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

UNITED STATES BANKRUPTCY COURT 

FOR THE EASTERN DISTRICT OF KENTUCKY

LEXINGTON DIVISION

IN RE:

CALUMET FARM, INC. CASE NO. 91-51414

DEBTOR IN POSSESSION

PHOENIX CORPORATION, formerly known as

Calumet Farm, Inc. PLAINTIFF

v. ADV. NO. 92-5049

D. WAYNE LUKAS; ESTATE OF L.R. FRENCH,

JR.; BARRY BEAL; EUGENE KLEIN;

MATCHMAKER FINANCIAL CORP.; EQUINE

CAPITAL CORP.; J.T. LUNDY;

EQUINE CAPITAL CORP., as a creditor

of J.T. Lundy; RIGGS NATIONAL BANK

OF WASHINGTON, D.C.; FIRST CITY

TEXAS-HOUSTON, N.A.; COMMONWEALTH

OF KENTUCKY REVENUE CABINET; BAKER

ECKERT & GENDRON, PSC d/b/a Woodford

Veterinary Clinic; MORVEN STUD, LTD.;

WOODROW MARRIOTT; CALUMET-GUSSIN NO. 1;

CITIZENS FIDELITY BANK, as Assignee

of Matchmaker Financial Corporation DEFENDANTS

MEMORANDUM OPINION

This matter is before the court on the motion of Phoenix Corporation, formerly known as Calumet Farm, Inc., the debtor in possession, for partial summary judgment determining that defendants J. T. Lundy, Equine Capital Corporation, Equine Capital Corporation as a creditor of J. T. Lundy, Matchmaker Financial Corporation, and Citizens Fidelity Bank as assignee of Matchmaker Financial Corporation have no interest in proceeds from the sale of the stallion CAPOTE.

FINDINGS OF FACT:

Prior to August 10, 1987, the defendants D. Wayne Lukas, L. R. French, Jr., Barry Beal and Eugene Klein were the owners of CAPOTE, a three-year old thoroughbred colt then engaged in racing in the United States. On August 10, 1987, Lukas, French, Beal and Klein (collectively the "Seller"), Calumet Farm, Inc. (the "Buyer"), and J. T. Lundy (the "Thoroughbred Manager"), entered into the CAPOTE Agreement of Purchase and Sale.

Pursuant to the terms of the agreement, the Seller sold to Calumet Farm an undivided one-half interest in the breeding qualities of CAPOTE for the sum of $6,400,000, payable in full on or before June 30, 1993. The Seller did not retain a security interest in the colt to secure payment of the purchase price.

On December 1, 1988, CAPOTE was retired from racing and delivered to Calumet Farm near Lexington, Kentucky to stand at stud. Under the terms of the agreement, upon delivery of the colt to Calumet Farm and upon Calumet's obtaining mortality insurance on the thoroughbred in accordance with the terms of the agreement, title and risk of loss to a one-half interest in the thoroughbred passed from the Seller to the Buyer.

The CAPOTE Agreement of Purchase and Sale provides that J. T. Lundy shall be the Thoroughbred Manager upon delivery of the thoroughbred to Calumet Farm, Inc. Lundy, who was president of Calumet Farm, Inc. from 1982 until March or April of 1991, signed the agreement of purchase and sale as president of the Buyer, Calumet Farm, Inc., and individually as Thoroughbred Manager. The duties of the Thoroughbred Manager as set forth in the agreement of purchase and sale include determining the number of mares to be bred to the stallion each breeding year; approving the mares to be bred; determining by mutual agreement with the Seller the amount of the stud fee; supervision and management of all breeding activities, accounting, billing of expenses and collection of stud fees or other revenues of the thoroughbred; and maintenance of public liability insurance, at the expense of the co-owners, to protect against loss or liability to third parties by reason of the negligence of the Thoroughbred Manager or his agents, servants or employees in keeping the thoroughbred. The Seller and the Buyer were each responsible for payment of one-half of expenses for the maintenance, care and promotion of the thoroughbred during its career as a stallion.

The CAPOTE Agreement of Purchase and Sale recites in pertinent part as follows:

CAPOTE Agreement of Purchase and Sale, Part II, ¶ 4 at 11 (emphasis added).

The agreement further provides as follows:

CAPOTE Agreement of Purchase and Sale, Part III at 12-13 (emphasis added).

J. T. Lundy resigned or was removed as principal officer of the debtor in March or April of 1991.

Calumet Farm, Inc. filed a petition for relief under chapter 11 of the Bankruptcy Code in this court on July 11, 1991.

At the conclusion of a lengthy hearing held in the Calumet Farm bankruptcy case on December 23, 1991, and after considering arguments of counsel, the court approved an auction of the estate's one-half interest in CAPOTE. The court ruled that the successful purchaser of the debtor's 50% interest in CAPOTE would be allowed to designate the Thoroughbred Manager for CAPOTE and dictate where the stallion would stand at stud. At the hearing counsel for Lundy conceded Lundy individually had no breeding rights in the stallion CAPOTE because he was no longer president of Calumet Farm, Inc., those breeding rights presumably inuring to the benefit of the successor Thoroughbred Manager as designated by Calumet Farm or its assignee.

The court also ruled that the co-owners of the other one-half interest in the stallion, the defendants Lukas, French, Beal and Klein, should be permitted to exercise a right of first refusal upon matching the highest and best auction bid price, subject to the right of all bidders to continue bidding thereafter until all of them bowed out of the bidding process. The auction was conducted in the courtroom immediately following the hearing. The court's rulings were incorporated in an order entered on December 24, 1991, as a final and appealable order approving the sale of CAPOTE.

Pursuant to the order of December 24, 1991, the court approved the sale at public auction of the debtor's undivided one-half interest in CAPOTE for $4,000,000, free and clear of all liens and encumbrances, including breeding rights (nominations/seasons) for the year 1992 and all years thereafter. The co-owners Lukas, French, Beal and Klein, exercising a right of first refusal accorded to them by the court, purchased the debtor's one-half interest in the stallion by matching the high bid of $4,000,000. The $4,000,000 which the co-owners paid to the estate was placed in an interest-bearing escrow account pending further orders of the court determining the rights of the debtor in possession and the defendants therein.

The order also provided that any alleged claims, liens, encumbrances, or interests of any nature would attach to the proceeds of the sale in the same order and to the same extent as to the thoroughbred and any equine rights thereto. The sale of the estate's undivided one-half interest in CAPOTE was "free and clear of any interest in [the estate's interest in CAPOTE] of an entity other than the estate." 11 U.S.C. § 363(f). No appeal was taken from the order.

The farm and the right to use the name Calumet Farm were sold at public auction on March 19, 1992. Thereafter, the debtor in possession changed its name to Phoenix Corporation and commenced this action in that name. The complaint of the plaintiff debtor in possession, which was filed on June 1, 1992, seeks a declaration of the rights of the plaintiff and numerous defendants, including the rights of the defendants J. T. Lundy, Equine Capital Corporation, Equine Capital Corporation as a creditor of J. T. Lundy, Matchmaker Financial Corporation, and Citizens Fidelity Bank as assignee of Matchmaker Financial Corporation, in proceeds of the sale of the debtor's undivided one-half interest in the stallion CAPOTE.

It does not appear there is any dispute that Equine Capital Corporation, Matchmaker Financial Corporation, and Citizens Fidelity Bank have the right to assert claims in and to the stallion CAPOTE and proceeds thereof on behalf of Lundy. However, an understanding of the relationship between Lundy on the one hand, and Equine Capital, Matchmaker, and Citizens Fidelity on the other hand, is helpful. The following description of the transactions giving rise to the indebtedness owed by defendant Lundy to defendants Equine Capital, Matchmaker, and Citizens Fidelity is based on allegations contained in the counterclaims and crossclaims of Lundy, Equine Capital Corporation, Matchmaker, and Citizens Fidelity, which are deemed denied by the plaintiff and other defendants.

On April 4, 1991, Lundy and an entity known as Maricopa Ranch, Inc. executed a promissory note (no. 658) in favor of Matchmaker. The balance owing on the note as of February 28, 1992, was $2,732,203.37 plus interest from that date, costs, and attorneys fees. To secure the indebtedness, Lundy and Maricopa granted to Matchmaker a security interest in all of Lundy's right, title and interest in Lundy's four lifetime breeding rights in the stallion CAPOTE, the proceeds thereof, and other collateral owned by Lundy or Maricopa. Matchmaker perfected its security interest by filing financing statements on May 28, 1991 in the offices of the Woodford and Fayette County Clerks. Matchmaker in turn assigned its interest in the Lundy/Maricopa note and security agreement to Citizens Fidelity Bank and Trust Company to secure payment of an indebtedness of Matchmaker to the bank.

Also on or about April 4, 1991, Lundy and Maricopa executed a promissory note (no. 657) in favor of Equine Capital. To secure the indebtedness, Lundy and Maricopa granted to Equine Capital a security interest in Lundy's right, title and interest in CAPOTE and other collateral. Equine Capital perfected its security interest by filing financing statements in the offices of the Woodford and Fayette County Clerks. The outstanding balance of the note as of February 28, 1992 was $202,936.20 plus interest from that date, costs and attorneys fees.

Lundy filed a petition for relief under chapter 7 of the Bankruptcy Code on May 17, 1993, case no. 93-50775.

CONCLUSIONS OF LAW:

In opposing plaintiff's motion for summary judgment now before the court, Lundy and those defendants whose claims are derivative of Lundy's interest in CAPOTE, i.e., Matchmaker, Equine Capital, and Citizens Fidelity Bank, argue that Lundy's right to receive four annual lifetime breeding rights did not terminate upon his resignation or removal from the presidency of Calumet Farm, that the breeding rights compensate Lundy for services rendered in the past in connection with the sale of CAPOTE from the sellers to Calumet Farm, just as the trainers and agents have been awarded lifetime breeding rights as compensation for services rendered before the stallion began its breeding career. The defendants point to the paragraph which provides that Lundy's breeding rights are "subject to the same conditions and restrictions as the other individuals named in this paragraph."

The court is not persuaded by the arguments propounded by Lundy and his creditors. It is clear to the court that the parties to the CAPOTE agreement of purchase and sale intended that Lundy would be designated "Thoroughbred Manager" for as long as he remained president of Calumet Farm, Inc. If Lundy resigned or was removed as president of Calumet Farm, the duties of the thoroughbred manager were to be assumed by Lundy's successor as designated by Calumet Farm. The court is of the opinion that the breeding rights granted to the thoroughbred manager constitute compensation for the duties assumed by the thoroughbred manager and do not belong to Lundy individually.

Lundy and his creditors argue that it would be anomalous to allow Lundy to devise or bequeath his breeding rights, as seems to be permitted by the CAPOTE agreement of purchase and sale, page 12, but to deny Lundy an interest in the breeding rights upon termination of his employment with Calumet Farm. The court believes it would be more anomalous to permit Lundy to retain his four lifetime breeding rights, and to permit each successive thoroughbred manager to retain four lifetime breeding rights, or in the alternative, to deny each successive thoroughbred manager any compensation for his or her services as thoroughbred manager. The most logical interpretation of the agreement leads to the conclusion that four lifetime breeding rights were granted to J. T. Lundy only for so long as he remained thoroughbred manager, with the breeding rights to inure to the benefit of any successor thoroughbred manager.

The affidavit filed by Lundy's counsel that he misspoke when he announced at the December 23, 1991 hearing that Lundy no longer claimed an interest in the lifetime breeding rights does not compel the court to reach a different conclusion.

Even if Lundy had a claim to 4 lifetime breeding rights, those 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. Such claims are not otherwise affixed to the proceeds of sale of CAPOTE. See Phoenix Corporation v. Hill 'N Dale Farm of Gormley, Ontario, Canada (In re Calumet Farm, Inc.), adv. no. 92-5048, Memorandum Opinion at 13-14 (Bankr. E.D. Ky. Sept. 16, 1993), aff'd, Heinz v. Phoenix Corporation, no. 93-489 Memorandum Opinion and Order (E.D. Ky. September 27, 1994), on appeal to the Sixth Circuit Court of Appeals.

For these reasons, the motion of plaintiff for partial summary judgment against defendants Lundy, Equine Capital Corporation, Equine Capital Corporation as creditor of J. T. Lundy, Matchmaker Financial Corporation, and Citizens Fidelity Bank as assignee of Matchmaker should be sustained.

Dated:

By the court -

Chief Judge

Copies to:

counsel of record