IN RE: CALUMET FARM, INC. CASE NO. 91-51414

UNITED STATES BANKRUPTCY COURT 

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

IN RE:

CALUMET FARM, INC. CASE NO. 91-51414

DEBTOR

PHOENIX CORPORATION, formerly

known as Calumet Farm, Inc. PLAINTIFF

VS. ADVERSARY NO. 92-5048

HILL 'N DALE FARM OF GORMLEY,

ONTARIO, CANADA, ET AL. DEFENDANTS

MEMORANDUM OPINION

This matter is pending on the motion of the plaintiff debtor-in-possession, Phoenix Corporation, formerly known as Calumet Farm, Inc., for summary judgment on issues raised by Count II of the complaint in this adversary proceeding. The motion is directed against those defendants in this adversary proceeding who, pursuant to the provisions of Part IV of the TALINUM Agreement of Purchase and Sale, are accorded one or more "transferable free breeding rights" annually to the stallion TALINUM during the life of the stallion, so-called "lifetime" breeding rights. The motion is also directed against defendants who claim an interest by way of assignment or security in the "lifetime" breeding rights of the thoroughbred manager, the defendant, J.T. Lundy. The debtor-in-possession seeks a determination that it has no ongoing obligation to honor such breeding rights and that it may sell the stallion free and clear of such breeding rights. The defendants Janice Heinz and Susan McGee have moved for summary judgment declaring them to be continuing owners of "lifetime" breeding rights in TALINUM.

FINDINGS OF FACT:

On December 15, 1988, Calumet Farm, Inc. of Lexington, Kentucky, as buyer, and Northern Equine Thoroughbred Production, Ltd., a Canadian corporation with its principal place of business at Hill 'N Dale Farm, Gormley, Ontario, Canada, as seller, entered into the TALINUM Agreement of Purchase and Sale whereby Calumet purchased the thoroughbred TALINUM from Northern Equine for the purpose of standing the colt at stud at Calumet Farm. The agreement names J.T. Lundy, who was then president of Calumet Farm, Inc., as thoroughbred manager. Lundy signed the agreement for Calumet Farm, Inc. in his capacity as president and also signed the agreement individually as thoroughbred manager to signify his willingness to assume the responsibilities imposed on the thoroughbred manager by the agreement.

Calumet agreed to pay Northern Equine $3,600,000, inclusive of interest, for TALINUM. The agreement provided the colt was to be retired from racing and delivered to Calumet Farm by December 24, 1988 in contemplation that it would commence its career as a stallion during the 1989 breeding season.

The purchase price was to be paid in full before July 31 of the sixth year of the stallion standing at stud. The income from breeding mares to the stallion was to be paid to the seller until the purchase price was paid. It was agreed that until the purchase price was paid the seller would receive annually six live foal guarantee breeding seasons [the right to breed six mares annually to the stallion]. These seasons were valued at $15,000 each, which amount was to be credited against the purchase price upon utilization of any such season by the seller.

The agreement recited that the seller was the owner of the entire interest in the thoroughbred colt TALINUM. The agreement further provided that title to the thoroughbred would pass to Calumet upon the colt's retirement from racing and delivery to Calumet Farm. The seller retained a purchase money security interest in the thoroughbred to secure payment of the purchase price, but did not perfect the security interest by filing a UCC-1 form.

The purchase price had not been paid when Calumet Farm, Inc. filed its petition for relief under chapter 11 of the Bankruptcy Code in this court on July 11, 1991. In a prior opinion this court determined that by reason of the failure to perfect its security interest in the stallion, the seller, Northern Equine, holds only an unsecured claim against the estate of the debtor. The purchase money lien of Northern Equine in the amount of $3,420,000 was preserved for the benefit of the estate.

Part III of the agreement provides that the stallion shall be bred only to stakes-winning or stakes-producing mares; that after delivery of the thoroughbred to Calumet Farm the thoroughbred manager shall have the general supervision and management of the thoroughbred, including without limitation, the supervision and management of all breeding activities, accounting, billing of expenses and collection of any stud fees or other revenues of the thoroughbred. The agreement further required that separate books, records and bank accounts be kept by the thoroughbred manager which accurately reflect all income and disbursements for and on behalf of the seller and the buyer. Any interest accruing on stud fees, accumulated income, or any other monies in the stallion account was to be paid to the thoroughbred manager as an administrative fee.

The agreement recites that it is the intention of both seller and buyer that the thoroughbred shall remain at stud at the buyer's farm during the life of the stallion. In the event of death or incapacity of the thoroughbred manager or his resignation or discharge as the principal officer of the buyer, the agreement provides the thoroughbred shall nonetheless remain in the possession of the buyer with the duties of the thoroughbred manager to be "assumed by J.T. Lundy successor (sic), as designated by buyer."

Part IV of the TALINUM Agreement of Purchase and Sale provides as follows:

PART IV - BREEDING RIGHTS

The following individuals and entity shall receive the number of transferable free breeding rights opposite their names. Such breeding right gives the holder one (1) nomination per breeding season to the Thoroughbred during the lifetime of the Thoroughbred without cost:

 

A. Alan Krutchkoff (1), Bob Fox (1), Janice Heinz (1), and Susan McGee (1), as agents;

 

B. J. T. Lundy (4), as Stallion Manager;

 

C. Gary R. Matthews (1), as attorney-in-fact;

 

D. D. Wayne Lukas (1), as trainer;

 

Annual nominations may be sold, exchanged, transferred, assigned or otherwise disposed of, including by inheritance or will, but the nominations are non-cumulative from one breeding season to another. Notwithstanding the foregoing, a nomination cannot be sold on a public exchange or at auction pursuant to any public or private listing, and if attempted by the breeding right holder, then such breeding right shall be null and void.

 

All breeding right (sic) may be sold or transferred provided they are sold or transferred through Buyer or its designated agent. The breeding rights may not be sold on a public exchange or private listing and if such sale is attempted by the breeding right holder, then such breeding right shall be null and void, and be forfeited forever.

 

Paragraph 5 of Part V of the agreement provides that it shall be binding upon, and shall inure to the benefit of, the respective parties hereto, their respective heirs, personal representatives and assigns, provided, however, that neither party shall assign or transfer his interest in the thoroughbred without the written consent of the other party hereto, except in accordance with the provisions of this agreement. The agreement further provides that it shall be construed under the laws of the Commonwealth of Kentucky.

Alan Krutchkoff is not named as a defendant in this adversary proceeding because proceedings against him are stayed by reason of the fact he and his wife had filed a joint petition for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey. In re Alan and Mary Jedna Krutchkoff, Case No. 92-20850. Krutchkoff's right to breed one mare annually to TALINUM during the life of the stallion was sold as an asset of his bankruptcy estate to Barry R. Ostrager. On March 12, 1993, the debtor-in-possession moved for leave to add Ostrager as a party defendant in this adversary proceeding. By order entered April 23, 1993, Ostrager agrees to be bound by the decision of the court on the cross motions of the parties for summary judgment on the issue of the nature, validity and enforceability of the lifetime breeding rights in TALINUM.

Gary Matthews is not named as a defendant. He has transferred his "lifetime" breeding right in TALINUM to the plaintiff debtor-in-possession for nominal consideration disclaiming any interest he may have in such right. See Exhibit B to the Memorandum in Support of Plaintiff's Motion for Partial Summary Judgment.

The defendant Gary Bouchard apparently claimed to have purchased one of the four "lifetime" breeding rights accorded J.T. Lundy as thoroughbred manager. Bouchard, after having been properly served, failed to answer the complaint in this adversary proceeding. A default judgment has been entered against him barring any claim he may assert to a "lifetime" breeding right in the stallion.

On April 1, 1991, J.T. Lundy and Maricopa Ranch, Inc., an entity wholly or principally owned by Lundy, executed a note in the principal amount of $2,325,725 payable to Matchmaker Financial Corporation. To secure payment of the indebtedness evidenced by the note Lundy and Maricopa executed a security agreement conveying to Matchmaker a security interest in three "lifetime" breeding rights in TALINUM. It is not apparent that Maricopa had any such rights, but clearly Lundy did. Matchmaker in turn assigned its interest in the Maricopa/Lundy note and security agreement to Citizens Fidelity Bank & Trust Company to secure payment of an indebtedness of Matchmaker to the bank.

Citizens Fidelity Bank & Trust Company also claims a security interest in the "lifetime" breeding rights of Lundy in TALINUM to secure payment of a note in the principal amount of $6,650,000 executed by Lundy and his wife Lucille Wright Lundy on February 10, 1988. The note is prior in time to the TALINUM Agreement of Purchase and Sale. However, on December 1, 1990, to secure payment of the indebtedness evidenced by the note and amendments thereto, Lundy executed a security agreement conveying to the bank a security interest in all breeding rights which he owned. The security interest of the bank was perfected by the filing of a financing statement with the county clerks of Woodford County and Scott County on July 31, 1991.

On April 1, 1991, J.T. Lundy and Maricopa Ranch, Inc. executed a note in the principal amount of $179,125.30 payable to Equine Capital Corporation. To secure payment of the indebtedness evidenced by the note Lundy and Maricopa executed a security agreement conveying to Equine Capital a security interest in stallion shares and breeding rights described in Exhibit "A" to the agreement. There are no stallion shares or breeding rights listed on Exhibit "A" to the agreement.

J.T. Lundy resigned from his position as president of Calumet Farm, Inc. in March or April of 1991, prior to the commencement of Calumet's chapter 11 proceeding.

The debtor-in-possession takes the position that the breeding rights of the defendants do not rise to the level of an ownership interest in TALINUM. The debtor-in-possession contends the defendant owners of breeding rights have only contractual rights to breed mares to TALINUM during the life of the stallion; that denial to them by the debtor-in-possession of the privilege of exercising such rights presently or by reason of sale of the stallion merely gives rise in their favor to an unsecured claim against the estate of the debtor for compensation for breach of performance.

The defendants claim the holders of the "lifetime" breeding rights to TALINUM have a co-ownership interest in the stallion; that these rights should continue and be enforceable against any purchaser of the stallion; that if the court should determine that the debtor-in-possession may sell the stallion free and clear of their breeding rights the defendants should be entitled to a pro rata share of the proceeds of sale based on a determination of the value of such rights.

The debtor-in-possession also contends J.T. Lundy lost his entitlement to four breeding rights as thoroughbred manager of TALINUM upon cessation of his employment as president of Calumet Farm, Inc.

The lenders asserting security interests in the breeding rights of Lundy contend the TALINUM Agreement of Purchase and Sale does not provide for forfeiture of Lundy's "lifetime" breeding rights in the stallion upon termination of his position as president of Calumet.

CONCLUSIONS OF LAW:

The individuals who, pursuant to Part IV of the TALINUM Agreement of Purchase and Sale, received annual "transferable free breeding rights" to TALINUM during the life of the stallion are third party beneficiaries of the agreement between the seller, Northern Equine Thoroughbred Production, Ltd., and the buyer, Calumet Farm, Inc., the debtor herein. The only named third party beneficiary to sign the agreement, J.T. Lundy, is identified as "party of the third part, the thoroughbred manager." If one accepts the argument of the defendant lending institutions asserting a security interest in Lundy's breeding rights, that termination of his position as president of Calumet Farm, Inc. does not affect his entitlement to breed four mares annually to TALINUM during the life of the stallion, then it would seem to follow that he as well as the other individuals named in Part IV of the agreement are third party beneficiaries of the agreement.

One might infer from custom in the thoroughbred horse industry as posited by counsel for the debtor-in-possession, that the four annual breeding rights were awarded to Lundy as compensation for his services as thoroughbred manager, but the agreement does not so state. The only compensation specifically provided to Lundy for such services is the interest on monies in the separate bank account in which the thoroughbred manager is to deposit earnings of the stallion. The breeding privileges accorded to the individuals named in Part IV of the TALINUM Agreement of Purchase and Sale are described as transferable "free" breeding rights, which they may exercise "without cost," which would seem to suggest that the recipients do not have to perform any services for the breeding rights. There may be questions as to whether the breeding rights were awarded to the named individuals for prior services, as gratuities, or are intended as compensation for services to be performed. These questions are ancillary to the ultimate question of whether these breeding rights rise to the level of an ownership interest in the stallion, as claimed by the defendants.

The seller, Northern Equine Thoroughbred Productions, Ltd., represented that it owned the entire interest in TALINUM, which interest passed to the buyer, Calumet Farm, Inc., upon delivery of the thoroughbred to Calumet Farm, subject only to the security interest of Northern Equine to secure payment of the purchase price. This and other language in the TALINUM Agreement of Purchase and Sale convinces the court that presently only the debtor-in-possession has an ownership interest in the stallion. Upon the commencement of this case, title to the stallion, the ownership interest of Calumet Farm, Inc., became property of the estate. Upon the avoidance of Northern Equine's consensual lien, Northern Equine's equitable interest in the stallion represented by its security interest therein is preserved for the benefit of the estate. 11 U.S.C. 551. In re Van De Kamp's Dutch Bakeries, 908 F.2d 517 (9th Cir. 1990). Consequently, at the present time, the entire legal and equitable ownership interest in the stallion is vested in the estate of the debtor.

The security interest of Northern Equine preserved for the benefit of the estate relates back to the date of the TALINUM Agreement of Purchase and Sale on December 15, 1988. The assignment of the breeding rights to the third party beneficiaries did not occur until title to and possession of TALINUM was delivered to Calumet Farm, Inc. on or about December 24, 1988. While Northern Equine concurred in the assignment of breeding rights to the third party beneficiaries, there is no language in the agreement to suggest that in doing so Northern Equine subordinated its security interest to these breeding rights. It would be an anomaly if it were determined that the third party beneficiaries now have a greater interest in the stallion than the seller's interest which is preserved for the benefit of the estate.

The breeding rights in question were assigned to the third party beneficiaries by Calumet Farm, Inc., with Northern Equine concurring in the assignment. This is discernable from the fact that Northern Equine transferred its entire interest in and possession of TALINUM to Calumet Farm, Inc., retaining only a security interest in the stallion, and the privilege of utilizing six annual live foal breeding rights at a fixed price for credit on the purchase price. Once the purchase price was paid in full, honoring the breeding rights of the third party beneficiaries during the remaining life of the stallion was to be a matter between the beneficiaries and Calumet. Consequently, the assignment of the breeding rights to the third party beneficiaries was made by Calumet and was merely concurred in by Northern Equine. As previously noted, the purchase money lien of the seller, Northern Equine, affixed to TALINUM prior to the assignment of breeding rights to the third party beneficiaries. Consequently, even if one assumes the assignment of the breeding rights conveyed to the third party beneficiaries an interest in the stallion, that interest would have passed to the assignees subject to the lien of Northern Equine. The sale of the stallion by the trustee essentially will be a sale foreclosing the seller's purchase money lien preserved for the benefit of the estate. The interest of the third party beneficiaries in the stallion, if any, will be extinguished by the sale unless the stallion sells for a sum in excess of $3,420,000.

Moreover, under Kentucky law a breeding right as distinguished from a share in a stallion is a contract right for timely access to the breeding capabilities of the stallion, an intangible property right. The assignment of such right, whether accomplished, as in this instance, by inclusion of the assignment in an agreement of purchase and sale of the stallion or by a more traditional instrument of assignment does not transfer to the assignee an ownership interest in the stallion itself. Calumet Farm v. Revenue Cabinet, Ky.App., 793 S.W.2d 830 (1990). The fact that the assignment may transfer breeding rights exercisable in one or more future years or annually during the life of the stallion whenever such rights would otherwise accrue or be available to the assignor does not elevate the rights assigned to an ownership interest in the stallion. Ownership of the interest in the stallion on which an original assignment is predicated continues in the assignor. The assigned rights are contracts for access to the breeding capabilities of the stallion, which in a nonbankruptcy forum may be enforceable in an action for specific performance, but which in a bankruptcy forum are enforceable only as general monetary claims against the estate. 11 U.S.C. 101(5), 502(b), 502(c)(2).

The breeding rights assigned by the TALINUM Agreement of Purchase and Sale to the third party beneficiaries of the agreement do not rise to the level of an ownership interest in the stallion. The assignees are not obligated in any manner for the upkeep of TALINUM as generally would be so if they had an ownership interest in the stallion.

The trustee may sell the stallion free and clear of breeding rights in question. The claims of the breeding rights holders for breach of performance will not attach to the proceeds of sale but rather shall be allowable only as general unsecured claims against of the estate of the debtor. 11 U.S.C. 502(c)(2).

Dated:

By the court -

 

_____________________________

JOE LEE, CHIEF JUDGE

 

Copies to:

 

Stephen O'Brien, III, Esq.

Stephen Vasak, Esq.

Frank T. Becker, Esq.

Robert Miller, Esq.

Tom Miller, Esq.

J. Montjoy Trimble, Esq.

Paula Burrage, Esq.

James W. Gardner, Esq.

Tracey N. Wise, Esq.

Daniel M. Litt, Esq.

Barbara C. Kinney, Esq.

Baker, Eckert & Gendon, PSC

Joseph M. Scott, Esq.

Gary Bouchard

Michael V. Broderick, Esq.

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

 

 

IN RE:

 

CALUMET FARM, INC. CASE NO. 91-51414

 

DEBTOR

 

 

PHOENIX CORPORATION, formerly

known as Calumet Farm, Inc. PLAINTIFF

 

VS. ADVERSARY NO. 92-5048

 

HILL 'N DALE FARM OF GORMLEY,

ONTARIO, CANADA, ET AL. DEFENDANTS

 

 

 

ORDER

 

 

In conformity with the Memorandum Opinion of the court this day entered, the motion of the debtor-in-possession for summary judgment determining that it has no ongoing duty to honor the breeding rights assigned to the defendants pursuant to Part IV of the TALINUM Agreement of Purchase and Sale and that it may sell the stallion TALINUM free and clear of such breeding rights is SUSTAINED. The cross-motions of the defendants Janice Heinz and Susan McGee for a judgment declaring them to be continuing owners of "lifetime" breeding rights to TALINUM is OVERRULED.

Dated:

By the court -

 

_____________________________

JOE LEE, CHIEF JUDGE

 

Copies to:

 

Stephen O'Brien, III, Esq.

Stephen Vasak, Esq.

Frank T. Becker, Esq.

Robert Miller, Esq.

Tom Miller, Esq.

J. Montjoy Trimble, Esq.

Paula Burrage, Esq.

James W. Gardner, Esq.

Tracey N. Wise, Esq.

Daniel M. Litt, Esq.

Barbara C. Kinney, Esq.

Baker, Eckert & Gendon, PSC

Joseph M. Scott, Esq.

Gary Bouchard

Michael V. Broderick, Esq.