West Hills Farms, LLC v. ClassicStar, LLC (In re ClassicStar Mare Lease Litig.), MDL No. 1877.Master File: Civil Action Nos. 07–353–JMH

Citation823 F.Supp.2d 599
Decision Date08 November 2011
Docket Number06–243–JMH.,MDL No. 1877.Master File: Civil Action Nos. 07–353–JMH
PartiesIn re CLASSICSTAR MARE LEASE LITIGATIONandWest Hills Farms, LLC, et al., Plaintiffs, v. ClassicStar, LLC, et al., Defendants.
CourtUnited States District Courts. 6th Circuit. United States District Court of Eastern District of Kentucky

OPINION TEXT STARTS HERE

Spencer D. Plummer, III, Fruit Heights, UT, pro se.

Zeus Investments, LLC, Fruit Heights, UT, pro se.

Debora D. Plummer, Fort Worth, TX, pro se.S. David Plummer, Fort Worth, TX, pro se.Shane D. Plummer, Fort Worth, TX, pro se.Thomas Williams, Erie, CO, pro se.Strategic Opportunity Solutions, LLC, Fort Worth, TX, pro se.Gary L. Thornhill, Santa Clara, CA, pro se.Robert Holt, Centennial, CO, pro se.Elizabeth Holt, Centennial, CO, pro se.National Equine Lending Company, LLC, pro se.New Nel, LLC, Bountiful, UT, pro se.Jennifer Stahle, Kaysville, UT, pro se.Viking Real Estate, L.C., Fort Worth, TX, pro se.Crown Jewels Limited Partnership, Fort Worth, TX, pro se.Barry D. Hunter, Medrith Lee Norman, Paul E. Sullivan, Frost Brown Todd LLC, Jana M. Smoot White, Taft A. McKinstry, Fowler, Measle & Bell, LLP, Charles C. Mihalek, Steven M. McCauley, Charles C. Mihalek, PSC, Lexington, KY, Robert C. Webb, Junis L. Baldon, Frost Brown Todd LLC, Louisville, KY, Catherine L. Sakach, Wolf Block Schorr & Solis-Cohen LLP, Cherry Hill, NJ, Elizabeth Juliana Rest, Ory Sandel, Richard J. Idell, Idell & Seitel LLP, Gilbert Ross Serota, Jeremy T. Kamras, Simona Alessandra Agnolucci, Howard Rice Nemerovski Falk & Rabkin, San Francisco, CA, Brent E. Johnson, Holland & Hart, David W. Scofield, Peters Scofield Price, Kenneth W. Yeates, Kyle C. Thompson, Savage, Yeates & Waldron, PC, James Douglas Gilson, Nathan Ray Denney, Callister Nebeker, Salt Lake City, UT, Jayson E. Blake, Marc L. Newman, The Miller Law Firm, Rochester, MI, David P. Thatcher, Michael Oliver Eckard, Ogletree, Deakins, Nash, Smoak & Stewart, Atlanta, GA, David Z. Chesnoff, Richard A. Schonfeld, Chesnoff & Schonfeld, Las Vegas, NV, Jonathan F. Jorissen, Butzel Long, Bloomfield Hills, MI, Robin Luce Herrmann, Butzel Long, Dennis K. Egan, Kotz, Sangster, Wysocki & Berg, P.C., Detroit, MI, Timothy S. Arnold, Braun Kendrick Finkbeiner, Saginaw, MI, Jeffrey Alan Springer, Springer & Steinberg, PC, Denver, CO, Blake C. Erskine, Jr., Mark Bradley Blackburn, Erskine & Blackburn, LLP, Austin, TX, Joseph M. Garemore, Stephen J. Defeo, Brown and Connery LLP, Westmont, NJ, George J. Krueger, James T. Strawley, John E. Lucian, Jonathan Scott Goldman, Norman E. Greenspan, Blank Rome, LLP, Philadelphia PA, Alisa E. Moen, Blank Rome LLP, Wilmington, DE, for Plaintiffs.Brian M. Johnson, David Andrew Owen, Jason Trent Ams, Jennifer Julie Cave, Matthew A. Stinnett, Greenebaum, Doll & McDonald, PLLC, Pamela Dae Perlman, Mickey T. Webster, Wyatt, Tarrant & Combs LLP, Gregory P. Parsons, Jonathan Ernest Harris, Stites & Harbison PLLC, Lexington, KY, Angela S. Fetcher, Culver V. Halliday, Lea Pauley Goff, Matthew R. Lindblom, Stoll, Keenon & Ogden, PLLC, Louisville, KY, Steven C. Forman, Cherry Hill, NJ, Benjamin Samuel Klehr, Eric D. Freed, Neal D. Colton, Cozen O'Connor, Philadelphia PA, Jeffrey M. Heftman, Richard A. Del Giudice, Gozdecki, Del Guidice, Americus & Farkas LLP, Chicago, IL, for Defendants.John O'Neill Morgan, Jr., Lexington, KY, Romaine C. Marshall, Holland & Hart, Salt Lake City, UT, J. Ronald Sim, Stoel Rives, LLP, Seattle, WA.

MEMORANDUM OPINION AND ORDER

JOSEPH M. HOOD, Senior District Judge.

This matter is before the Court upon the Motion for Summary Judgment made by Plaintiffs Arbor Farms, LLC, Jaswinder Grover, Monica Grover, MacDonald Stables, LLC, Nelson Breeders, LLC, and West Hills Farms, LLC [DE 482]. 1 David Plummer, Spencer Plummer, and Strategic Opportunity Solutions, LLC, which did business as Buffalo Ranch, have filed a Response stating their objections [DE 514, 524], as have ClassicStar 2004, LLC, ClassicStar Farms, Inc., Tony Ferguson, GeoStar Corporation, GeoStar Financial Services Corporation, and Thom Robinson [ see DE 515, 523],2 and John Parrott [DE 533].3 In turn, Plaintiffs have filed replies in further support of their Motion for Summary Judgment [ see DE 549, 550, 556].4 Additionally, the Court has had the benefit of the parties' additional briefs and oral argument on issues related to damages: the Plaintiffs' Notice Supplementing the Amount of Damages Sought in Motion for Summary Judgment [DE 741]; Defendants GeoStar Corporation, ClassicStar Farms, Inc., Tony Ferguson, Thom Robinson, First Source Wyoming, Inc., and GeoStar Financial Services Corporation's Notice of Objections to Plaintiffs' Request for Damages and Motion for Briefing 5 [DE 742, 744]; Defendant Parrott's Notice of Objections to Plaintiffs' Request for Damages [DE 743]; Plaintiffs' Reply to Objections [DE 745]; Defendants GeoStar Corporation, ClassicStar Farms, Inc., Tony Ferguson, Thom Robinson, First Source Wyoming, Inc., and GeoStar Financial Services Corporation's Reply in Support of Objections to Plaintiffs' Request for Damages [DE 750]; and Plaintiffs' Sur–Reply to Objections [DE 755]. [ See also DE 756, Minute Entry Order for Hearing, September 29, 2011.]

I. Factual and Procedural BackgroundA. The ClassicStar Mare Lease Program

Between 2001 and 2005 the ClassicStar Mare Lease Program generated over $600 million in sales primarily to high income individuals with an interest in participating in the thoroughbred horse industry. The Mare Lease Program, in theory, allowed participants to lease valuable thoroughbred mares from an operation with a long track record of success in the thoroughbred industry and breed those mares for a season, keeping the resulting foal. During the relevant period, GeoStar Corporation (“GeoStar”) owned ClassicStar, LLC (ClassicStar), which represented to potential investors that participants in its (and its predecessor's) Programs had sold horses for an average of 130% of the cost to lease the mare and produce the foal. ClassicStar warranted to its investors that it owned the mares involved in the Program and represented that the base price of a mare lease would be approximately 30% of the value of the mare.

Investors often purchased packages involving multiple pairings and carrying large price tags. Financing was available for these large purchases, and participants could finance half or more of their packages with a supposedly reputable third party lender. Moreover, the Mare Lease Program was marketed as structured so as to allow purchasers to claim tax deduction for the expenses associated with their breeding business including the loan, and investors were advised that no investor had ever had a deduction associated with the Program disallowed.6

Finally, participants were provided the opportunity to exchange portions of their mare lease interests for other assets including working interests in coal bed methane developments stock in Gastar Exploration, Ltd. (“Gastar”), GeoStar's publicly traded affiliate, and units in First Equine Energy Partners, L.L.C. (“FEEP”), an entity crafted by GeoStar's principals which purported to have interests in both horses and coal bed methane properties.

B. The Ruse

If the potential for returns and the generous tax benefits associated with the Mare Lease Program seemed too good to be true, it was because they ultimately were. This was not apparent, of course to investors, because the participants were not told the truth.

From the beginning, ClassicStar sold more Mare Lease Programs than its existing interests in thoroughbred breeding opportunities could support, promising participants far more breeding pairings than it had thoroughbreds to deliver. It was represented to Plaintiffs that mare leases would be priced at approximately 30% of the cost of the mare, which was in keeping with industry custom where mare leases are priced at approximately 30–40% of the cost of the mare, and the agreements between Plaintiffs and ClassicStar stated in no uncertain terms that ClassicStar owned the horses that it purported to lease to participants. Yet, GeoStar maintained tax asset ledgers listing all of ClassicStar's equine assets and which show that, at the same time ClassicStar was selling an average of $150 million in mare lease packages in each of 2001, 2002, 2003, and 2004, it owned less than $10 million dollars worth of mares in 2001, only $37 million dollars worth of mares in 2002, $56 million worth of mares in 2003, and $48 million worth of mares in 2004. Even though ClassicStar's horse wealth grew with each year, ClassicStar would have needed more than $300 million worth of mares to support $150 million of Mare Lease Program sales in any given year, and its assets were never even close. 7

Early on, ClassicStar glossed over its shortfall of thoroughbred inventory by providing participants listings of pairings denominated as “TBN” or “to be named.” Participants were encouraged to exchange their yet unnamed pairings for interests in GeoStar's mineral programs, relieving ClassicStar of the pressure to produce an adequate number of thoroughbred pairings to its Mare Lease Program participants. Eventually, ClassicStar stopped using the “TBN designation” and started including quarter horse breeding pairs in the packages, although the cost of participating and the value listed for those horses still reflected those associated with thoroughbred pairings. Effectively, the prices were inflated beyond what the best quarter horse foal could be expected to bring at sale and substantially overstating the number of potential embryos which a mare could generate in a season. ClassicStar did not actually own the quarter horses. Rather, they were “on loan” from the Plummers and their aptly named business, Strategic Opportunity Solutions, LLC (“SOS”) which operated as Buffalo Ranch. Indeed, it was only in late 2004 that Tony Ferguson executed backdated lease agreements with...

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