James T. Scatuorchio Racing Stable, LLC v. Walmac Stud Mgmt., LLC

• Decision Date: 19 April 2013
• Docket Number: Civil Action No. 5:11–374–DCR.
• Citation: 941 F.Supp.2d 807
• Parties: JAMES T. SCATUORCHIO RACING STABLE, LLC, et al., Plaintiffs, v. WALMAC STUD MANAGEMENT, LLC, et al., Defendants.
• Court: U.S. District Court — Eastern District of Kentucky

941 F.Supp.2d 807

JAMES T. SCATUORCHIO RACING STABLE, LLC, et al., Plaintiffs,

v.WALMAC STUD MANAGEMENT, LLC, et al., Defendants.

Civil Action No. 5:11–374–DCR.

United States District Court,

E.D. Kentucky,

Central Division,

at Lexington.

April 19, 2013.

Stephen C. Matthews, Porzio, Bromberg & Newman, P.C., Morristown, NJ, David Thomas Faughn, Michael D. Meuser, Miller, Griffin & Marks, P.S.C., Lexington, KY, Richard David Schibell, Schibell Mennie & Kentos, LLC, Ocean, NJ, for Plaintiffs.

Frank T. Becker, Lexington, KY, for Defendants.

MEMORANDUM OPINION AND ORDER

DANNY C. REEVES, District Judge.

This matter is pending for consideration of Defendants Walmac Stud Management, LLC (“Walmac Stud”), Walmac Farm, LLC (“Walmac Farm”), Lincoln–Walmac Associated Farm Pty Ltd. (“Lincoln–Walmac”), John T.L. Jones III (“Jones”), and Saybrook Advertising, LLC's (“Saybrook”) Motion to Dismiss Counts Five, Six, Seven, Eight, Nine, Eleven, Twelve, and Fourteen of the Second Amended Complaint for Failure to State a Claim. [Record No. 105] Plaintiffs James T. Scatuorchio, LLC (“Scatuorchio, LLC”), James T. Scatuorchio, Kevin Scatuorchio, Courtney Sullivan, and Bryan Sullivan have also filed a Motion to Strike Attachment to Defendants' Reply in Support of their Motion to Dismiss. [Record No. 112] For the following reasons, the defendants' motion to dismiss will be granted in part and denied in part. The plaintiffs' motion to strike will be denied.

I.

This matter arises from the ownership and management of the thoroughbred stallion Ready's Image which is currently co-owned by the plaintiffs and a number of the defendants. The plaintiffs' Complaint is predicated upon the alleged “dishonest and fraudulent” manner in which the defendants managed the stud career of Ready's Image and the breach of a number of relevant contracts between the parties.

A. Factual Background

Plaintiff James T. Scatuorchio has been involved in the development and racing of thoroughbred horses for over ten years. In 2008, he formed Scatuorchio, LLC as a Florida Limited Liability Company, of which he serves as the sole member. [Record No. 72 ¶¶ 17, 18] Scatuorchio, LLC, along with James T. Scatuorchio's children, Kevin Scatuorchio and Courtney Sullivan, each own interests in Ready's Image. [ Id. ¶ 19] Walmac Farm is located in Lexington, Kentucky. It boards, breeds, sells, establishes the stud lines of, and markets the breeding potential of stallions. [ Id. ¶ 24] Saybrook is an entity associated with Walmac Farm which markets its thoroughbreds for breeding. [ Id. ¶ 25]

In 2008, the Walmacs ¹ approached James T. Scatuorchio about buying an ownership interest in Ready's Image and managing the horse's career as a stud. [ Id. ¶ 20] During these discussions, the Walmacs made a number of representations concerning the defendants' ability to manage Ready's Image's stud career. Among these representations was that: (i) they could “do everything that was necessary to maximize the likelihood of Ready's Image's success; (ii) Jones owned Walmac Farm and was a “stallion manager,” a breeding industry professional responsible for breeding and handling stallions; (iii) the Walmacs “had an excellent reputation[ ] in Kentucky thoroughbred breeding community; and (iv) they had the ability and means to successfully market Ready's Image in both the United States (“Northern Hemisphere”) and Australia (“Southern Hemisphere”). [ Id. ¶¶ 21, 27] Additionally, the Walmacs represented that they could expose Ready's Image to a “book of more than 100 mares” in the horse's first breeding season. [ Id. ¶ 28] The plaintiffs estimate that this could have generated roughly $1.5 million in stud fees. [ Id.]

The plaintiffs allege that these representations “resonated with [them] because their overriding goal was (and is) to successfully breed Ready's Image to a sufficient quality and quantity of mares to satisfactorily ensure that his blood line would continue for generations,” as this is “essential to Ready's Image establishing himself as a successful stallion.” [Record No. 109, p. 5; Record No. 72, ¶ 28] Based on the representations made by the Walmacs, in October 2008, Scatuorchio, LLC, Kevin Scatuorchio, and Courtney Sullivan sold a two-thirds undivided interest in Ready's Image to Walmac Stud for $2.4 million. [Record No. 72 ¶¶ 32, 47] This initial transfer of ownership interests was memorialized in the “Sale Agreement” and “Co–Ownership Agreement” (“COA”). [ Id. ¶¶ 32–35] As part of the agreements effectuating the sale and co-ownership arrangements, Walmac Stud was named as the “Stallion Manager,” and would be responsible for the day-to-day management of Ready's Image and “procuring business for the syndicate in the form of mare owners paying to breed their mares to Ready's Image.” [Record No. 109, p. 5; Record No. 72 ¶ 39]

1. Southern Hemisphere Agreements

On April 23, 2009, the parties entered into three additional agreements vesting other entities with ownership rights and responsibilities concerning the management of Ready's Image in the Southern Hemisphere. [Record No. 72 ¶ 51] These agreements consisted of: (i) the Southern Hemisphere Sale Agreement; (ii) the Southern Hemisphere Co–Ownership Agreement (“SHCOA”); and (iii) Southern Hemisphere Lease Agreement (“SHLA”), (collectively, the “Southern Hemisphere Agreements”). [ See id. ¶¶ 51–67]

The Southern Hemisphere Agreements conferred an ownership interest in Ready's Image to Defendant Lincoln–Walmac, and the SHCOA designated Walmac Stud as the stallion manager for all Southern Hemisphere operations. [ Id. ¶¶ 41, 52, 60] The underlying purpose of the SHCOA was to govern the rights and obligations of the parties having an ownership interest in Ready's Image in the Southern Hemisphere during the stallion's time in Australia, where it spends several months of the year breeding. [ Id. ¶ 58]

Under the SHLA, Lincoln–Walmac was also designated as a lessee of the “use, purpose and attributes” for the purpose of Ready's Image's breeding in the Southern Hemisphere for the 2009–2012 Southern Hemisphere breeding seasons. [Record No. 72–1, p. 67] In accordance with the SHLA, Lincoln–Walmac also assumed the responsibility for the care, upkeep, and marketing of Ready's Image in the Southern Hemisphere, and thus became “in essence ... the Stallion Manager of Ready's Image in the Southern Hemisphere for the duration of the lease.” [ Id. ¶¶ 65, 66; Record No. 109, p. 6] Lincoln–Walmac was responsible for remitting to the co-owners ² any revenue generated by Ready's Image in the Southern Hemisphere in the form of “Stallion Rent.” ³ [Record No. 72 ¶ 65]

2. Mare Agreement

As dictated by the original Sale Agreement, Walmac Stud was responsible for the marketing and procuring mares to breed with Ready's Image. [ Id. ¶ 68] However, by early 2010 James Scaturochio, Kevin Scatuorchio, and Bryan Sullivan (collectively, the “Mare plaintiffs”) became concerned that not enough was being done to promote Ready's Image to potential mare-owners. [ Id. ¶ 69] Due to these concerns, the Mare plaintiffs entered into the “Mare Agreement” with Walmac Farm on January 20, 2010.⁴ [ Id. ¶¶ 68–70] Pursuant to the Mare Agreement, the Mare plaintiffs would receive the proceeds of any contracts associated with mares delivered by any of the Mare plaintiffs to Walmac Farm for breeding with Ready's Image, up to a limit of twenty mares during the 2010 season. [ Id. ¶ 72] In accordance with the Mare Agreement, the Mare plaintiffs delivered at least ten mares to the Walmacs for breeding to Ready's Image. [ Id. ¶ 83]

The plaintiffs allege that the defendants have failed to meet their obligations as set forth in these contracts. The plaintiffs have not received from “any defendant any distribution of revenues generated by Ready's Image,” and have not received any funds from Walmac Farm or Walmac Stud pursuant to the Mare Agreement. [ Id. ¶¶ 73–77] Additionally, pursuant to an audit by the Curchin Group, LLC that was conducted at the behest of the plaintiffs, it was found that: “the billing records were demonstrably erroneous; moneys appropriately due to Ready's Image had been inexplicably diverted from Ready's Images' account; the Walmacs had overbilled [the plaintiffs] for various expenses; and there was simply not a complete accounting relative to Ready's Image from which [the plaintiffs] could either complete their tax returns or ascertain moneys due.” [ Id. ¶ 79]

B. Procedural History

On March 30, 2011, the plaintiffs commenced this action in New Jersey state court.⁵ The defendants then removed the matter to the District Court of New Jersey. [Record Nos. 1, 1–2] Following removal, the defendants moved to dismiss the action in favor of mediation or arbitration. In the alternative, they sought to transfer venue. On November 21, 2011, this action was transferred to this district. [Record Nos. 19, 28] Thereafter, the plaintiffs were granted leave to file a Second Amended Verified Complaint (the “Complaint”), and the defendants renewed their motion to dismiss in favor of arbitration or mediation. [Record Nos. 71, 72, 75] The Complaint consists of fourteen counts arising from the ownership and management of Ready's Image. Specifically, the plaintiffs allege that the defendants fraudulently induced the plaintiffs to transfer ownership interests in Ready's Image to the defendants and that after the ownership and management interests were transferred, the defendants breached the relevant agreements between the parties, resulting in breach of contract and fiduciary duties, fraud, waste, and conversion.

On September 13, 2012, the Court addressed the defendants' second renewed motion to dismiss in favor of arbitration or mediation, and directed that certain counts of the Complaint be submitted to arbitration. [Record Nos. 86, 103] The Court's September 13, 2012 Memorandum Opinion and Order was later amended and clarified by subsequent Order on January 2, 2013, 2013 WL 28067. The...