Carol Rose & Carol Rose, Inc. v. Aaron (In re Rose)
| Decision Date | 23 January 2019 |
| Docket Number | ADV. PROC. NO. 17-4104,ADV. PROC. NO. 17-4131,CASE NO. 17-42053 |
| Parties | IN RE: CAROL ALISON RAMSAY ROSE, Debtor. CAROL ROSE AND CAROL ROSE, INC., Plaintiffs/Counter-Defendants, v. LORI AARON, PHILLIP AARON, AARON RANCH, AND JAY MCLAUGHLIN Defendants/Counter-Plaintiffs. EQUIS EQUINE, LLC AND ELIZABETH WESTON, Plaintiffs, v. CAROL ALISON RAMSAY ROSE, CAROL ROSE, INC., LORI AARON, PHILLIP AARON, AARON RANCH, AND AARON'S RANCH, INC., Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of Texas |
The Court conducted a trial of the disputes between the parties over nine days during May and June 2018. Although the disputes arise from two different bankruptcy cases, several different contested matters, and multiple adversary proceedings, and each of the parties raise distinct claims, the Court tried the disputes together due to significant shared facts. The Court issues this consolidated opinion for the same reason. The Court exercises its core jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(b)(2).1 This memorandum opinion embodies the Court's findings of fact and conclusions of law. See FED. R. BANKR. P. 7052.
The disputes between the parties arise from events that occurred in 2013. The disputes led to several lawsuits and counterclaims in Texas state court. In September 2017, with the litigation still ongoing, Carol Rose ("Rose") and Carol Rose, Inc. ("Rose, Inc.") filed for bankruptcy.
On October 25, 2017, Rose and Rose, Inc. (collectively with Rose, the "Rose Parties") removed pre-petition litigation styled as Carol Rose and Carol Rose, Inc. v. Lori Aaron, Phillip Aaron, Aaron Ranch, and Jay McLaughlin, in the 235th Judicial District Court in Cooke County, Texas, Cause No. 13-00535, and commenced Adversary Proceeding No. 17-4104 (the "Aaron Action"). The Aaron Action centers on a dispute between the Rose Parties and Lori Aaron, Phillip Aaron, Aaron Ranch (collectively, the "Aaron Parties" or the "Aarons") and Jay McLaughlin ("McLaughlin") arising out of various agreements. These agreements include the (i) Confidential Term Sheet, (ii) Lease, (iii) Consulting Agreement, (iv) sale catalog for the Carol Rose Quarter Horse preview and dispersal sale of horses, tack and equipment held on August 15, 16, and 17, 2013, and (v) Buyer's Registration and Sale Condition Agreement along with Acknowledgements of Purchase along with Bills of Sale. The agreements concern (i) certain quarter horses that Rose sold to the Aarons, (ii) the Aarons' lease of real and personal propertyowned by the Rose Parties, (iii) consulting services to be provided by Rose, and (iv) the Aarons' purchase of certain tack and equipment at the dispersal sale.
The Rose Parties also removed pre-petition litigation brought by Elizabeth Weston ("Weston") and Equis Equine, LLC ("Equis Equine" and, collectively with Weston, the "Weston Parties") in the 235th Judicial District Court in Cooke County, Texas, which action was removed to this court as Adversary Proceeding No. 17-4125. On December 19, 2017, the Weston Parties filed their objection to the dischargeability of the alleged indebtedness owed by the Rose Parties and initiated Adversary Proceeding No. 17-4131. The Weston Parties' dischargeability complaint centers on the alleged misconduct of Rose and the Aarons in connection with the dispersal sale. On January 10, 2018, the Weston Parties amended the December 19, 2017 dischargeability complaint to include (1) equitable subordination claims, (2) a claim for declaratory judgment on the proofs of claims that the Weston Parties filed in the Rose Parties' bankruptcy cases, and (3) a claim for entry of judgment on non-debtor state-law claims (collectively, the "Weston Action").
The Weston Parties, the Aaron Parties and McLaughlin filed proofs of claim in the bankruptcy cases. Their claims are based on the state court litigation, which the Rose Parties removed to this Court. The Rose parties objected to the allowance of the claims, and the Court tried the claim objections together with the associated adversary proceedings.
1. Carol Rose has been in the equine industry for over fifty years and has specialized in breeding, training and showing performance quarter horses. She advertises her horses as champions that have won nearly every major competition event.
2. Rose is the president and sole owner of Rose, Inc., which owns a large piece of real property and improvements located at 4500 I-35 North, Gainesville, Texas 76240 (the "Gainesville Ranch"). Rose does business as Carol Rose Quarter Horses.
3. Since 1968, Rose has conducted her horse operations at the Gainesville Ranch. There are two homes on the Gainesville Ranch, including Rose's home, several mobile homes, and several large horse barns. Rose's business office is attached to her home.
4. Rose breeds quarter horses using stallions and recipient mares (sometimes referred to in the testimony as "recips") on the Gainesville Ranch. Rose raises some of the offspring and trains them to participate in competitions where they can earn prizes. Rose breeds and trains horses to compete in all the Western-style disciplines, including the cutting, reined, and reined cow horse disciplines.
5. SHINING SPARK was one of the stallions raised by Rose. SHINING SPARK won many competitions in the early 1990s. SHINING SPARK retired in 1994, and he was eventually inducted into the National Reining Horse Association Hall of Fame.
6. SHINING SPARK was integral to Rose's breeding program. As SHINING SPARK aged, his fertility declined. In 2000, a veterinarian named Dr. Dickson Varner helped Rose to address SHINING SPARK's fertility issues so that she could continue producing offspring from the stallion. Thereafter, Rose maintained a working relationship with Dr. Varner.
7. SHINING SPARK produced two stallions that are relevant to these proceedings: A SHINER NAMED SIOUX and SHINERS LENA DOC. A SHINER NAMED SIOUX and SHINERS LENA DOC are full-blood siblings. SHINERS LENA DOC is eight years older than A SHINER NAMED SIOUX and was injured as a five-year-old in competition.
8. During the relevant time period, Rose charged fees to people who wanted to breed their mares to one of her stallions. Rose also earned income when one of her horses won a competition. In addition, Rose sold some of the offspring of her breeding program through "private treaty" sales, that is, directly to prospective buyers.
9. Rose allowed people to board horses at the Gainesville Ranch for a monthly fee. The amount varied depending on the age, sex, and needs of the horse. Rose charged additional fees for her employees to train and ride the boarded horses. Rose also offered training to owners who wanted to ride their horses in competitions.
10. Rose defrayed expenses by "partnering" with others on some of her horses. Her partners shared an ownership interest with Rose in particular horses. Rose also defrayed expenses by bartering with service providers. She offered free boarding for horses as well as a limited number of free breedings with her stallions to some of her service providers.
11. Rose employed a small staff to help her run the Gainesville Ranch, including a head horse trainer and several assistant horse trainers. Many of the employees lived on the Gainesville Ranch, and several had worked for Rose for many years.
12. Jay McLaughlin came to work for Rose beginning on January 1, 2009. McLaughlin has trained and shown performance horses since he graduated from high school in 1993.
13. Rose employed McLaughlin as her head horse trainer. He primarily rode and trained the performance quarter horses that were three-years-old and up. In addition to his salary, Rose paid McLaughlin one-third of any winnings when he showed a horse in a competition as well as a commission on the sale of horses that were two-years-old and up.
14. Rose controlled every aspect of managing and running the daily operations of the Gainesville Ranch as well as horse sales and breedings. She was a difficult employer. She sometimes berated her horse trainers, including McLaughlin, in front of clients.
15. Rose was less involved in the financial aspects of managing and running the Gainesville Ranch. Rose testified, credibly, that she is not an "office person." She relied on others to keep the books and records for her business. Rose employed Nelle Murphy as her office manager during the relevant time period, and Eleise Blake provided Rose with bookkeeping services on a contract basis.
16. Blake had worked with Rose since 1995 and considered her a personal friend. In addition to showing her own performance quarter horses, Blake owned an accounting business. She kept a general ledger for daily transactions for Carol Rose Quarter Horses and sometimes used the business bank account to pay some of the bills for Carol Rose Quarter Horses. Blake used a proprietary software system to generate invoices for Rose to bill customers.
17. Victor Clark, who is a Certified Public Accountant ("CPA"), provided accounting services to Rose's business. Clark had worked with Rose since 1978 and was her business partner on some horses. He also provided equine appraisal services to Rose. Clark lives in Ohio and has worked for Campbell-Rose, CPAs since he graduated from college.
18. Rose testified that her business, especially the breeding and sales parts of her business, ebbs and flows with the economy. In December 2006, Rose and Rose, Inc. obtained a $1.5 million loan from Texas Star Bank. The loan was secured by the Gainesville Ranch as well as Rose's personal guaranty.
19. Rose began experiencing severe cash flow problems after the financial crises of 2007-2008. The Gainesville Ranch cost more than $200,000 to operate each month. Carol Rose Quarter Horses was not generating enough income to pay all of its ongoing expenses -...
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