This matter is before the court on the motion of Larry Richardson to compel Calumet Farm, Inc. (Calumet), debtor in possession, to deliver a stallion service certificate for the 1990 breeding of the mare SISTER DUSTY to the stallion WILD AGAIN.

A stallion service certificate is a form issued by the Jockey Club, to be completed by the stallion owner or manager, for presentation to the Jockey Club to authenticate that a designated mare was bred to a designated stallion. The certificate is required by the Jockey Club as a precondition of registering with the Jockey Club any foal of the mare as a thoroughbred horse.

FINDINGS OF FACT:

The movant Larry Richardson formerly served as the general manager of Bluegrass Farm Management Inc., a corporation owned by Nelson Bunker Hunt which operated Bluegrass Farm across the highway from Calumet near Lexington, Kentucky. In 1987 Bluegrass Farm entered into six foal-share agreements with Calumet. Bluegrass Farm had not participated in foal-share arrangements previously. Six mares owned by Bluegrass Farm were bred in 1987 to the stallion ALYDAR which at that time was owned by Calumet. Bluegrass Farm and Calumet each were to own a 50% interest in each of the resulting foals. Mr. Hunt and J. T. Lundy, then president of Calumet and stallion manager of stallions standing at Calumet, considered the possibility of retaining and racing the foals rather than selling them, but that decision was not made when the foal-share contracts were executed, according to Richardson.

Ultimately the decision regarding the future of the foals was made by economic necessity. In the fall of 1987, while the mares were in foal, Mr. Hunt announced Bluegrass Farm would conduct a dispersal sale of all of its thoroughbred mares in January 1988.

Lundy approached Richardson sometime after the announcement of the dispersal sale and expressed his concern that once the mares subject to the foal-share contracts were sold Calumet might become an unwilling foal-share partner with the purchasers of the mares. Lundy recounted his concern as follows: "I did not want Calumet Farm to become partners with unidentified third parties. . . . I was very concerned that Calumet Farm would not receive full consideration for these ALYDAR seasons, as during this time Mr. Hunt was experiencing financial hardship." Plaintiff's exhibit B. Lundy proposed to Richardson that five foal-share agreements be converted to no-guarantee stallion service contracts with a payment to Calumet of a $300,000 stud fee for each mare and asked Richardson to talk to Mr. Hunt about the proposal.

Richardson conveyed Lundy's request to Mr. Hunt. Richardson testified that initially Hunt was not receptive to the suggestion. After several discussions with Richardson Mr. Hunt agreed that selling the mares subject to the foal-share contracts might depress the price at which the mares could be sold. Mr. Hunt agreed to the conversion of the five foal-share agreements to no-guarantee stallion service agreements.

The five mares were sold at the Bluegrass Farm dispersal sale in January 1988 for approximately $6.3 million. On February 12, 1988, Bluegrass Farm paid to Calumet by wire transfer the sum of $1,525,000.00, representing five stud fees at $300,000 each plus sales tax of 5% less a setoff of $50,000. See plaintiff's exhibits D, E, F, and G.

Richardson testified that in return for his assistance in persuading Mr. Hunt to agree to conversion of the five foal-share agreements to no-guarantee stallion service agreements and to pay the stud fees, Lundy gave Richardson two breeding seasons in stallions co-owned by and standing at Calumet, SECRETO and WILD AGAIN. According to Richardson, Lundy said, "If Mr. Hunt pays these off, you deserve to get something for this." Lundy volunteered the seasons. The WILD AGAIN syndicate agreement executed by the co-owners of the stallion and by Lundy as president of Calumet and as stallion manager provides that nominations may be sold, exchanged, or otherwise disposed of provided written notice thereof, stating the name and address of the party entitled to use such nomination, be sent to the syndicate manager. Richardson was not given any writing evidencing his ownership of these complimentary seasons. Apparently, the nominations were not designated for a specified year. According to Richardson, he waited until 1990 to use or sell the nominations in anticipation that the value of the nominations would increase.

Richardson did not inform Mr. Hunt that he received two nominations from Calumet in exchange for his efforts in effecting the conversion of five foal-share agreements to no-guarantee stallion service contracts. On cross-examination by counsel for First City, Richardson acknowledged that customarily a stud fee is paid when a mare in foal subject to a foal-share is sold at auction but added that he was not sure the custom would apply if the parties to the foal-share agreement contemplated racing the horses.

During the 1990 breeding season Richardson entered into a foal-sharing contract with Tony Seale whereby Seale's mare SISTER DUSTY was bred to WILD AGAIN using Richardson's complimentary season. The breeding was noted on the stallion's book, as evidenced by a computer printout showing mares bred to WILD AGAIN in 1990. See plaintiff's exhibit H. The handwritten notation next to the name SISTER DUSTY indicates this was a complimentary season for Larry Richardson, according to the testimony of Kim Day, an employee of Calumet.

Day first became aware of Richardson's breeding seasons when he requested the stallion service certificates in June of 1991. By letter to Richardson Ms. Day requested a copy of the contract or some form of documentation regarding the origin of the seasons. Because Richardson did not have a secretary, Day typed for him the letter composed by Richardson dated August 14, 1991 on Bluegrass Farm stationary addressed "To Whom It May Concern" in which Richardson states he received the two 1990 seasons "as commission for converting six 1987 foal share contracts between Bluegrass Farm and Calumet Farm to six 1987 no guarantee stud fees." See plaintiff's exhibit A.

First City, which asserts a security interest in stallion service certificates relating to all of Calumet's bloodstock, has declined to authorize Calumet to provide the certificates to Richardson for the 1990 seasons.

On July 21, 1988, Calumet and First City National Bank of Houston (First City, Texas-Houston N.A.) entered into a loan agreement whereby First City agreed to provide to Calumet a term loan in the amount of $15 million and a line of credit of up to $50 million. In return, Calumet executed a security agreement contemporaneously with the loan agreement whereby Calumet granted to First City a security interest in all of Calumet's equine interests, as follows:

Security agreement dated July 21, 1988, Agreed Stipulation of Evidence exhibit B. The bank perfected its security interest by filing a financing statement describing the above collateral on July 26, 1988 in the office of the Fayette County Clerk. Agreed Stipulation of Evidence exhibit C. Other relevant provisions of the security agreement which should be noted are as follows:

Security agreement, Agreed Stipulation of Evidence exhibit B (emphasis supplied).

The court conducted an evidentiary hearing on Richardson's motion and heard arguments of counsel on February 3, 1992. First City argues: (1) Richardson took the breeding right subject to First City's lien; (2) First City's lien attaches to Richardson's interest in the 1991 foal by WILD AGAIN out of SISTER DUSTY, that interest representing proceeds of the original collateral; (3) First City's lien in the stallion service certificate prevents its issuance by Calumet without adequate protection being provided to First City; (4) the transfer of the breeding season to Richardson may be avoidable as a fraudulent conveyance or may constitute conversion.

First City filed a motion on February 5, 1992 for adequate protection, requesting that any order directing Calumet to deliver the stallion service certificate to Richardson "be conditioned upon First City being afforded adequate protection of that interest to include the retention of First City's lien in the stallion certificate, its products and proceeds, including the resultant Jockey Club certificate, and/or a lien upon the thoroughbred horse which constitutes the products and proceeds of the breeding right in question."

Riggs National Bank of Washington, D.C. asserts a security interest in, inter alia, 1990 breeding seasons to WILD AGAIN purchased by Calumet-Gussin No. 1, a limited partnership, from Calumet Farm, Inc. in September 1987. Riggs' position differs somewhat from that adopted by First City. Riggs argues: (1) the transfer of a breeding right from Calumet to Richardson may be avoidable as a fraudulent conveyance for want of consideration; (2) in the alternative, if the services of Richardson conferred a benefit on Calumet to the detriment of his employer the transaction might constitute a commercial bribe and the consideration therefor would be void; (3) the stallion service certificate should be released if the transferee of a season can prove it is a "bona fide purchaser" of the season.

CONCLUSIONS OF LAW:

One issue to be determined is whether the transfer of the 1990 WILD AGAIN nomination/season (breeding right) from Lundy to Richardson occurred before or after July 26, 1988, the date First City perfected its security interest in breeding rights to WILD AGAIN and other stallions owned by Calumet. Counsel for Richardson argues the transfer occurred in February of 1988 when Lundy orally granted to Richardson one nomination to WILD AGAIN and one nomination to SECRETO.

The court is of the opinion the transfer of the WILD AGAIN season to Richardson occurred when the mare SISTER DUSTY was bred to the stallion. By his own admission Richardson did not perform services for Calumet in expectation of remuneration of any kind. The breeding rights which Lundy chose to award to Richardson were not allocated to any particular breeding season. Richardson did not receive any indicia of ownership of the breeding rights. Consequently, prior to the time the breeding right to WILD AGAIN was honored by Calumet, Richardson could not have compelled Calumet or the co-owners of the stallion, by action at law or equity, to honor the breeding right. Thus, the transfer of the breeding right occurred when the breeding right was exercised. The breeding right was transferred and extinguished by the exercise thereof more or less simultaneously, but immediately prior thereto First City did have a security interest in the breeding right.

All the transactions between the parties occurred before July 13, 1990, prior to which date, under Kentucky law, a breeding right for a season was recognized as a general intangible for purposes of Article 9 of the Uniform Commercial Code. North Ridge Farms, Inc. v. Trimble, 37 U.C.C. Rep. Serv. 1280 (Ky. Ct. App. 1983), aff'd on other grounds 700 S.W.2d 396 (Ky. 1985); KRS 355.9-106.

The Uniform Commercial Code provides that except as otherwise provided in Article 9 thereof a security agreement is effective according to its terms between the parties, against purchasers of the collateral and against creditors. KRS 355.9-201.

We are also instructed by the Uniform Commercial Code that:

KRS 355.9-306(2) (emphasis supplied).

KRS 355.9-306(1).

Article 9 of the Uniform Commercial Code does recognize several exceptions to the rule that a security interest continues in collateral notwithstanding any sale, exchange or other disposition of the collateral. However, none of the exceptions is applicable to the facts of this matter, particularly where as in this instance the collateral [a breeding right] is a general intangible.

The exceptions to the foregoing rule are as follows:

1. Sale, exchange, or other disposition of the collateral authorized by security agreement or otherwise exception. If a sale, exchange or other disposition of the collateral was authorized by the secured party in the security agreement or otherwise the security interest in the collateral is extinguished. KRS 355.9-306(2). There is no contention by the movant in this matter that the transfer of breeding rights to him was authorized by the secured party in the security agreement or otherwise. Consequently, this exception is not applicable to the resolution of this matter.

2. Unperfected security interest exception. This exception, which is set forth in KRS 355.9-301(1), governs priority disputes between the holder of an unperfected security interest and a transferee of general intangibles, and is inapplicable to the facts of this controversy. There is no contention that the security interest of First City is unperfected.

3. Buyer in ordinary course of business exception. Article 9 of the U.C.C. provides:

KRS 355.9-307(1).

Subsection (9) of KRS 355.1-201 referred to in KRS 355.9-307(1) provides:

KRS 355.1-201(9) (emphasis supplied).

The buyer in ordinary course of business exception is not applicable because the transferee of breeding rights acquires a general intangible rather than goods, whereas a buyer in ordinary course of business, by definition, is one who buys goods.

The inapplicability of this exception is established without reaching the question of whether Richardson is a buyer for consideration.

Also, it is not necessary to dwell on the question of whether breeding rights are farm products, because, even if they were, the ordinary course of business exception does not protect the buyer of farm products from a person engaged in farming operations.

4. Sale of a registered breed of horses at public auction exception. This exception, which is set out in KRS 355.9-307(6), applies to the sale of registered horses at public auction. The exception does not apply to the sale of breeding rights.

Because none of the foregoing exceptions to the rule that a security interest continues in collateral notwithstanding the sale, exchange or other disposition thereof are applicable to the facts of this matter it follows that Richardson acquired the WILD AGAIN breeding right from Calumet subject to the security interest of First City, unless the provisions of the Food Security Act dictate a different conclusion.

The Food Security Act of 1985, 7 U.S.C. § 1631, overrides the provisions of section 9-307(1) of the Uniform Commercial Code, KRS 355.9-307(1), by permitting buyers of farm products in the ordinary course of business under certain circumstances to acquire title thereto free and clear of encumbrances. See generally, Vance, Protecting Security Interests in Equine Collateral Under the Clear Title Provision of the Food Security Act of 1985, 78 Ky.L.J. 447 (1989-90). The definition of farm products in the Food Security Act is virtually identical to the definition of farm products under the Uniform Commercial Code. See KRS 355.9-109(3); see also supra notes 7 & 8.

The provisions of the Food Security Act apply to the sale of goods (farm products) and not to the sale of general intangibles such as breeding rights, and therefore this federal law is inapposite to the sale of breeding rights free and clear of liens. See Vance, supra, 78 Ky.L.J. at 459.

In view of the conclusion that the Food Security Act does not apply to the sale of intangibles such as breeding rights, clearly the breeding right to WILD AGAIN which Richardson received from Calumet was encumbered by the security interest of First City.

Because the breeding right has been extinguished by the exercise thereof the court must next address the question of whether and to what extent First City's security interest continues in proceeds, if any, of the breeding right.

First City contends its security interest continues in the foal that has resulted from the breeding of the mare, SISTER DUSTY, owned by Tony Seale, to WILD AGAIN, on Richardson's breeding right, because, according to First City, the foal is proceeds of the bank's collateral, the breeding right.

This contention is inconsistent with the provisions of section 4.15 of the security agreement which make rather clear that the progeny of collateral in which the bank is to acquire a security interest is the progeny of any mare which is part of the collateral and not progeny of mares owned by third parties or progeny of stallions which are part of the collateral. See also section 4.01 of the security agreement pursuant to which Calumet is not required to protect title to foals of Calumet stallions that are not foals of Calumet broodmares. Parties can by agreement place such limitation on proceeds. KRS 355.9-203(3).

In view of the language of the agreement which makes clear progeny of collateral includes only progeny of broodmares that are part of the collateral, whether bred to stallions that are part of the collateral or to stallions that are not part of the collateral, it would be inappropriate to expand the meaning of the term "proceeds" to sweep in as collateral foals of mares owned by third parties. Foals of mares owned by third parties would not be expected to remain in Calumet's possession at all times as required by section 4.03 of the security agreement. The court is of the opinion that it was the intention of the parties by the terms of the security agreement to exclude from collateral progeny of mares owned by third parties and that this intent would be subverted by characterizing foals of mares owned by third parties as "proceeds" of collateral.

When the mare SISTER DUSTY, which is wholly owned by a third party (Seale), was bred to WILD AGAIN on Richardson's breeding right pursuant to a foal share agreement between Seale and Richardson, to which Calumet is not a party, the resulting foal is not proceeds of First City's collateral.

A breeding right gives the owner thereof access to a stallion [variously referred to by counsel in this case as a breeding machine or a sperm bank] for the purpose of breeding thereto an acceptable nominated mare. The owner of the stallion may be entitled to payment of a stallion service fee, but absent a separate foal share agreement between the owner of the stallion and the owner of the impregnated mare, the owner of the stallion has no rights in the resulting foal to which a security interest in the breeding right may attach. See KRS 355.9-203(1)(c).

Absent a foal share agreement with the owner of the mare, the owner of the stallion has no obligation to provide support or maintenance for the foal such as is necessary to establish an obligation to or interest in a foal based on paternity.

The foal remains in utero during an eleven month gestation period and is nursed by the mare for a period of approximately seven to nine months after birth. The contribution of the stallion to this eighteen-month process beyond the initial fertilization of the embryo is nil.

The collateral is a breeding right for a season, a contract right, a general intangible, which when the stallion service is performed ordinarily confers on the stallion owner a right to payment, an account. It is this account rather than the foal that is the proceeds of collateral.

In some instances the stallion service fee may be a fixed amount payable when the service is performed without any guarantee of a foal. In other instances the owner of the mare may be guaranteed a foal that will stand and nurse in which case the stallion service fee may not be payable until a healthy foal is born. But in either instance, it is an account due the stallion owner that is the proceeds of the collateral, not the foal.

The security interest in the breeding right attaches to any account generated in favor of the stallion owner under the terms of the agreement between the stallion owner and the holder of the breeding right when the breeding right is honored. If, as in this instance, the breeding right is complimentary, with the result that no account is generated in favor of the stallion owner, there are no proceeds to which the security interest of First City may attach or in which the security interest may continue.

The stallion service certificate is a preprinted form prepared by the Jockey Club based on information provided by stallion owners or their agents to the Jockey Club listing all mares bred to a stallion during a breeding season. The certificate shows the name of the stallion, the name of the mare and her dam's name, and the first and last cover dates (dates of service), and must bear the signature of the stallion owner or authorized agent. The stallion owner or authorized agent must sign the form, and the form must be returned to the Jockey Club for use by the Jockey Club in determining whether the foal of the mare may be registered as a thoroughbred.

The completed form does not create any additional rights in the stallion owner and in particular does not evidence any right to payment. Any right to payment which the stallion owner may have arises independently of the stallion service certificate, and, in the absence of an independent right to payment, the stallion owner has no right to withhold signing of the stallion service certificate.

The breeding right in this instance was granted to Richardson gratuitously. He is not obligated by contract to pay Calumet for the breeding right. Once Lundy, acting in the dual capacity of president of Calumet and manager of the WILD AGAIN stallion syndicate, permitted Richardson to exercise the breeding right without any expectation of compensation therefor, Calumet should not be permitted to withhold issuance of the stallion service certificate at the instance of First City.

The issuance of the stallion service certificate is an obligation to be performed by the debtor as stallion owner or, with respect to syndicated stallions, as the stallion manager, as distinguished from an obligation owed to the debtor. First City's security agreement does not confer on the bank a security interest in obligations of the debtor in its capacity as either an owner of a stallion or stallion manager, as distinguished from obligations owed by others to the debtor.

Section 2.01(b) of the security agreement of July 21, 1988 grants to First City a security interest in stallion service certificates and Jockey Club certificates of registration relating to or in any way connected with Calumet stallions, broodmares and stallion shares described in section 2.01(a) of the agreement. The court interprets this language to refer to certificates previously issued to Calumet to evidence its ownership of the stallions and broodmares described in Exhibit A to the security agreement, or to certificates issued to Calumet in connection with the breeding of a Calumet mare which is part of the collateral to a stallion whether or not the stallion is part of the collateral. In other words, the bank has a security interest in certificates issued to Calumet and not in certificates issued by or on behalf of Calumet as the owner of a stallion or as part owner of a syndicated stallion. It is the view of the court that the language of the security agreement does not grant to First City a security interest in certificates intended to verify the breeding of stallions owned in whole or in part by Calumet to mares owned by third parties. This limitation on the security interest of First City in stallion service certificates and Jockey Club certificates of registration is consistent with the language of section 4.15 of the security agreement, which, as previously noted, makes clear that the progeny of collateral in which the bank is to acquire a security interest is only the progeny of any Calumet mare that is part of the collateral.

The foregoing interpretation of the language of the security agreement is the dispositive basis for denying the claim of First City of a security interest in the stallion service certificate at issue. But even if the language of the security agreement were not so dispositive the court would reach the same result.

The stallion service certificate is neither a "document" nor an "instrument" as those terms are defined by the Uniform Commercial Code. KRS 355.9-105(f) and (i); KRS 355.1-201; KRS 355.3-104. The certificate is merely a "writing," printing reduced to tangible form. KRS 355.1-201(46). In this instance the stallion service certificate is a writing generated by the Jockey Club (a non-debtor party) for the signature of the manager of the WILD AGAIN stallion syndicate (a non-debtor party) for issuance to SISTER DUSTY's owner (a non-debtor party).

The court has considered the possibility that the stallion service certificate qualifies as "goods." KRS 355.9-105(h). Records of this nature doe not appear to fit neatly into any classification of goods under Article 9 of the Uniform Commercial Code. KRS 355.9-109. In any event, the books and records of the WILD AGAIN syndicate are not the books and records of the debtor Calumet. In order th encumber the records of the syndicate it would be necessary for someone authorized to do so to sign the security agreement on behalf of the syndicate.

In order for the security interest of First City to attach to the certificate Calumet must have rights in the certificate. KRS 355.9-203(1)(c). Calumet, as a shareholder in the WILD AGAIN syndicate, may have a cause of action against Richardson to set aside as fraudulent the transfer to him of the complimentary breeding right to WILD AGAIN. However, the possible existence of this unliquidated claim does not establish that Calumet presently has rights in the stallion service certificate issuable to Seale.

The court is satisfied that Calumet, by reason of its ownership interest in the stallion, has no established rights in the stallion service certificate to the extent required for the certificate to be collateral subject to the security interest of First City. The court is also satisfied that delivery of the stallion service certificate will not deprive Calumet of any cause of action it may wish to assert against Richardson.

Consequently, the court is of the opinion the debtor in possession or its agent should be required to deliver the stallion service certificate for the WILD AGAIN/SISTER DUSTY foal as requested and that the Jockey Club should be permitted to issue the registration certificate for owners of the foal.

IV. REMEDIES OF FIRST CITY AND DEBTOR IN POSSESSION

Calumet and First City take the position that Lundy was acting ultra vires in granting complimentary breeding rights to Richardson and others. There is no evidence before the court on this issue at this time. There may be bases for distinction with respect to Lundy's corporate authority, his authority as manager under the terms of stallion syndicate agreements, and duties of Calumet under the loan agreement and security agreement with First City.

First City may have claims for damages for conversion against Lundy and Richardson. The debtor in possession may be able to set aside as a fraudulent conveyance the transfer of the breeding right to Richardson. The court is not determining or precluding any such remedies or any other remedies that may be available to First City or the debtor in possession. The court is of the opinion that these issues are not properly before the court at this time.

Dated:

By the court -

Joe Lee, Chief Judge

Copies to:

Robert L. Treadway

Joseph M. Scott, Jr.

Ashley Ward

Frank T. Becker

Bernard T. Lovely

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