaughter debate currently being waged in Congress.

The issue before the Court is whether a state law in California requiring all slaughterhouses to “immediately euthanize” any nonambulatory animal on its premises is preempted by the Federal Meat Inspection Act (FMIA). The National Meat case deals with a California law governing slaughterhouses in that state that was passed in 2008, after the Humane Society of the United States released a video of so-called “downer cows” being pushed with a forklift, kicked, electrocuted, and dragged with chains at a slaughterhouse.

If the Court ultimately finds that California (and, presumably, all other states) can impose its own regulations on slaughterhouses to which the FMIA applies within their respective states, this might ultimately affect the current battle over horse slaughter being waged in the United States. An interesting question raised by this case, in my mind, is this:

What if one or more states were to enact laws that made illegal the so-called ‘evils’ of slaughter that opponents of horse processing find so unsavory? Would the opponents of horse slaughter be opposed to the humane processing of horses in those states?"

It’s an interesting question, and I’m torn. While I generally don’t like to see new red tape and new regulations unduly imposed on any industry, I tend to think that most issues such as this are best dealt with on the state level. If the Supreme Court finds that states can, in fact, impose their own laws on federally-inspected slaughterhouses, I am somewhat encouraged that this might ultimately provide vehicle whereby a “win-win” resolution of the horse slaughter battle may be reached.  If humane horse slaughter can be reintroduced in the United States, many horse industry groups believe that that this would have a positive economic impact on the overall horse industry.

Follow me on Twitter @alisonmrowe

Happy Tuesday!  As of August 15, 2011, we now have a reported tax case arising from the infamous ClassicStar debacle.  Not surprisingly, the precedent involves "bad facts" and is not helpful for other taxpayers who took part in a ClassicStar deal or similar deal.  The following guest post on the opinion, entitled Van Wickler v. Commissioner, is by Paul Husband, a California equine lawyer whose practice emphasizes tax matters.  Enjoy!

"ClassicStar LLC was a company which offered highly leveraged mare leasing deals.  They offered top quality Thoroughbred mares and stallion breeding rights to leading sires like Elusive Quality and Mineshaft. The tax benefits of their programs, turbo-charged with leverage provided by loans which they helped arrange were prodigious. Leveraged mare leasing combined with the expensing of stud fees and the expensing of certain prepaid expenses can generate very significant tax savings. Unfortunately, the principals of this company ended up in prison for fraud.

But the fraud was not based on invalidity of the income tax law principles related to mare leasing and horse breeding which were involved. Rather, the fraud involved misrepresentations concerning  facts of various sorts, such as the “high quality Thoroughbred” mares, who sometimes turned out not to be Thoroughbreds at all, but Quarter Horses, or grade horses. The ClassicStar program also suffered problems in some cases with the reasonableness of charges, such as, a lease fee of over $200,000 which was charged for a mare which sold for $350. 

            There were hundreds of IRS audits of individuals who did business with ClassicStar. There were hundreds of assessments by the IRS based on these audits, and hundreds of Tax Court petitions were filed. Now we have a reported decision.

            The “ClassicStar” case decided August 15, 2011 was entitled Van Wickler v. Commissioner, T.C. Memo 2011-196; 2011.  It was tried before Tax Court Judge Maurice Foley, a fair-minded judge, who had previously recognized a horseman’s profit motivation in Routon v. Commissioner, T.C. Memo 2002-7 (2002).

            But, horse breeders lose Tax Court cases based on the “hobby loss” rules of Internal Revenue Code Section 183 all the time. Why should we care about this one? We should care because this precedent may be used as a bludgeon against others who did business with ClassicStar, even if the facts of the later cases were very different than the facts in Van Wickler. This reported opinion reflects a conscious policy by the Internal Revenue Service to “manage” case law. The IRS wants case law which is favorable for them. Favorable precedents give IRS Appeals Officers greater leverage in discussing settlements with horse business owning taxpayers and/or their representatives.

            The nature of the facts varies enormously in the hundreds of ClassicStar cases pending across the United States from cases in which the horse leasing taxpayers had very strong facts, and would likely win at trial, to cases such as Van Wickler. The facts in Van Wickler constituted a parade of horribles. In it, the taxpayer:

            1. Signed an agreement purporting to be the managing member of an LLC that had not yet been formed;

            2. Backdated a board agreement to November 1, 2002, when he did not enter into the transaction until December 30, 2002; and

            3. Signed a lease in which the schedule setting forth the names of mares to be leased and stallions whose breeding rights would be used was blank – the taxpayer did not know the identities, or even the breed of the mares which he had allegedly leased.

            The Tax Court in Van Wickler found:

            1. The accountings submitted to the court were contradictory and varied from version to version; and based on them, neither the taxpayer nor the Court could tell how much money was spent, or what it was spent on.

            2. The taxpayer not only did not negotiate the contract terms, he did not even know what the contract terms were.

            3. The taxpayer could not tell what horses had been leased.

            4. The mare named “Lita May” sold for $350, but one chart showed that the lease fee for her was $260,723, and on a different chart, the lease fee for that same mare was shown as $185,000.

            The Court held that there was no basis in the record to determine which expenses were allowable and which were not. Therefore Court concluded that there could not be any expenses allowed as deductions. 

            Yet there was some mercy shown. The Court found that Van Wickler had relied on an independent C.P.A., who had been deceived by the promoters, and who advised Van Wickler that the ClassicStar deal had a high degree of risk, but could have a high return. Based on what the court perceived as good faith efforts to get professional advice and his reliance upon a C.P.A., no penalties were assessed.

           The fact that Van Wickler is a reported case reflects that the IRS is judicious in managing their caseload. It was the Van Wickler case, with terrible facts for the taxpayer, that was tried and reported, rather than a case with good facts for the taxpayer.

            By contrast, in 2009, the IRS had another ClassicStar case in Tax Court which the mares leased were identified and were high quality Thoroughbreds; where the taxpayers were actively involved in managing their business, and had made visits to the farm where the mares were boarded, and to the auctions, had taken extensive horse business education, and had good books and records. The taxpayers had a highly qualified expert witness and your writer as an attorney. In that case, the IRS conceded shortly before trial. It was obvious that they did not wish that case to be the first judicial precedent for ClassicStar breeders.

            Make no mistake, I favor concessions by the IRS when it is obvious to them that the taxpayer is going to win the case. But my point is that as practitioners and horsemen and horsewomen, we should not be overwhelmed when case law like Van Wickler is brandished by an IRS Revenue Agent, Appeals Officer or District Counsel lawyer. They do pick and choose their cases, and therefore, often the judicial opinions come out of cases which are factually favorable for the IRS. These opinions do not mean that cases with facts favorable to the taxpayer/horseperson cannot be won. The individual facts of each case are paramount in determining the outcome of cases such as the ClassicStar cases. Representatives and horsemen should not be cowed into submission by an IRS reference to the Van Wickler decision." 

© B. Paul Husband 2011

Texas Racing Commission v. Marquez, a recent opinion from the Austin Court of Appeals, involved a horse race where two horses owned by Javier Marquez were inadvertently wearing each other’s saddle cloth numbers. One of the horses suffering from this “wardrobe malfunction” finished second, and the race stewards disqualified both horses and redistributed the race purse.

When the Texas Racing Commission refused to hear Marquez’s appeal of the stewards’ decision, Marquez sued the Texas Racing Commission and its executive director, Charla Ann King.

Marquez won big in the trial court. The trial court declared that Ms. King acted in excess of her statutory authority by refusing Marquez’s appeal, by disqualifying Marquez’s horses, and by redistributing the race purse. The trial court also awarded Marquez his attorneys’ fees under the Uniform Declaratory Judgment Act, and ordered the second place race purse distributed to Marquez. The Racing Commission appealed the decision.

On appeal, the Austin Court of Appeals found that Ms. King did exceed her authority in denying Marquez’s appeal of the stewards’ decision and upheld Marquez’s attorneys’ fees award under the Declaratory Judgment Act. However, the Court of Appeals vacated and dismissed the portion of the trial court’s judgment that awarded the second place race purse to be distributed to Marquez.

The trial court’s logic: TheTexas Racing Commission has exclusive jurisdiction over the issue of the second place race purse. Marquez needs to exhaust his administrative remedies by moving forward with his appeal before the Texas Racing Commission that he fought for in the trial court. 

Ironically, the Texas Racing Commission (the same entity that Marquez sued and fought on appeal) will get to decide whether or not Marquez will get the purse that his horse won when it was wearing the wrong “outfit”. 

Follow me on Twitter @alisonmrowe

In a rare appellate opinion dealing with a Texas stock law, the Waco Court of Appeals recently found in favor of Bradley Evans, an “alleged” cow owner in the case of Evans v. Hendrix

The memorandum opinion was rendered by the Honorable Al Scoggins, a fomer district judge in my home town of Waxahachie, Texas.  According to Justice Scoggins’s website, he is a horse owner.

 

Admittedly, the case does not involve a horse. But the fact scenario is one which could have easily involved a horse, and we can safely assume that the court of appeals decision would not have differed had the case involved a horse. 

The basic facts are as follows: Trucker Charles Hendrix collided with a cow on Highway 174 in rural Bosque County, damaging his big rig and the military cargo he was hauling (but Hendrix was not injured). Hendrix sued Evans, alleging that Evans was the owner of the cow in question. Hendrix asked the trial court to award him lost wages and damages to the tractor-trailer and cargo. After a bench trial, the trial court awarded Hendrix $10,000 in damages.

Evans was an "alleged" cow owner because he never admitted that he owned the cow. However, shortly after the accident, Hendrix observed Evans dragging the cow’s carcass up a nearby street with his tractor after having cut out the cow’s back straps.

On appeal, the Waco Court of Appeals reversed Hendrix’s award and ruled that Hendrix “take nothing”. What did Hendrix do wrong? According to the court:

  • Hendrix never pleaded or alleged that the dispute involved any stock laws [though my research indicates that Bosque County has enacted several stock laws related to cattle for different parts of the county between 1901 and 1939]. Hendrix might have added some ammunition to his case by pleading liability under the stock laws, assuming that the accident occurred in one of the areas of Bosque County where a stock law restricting the free roaming of cattle had been enacted.
  • Hendrix never argued that Evans violated any statutory provision. Because the stock law wasn’t raised, the court gave Hendrix the benefit of the doubt and assumed that Hendrix was relying on Section 143.102 of the Texas Agriculture Code, which deals with livestock roaming on the right-of-way of a highway. Under Section 143.102, the plaintiff must prove that a defendant knowingly permitted the livestock to roam on the highway. Hendrix put on no evidence that Evans knowingly allowed the cow to roam at large.

I think the Waco Court of Appeals got this right, given what appears to have been in the record. Hendrix may have survived appeal had he asserted liability under the local stock law on the trial court level, but he did not. 

Want more general info on Texas stock laws? Here’s a link to a great paper written and presented this year by Alex Eyssen at the Texas State Bar Agricultural Law CLE.

See also these blog entries on the topic of stock laws on the Equine Law Blog.

Follow me on Twitter: @alisonmrowe

Guten Tag aus Hannover, Germany, dear Equine Law Blog readers!

For the first time since the Equine Law Blog’s inception in early 2008, we are broadcasting "live" from a location outside the United States!  Speaking of the United States, this update is to let you know about the good news found in the U.S. Tax Court decision Blackwell v. Commissioner, decided on August 8, 2011. 

Minnesota performance horse breeders Mark and Patti Blackwell of Fresh Horses Farm stood up to our dear Uncle Sam and they prevailed in a hobby loss case! 

See this related post for more details on why this win is significant.

Why the Blackwells won, in a nutshell [according to the opinion]:

–They developed a "rather comprehensive" written business plan;

 –They prepared to start up the breeding and training activity by taking educational courses and consulting experts;

 –They were not "absentee, aloof, or recreational" horse owners;

 –They made adjustments, as necessary, in their business plan and activities in an effort to make a profit;

–They maintained reasonably good books & records of income and expenses related to their horse activity.

My take aways:  Keep good business records and a written business plan; do as much as you can yourself so that you’re not "absentee" or "aloof"; do research and consult experts as to how you might make a profit int he horse business and change things up if you find that the business plan is not working out.

About the picture Before I head to the great horse shows at Luhmühlen and Augsburg, I am staying a couple of days with my former host parents from my days as a Rotary Youth Exchange student (Eberhard and Renate Nickel).  Eberhard Nickel [pictured, on the way to the courthouse this morning] is a German attorney who specializes in construction law and public finance law.  The lawyers in Germany still wear robes to court [but I’m told they never wore wigs].

Follow me on Twitter @alisonmrowe

On July 28, 2011, the Fort Worth Court of Appeals affirmed the entire judgment in favor of the National Cutting Horse Association in the Paula Gaughan lawsuit. A copy of the Gaughan opinion can be found here. [Note: Westlaw has labeled this case, in error, as a Waco Court of Appeals case. The opinion was issued by the Fort Worth Court of Appeals].

Gaughan Recap: The Gaughan case stemmed from Paula Gaughan’s written requests to NCHA to inspect certain financial data found in the books and records of the NCHA. Gaughan sought the records to make sure the NCHA was “not guilty of waste or mismanagement in its financial affairs and in the administration of the NCHA’s business.” The NCHA produced 89,214 pages of documents to Gaughan under a protective order, but designated 36,556 of those pages as confidential. Gaughan wanted to share all of the documents with other NCHA members, which was one of the points of contention in the case.

A fellow by the name of Dean Sanders was also originally a plaintiff in the case, but he later dropped out. In November 2009, the 67th District Court in Fort Worth granted a motion for summary judgment in favor of the NCHA and ordered Gaughan and Sanders [even though he had dropped out of the case] to pay NCHA’s attorneys’ fees in the amount of $75,000 [NCHA had asked for $84,243].

Both Gaughan and the NCHA have issued public statements about the July 28, 2011 appellate opinion affirming the judgment, and they can be found here.

The Gaughan appellate decision comes on the heels of Lainie Whitmire’s May 13, 2011 appeal of the trial court’s surprising judgment in her case against the NCHA.

Whitmire Recap: In January 2011, the Whitmire case was tried to a jury in the 236th District Court of Tarrant County (Judge Tom Lowe, presiding). The jury found that NCHA officials “falsely imprisoned” Lainie Whitmire during the 2004 NCHA Futurity. According to Whitmire, they had taken her to a room at the Will Rogers Coliseum and allegedly not allowed her to leave while questioning her about her amateur status. The jury also determined that the NCHA breached an oral agreement with Whitmire leading her to believe her suspended NCHA membership and Amateur or Non-Pro status would be restored. The jury awarded no monetary damages on the false imprisonment claim, but it awarded Whitmire $70,000 in mental anguish damages against the NCHA on the claim related to the oral agreement.

In a turn of events that was shocking to many who were following the Whitmire case, the final judgment signed by Judge Lowe on April 15, 2011 overturned the jury verdict and ordered the Whitmires to pay the NCHA $347,000 in attorneys’ fees and court costs. The parties had spent four years and more than $1.6 million in attorneys’ fees and court costs in the Whitmire matter.

Whitmire appealed the case to the Fort Worth Court of Appeals on May 13, 2011. The parties have until August 15 to submit briefs to the court. For more information, see this article in the Quarter Horse News.

Stay tuned for more developments on the Whitmire appeal as they unfold. 

Follow me on Twitter @alisonmrowe