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

United States District Court, E.D. Kentucky, Central Division, Lexington

May 20, 2014

JAMES T. SCATUORCHIO RACING STABLE, LLC, et al., Plaintiffs,
v.
WALMAC STUD MANAGEMENT, LLC, et al., Defendants.

MEMORANDUM OPINION AND ORDER

DANNY C. REEVES, District Judge.

Defendants Walmac Stud Management, LLC ("Walmac Stud"), Walmac Farm, LLC ("Walmac Farm"), John T.L. Jones ("Jones"), and Lincoln-Walmac Associated Farms, Pty Ltd. ("Lincoln-Walmac") have moved for summary judgment regarding a number of remaining claims.[1] [Record No. 213] Plaintiffs James T. Scatuorchio, LLC ("Scatuorchio, LLC"), James T. Scatuorchio ("JTS"), Kevin Scatuorchio, Courtney Sullivan, and Bryan Sullivan ("Sullivan") oppose the motion. Having reviewed the parties' filings, the motion will be granted, in part, and denied, in part.

I.

The factual and procedural background of this matter has been set out in detail in prior orders. [ See Record Nos. 103, 127, 267, 268, 271.] This action arises from a series of contracts regarding the ownership and stud career of the thoroughbred stallion Ready's Image in both the Northern and Southern Hemispheres. These contracts include the Sale Agreement (also known as the Purchase Agreement), the Stallion Co-Ownership Agreement ("COA"), the Installment Agreement (also known as the Southern Hemisphere Sale Agreement), the Southern Hemisphere Co-Ownership Agreement ("SHCOA"), the Southern Hemisphere Lease Agreement ("SHLA"), and the Mare Agreement. The plaintiffs claim that the defendants violated the relevant agreements and breached their duties of good faith and fair dealing and their fiduciary responsibilities during the transfer of ownership and management of Ready's Image. Conversely, Defendant Lincoln-Walmac has filed two counterclaims seeking to recover unpaid expenses and stud fees allegedly due in the Southern Hemisphere.

A. The Parties' Agreements

On October 2, 2008, Plaintiffs Scatuorchio, LLC, and JTS' children, Kevin Scatuorchio and Courtney Sullivan, sold a two-thirds undivided interest in Ready's Image to Defendant Walmac Stud. This agreement was memorialized by the Sale Agreement. [Record No. 72-1, pp. 1-20] These parties also entered into the COA which contains the terms and conditions of the parties' relationship as co-owners of the thoroughbred. [Record No. 72-1, pp. 29-35] Walmac Stud was named as the "Stallion Manager" under the COA and was responsible for the day-today management of Ready's Image. Likewise, it was responsible for procuring mares to breed with Ready's Image.

On April 23, 2009, the parties entered into three additional agreements vesting other entities with ownership interests and responsibilities regarding the management of Ready's Image in the Southern Hemisphere. These agreements included: (i) the Installment Agreement; (ii) the SHCOA; and (iii) the SHLA, (collectively, the "Southern Hemisphere Agreements"). Under these agreements, Defendant Lincoln-Walmac became a co-owner of Ready's Image in the Southern Hemisphere. The SHCOA designated Walmac Stud as the Stallion Manager for all Southern Hemisphere operations. Much like the COA, the SHCOA governed the rights and obligations of the parties having an ownership interest in Ready's Image in the Southern Hemisphere during the stallion's breeding time in Australia.

Under the SHLA, Lincoln-Walmac was also designated as a lessee of the "use, purpose and attributes" of Ready's Image for breeding activities in the Southern Hemisphere for the 2009-2012 breeding seasons. [Record No. 72-1, p. 67] Lincoln-Walmac also assumed responsibility for the care, upkeep, and marketing of Ready's Image in the Southern Hemisphere and was responsible for remitting to the Southern Hemisphere Co-Owners[2] any revenue generated by Ready's Image in the Southern Hemisphere in the form of "Stallion Rent." [ See SHLA, Record No. 72-1, p. 68 (defining "Stallion Rent").]

After a disappointing first year at stud, the parties became concerned that not enough was being done to promote Ready's Image to potential mare-owners. As a result, on January 20, 2010, Plaintiffs JTS, Kevin Scatuorchio, and Sullivan (collectively, the "Mare Plaintiffs") entered into the Mare Agreement with Defendant Jones, who signed as the Managing Director of Walmac Farm. The Mare Plaintiffs were represented by attorney Richard Schibell when they entered into the Mare Agreement. [ See Record No. 72-1, pp. 80-81 (noting that Schibell is "cc'd" on the Mare Agreement); see also Sullivan's Deposition, Record No. 216-6, p. 56.] Neither Plaintiffs JTS nor Sullivan have an individual ownership interest in Ready's Image. Further, Sullivan is only a signatory to the Mare Agreement.

Under the Mare Agreement, the Mare Plaintiffs are entitled to receive the proceeds of any contracts associated with mares delivered by the Mare Plaintiffs to Walmac Farm for breeding with Ready's Image. [ See Record No. 72-1, pp. 80-81.] More specifically, the Mare Agreement states, in part, that it is agreed that if:

1) The "Original Ready's Image Owners" pay shipping costs from another state to and from Kentucky for a mare (hereinafter "Mare") shipped in 2010 to breed to Ready's Image and pay the board and routine veterinary charges for the Mare while boarded in Kentucky for the 2010 breeding and
2) Have a third party owner sign a breeding contract to breed the Mare, the same mare for which they paid the shipping, board, and veterinary expenses noted above, to Ready's Image, and said breeding contract shall be standard Walmac Farm breeding contract form and shall be for the full advertised stud fee payable when the foal stands and nurses or earlier,
Then the Ready's Image Syndiate shall remit all proceeds from the sale of each contract executed for such mare to the Original Ready's Image Owners.

[Record No. 72-1, p. 80]

The parties do not dispute that the Mare Plaintiffs delivered several mares to Ready's Image for breeding. [Record No. 209-3, p. 20] However, the plaintiffs contend that they have not received a distribution of any resulting proceeds from either Walmac Stud or Walmac Farm.

B. Procedural History

Since the plaintiffs initiated this action in New Jersey state court on March 30, 2011, the scope of this litigation has been considerably reduced. Portions of various claims have been referred to arbitration, portions of other claims have been dismissed, and the plaintiffs have abandoned various claims.[3] [ See Record Nos. 86, 103, 127.] Despite the parties' continuing uncertainty regarding which claims the plaintiffs are actively pursuing, as well as the identify of the plaintiffs actually asserting those claims (especially in the case of Sullivan), [4] it appears that the following claims remain:

(1) Count 2 for Breach of the Southern Hemisphere Agreements, by Scatuorchio, LLC, Kevin Scatuorchio, Courtney Sullivan, and JTS (the "plaintiffs") against Lincoln-Walmac;
(2) Count 3 for Breach of the Mare Agreement by the plaintiffs and Co-Plaintiff Sullivan against Walmac Farm and Walmac Stud;
(3) Count 5 for Breach of the Covenant of Good Faith and Fair dealing of the Southern Hemisphere Agreements, by the plaintiffs against Lincoln-Walmac;
(4) Count 6 for Breach of the Covenant of Good Faith and Fair Dealing of the Mare Agreement, by the plaintiffs and Co-Plaintiff Sullivan, against Walmac Farm and Walmac Stud;
(5) Count 7 for Breach of Fiduciary Duties relating to Ready's Image standing in the Southern Hemisphere, by the plaintiffs against Lincoln-Walmac;
(6) Count 9 for Accounting, by the plaintiffs against Lincoln-Walmac, and by Co-Plaintiff Sullivan against Walmac Farm, Lincoln-Walmac, Walmac Stud, and Jones;
(7) Counts 11 for Conversion, 12 for violation of the New Jersey Consumer Fraud Act, and 13 for violation of New Jersey RICO, by Co-Plaintiff Sullivan;
(8) Count 14 for Rescission/Reformation by the plaintiffs against Lincoln-Walmac relating to the Southern Hemisphere Agreements;
(9) Counterclaim for Breach of Southern Hemisphere Agreements, by Lincoln-Walmac against Scatuorchio, LLC, Kevin Scatuorchio, and Courtney Sullivan; and
(10) Counterclaim for Breach of Contract for Unpaid Stud Fees, by Lincoln-Walmac against JTS.

Notwithstanding this appraisal, the plaintiffs provide a more limited assessment of their remaining claims, stating:

[T]he only claims remaining are (1) claims asserted by Plaintiffs James T. Scatuorchio [], Kevin Scatuorchio [], and Bryan [Sullivan] against Walmac Farm, LLC [] under what has been referred to herein as the "Mare Agreement, " and (2) claims asserted by Plaintiffs James T. Scatuorchio, LLC [], Courtney Sullivan [], and Kevin [Scatuorchio] against Lincoln-Walmac [] for an accounting, breach of contract, including the covenant of good faith and fair dealing, and breach of fiduciary duty arising out of its conduct in the Southern Hemisphere as nominal "lessee"..., but with the rights and duties of a full-fledged stallion manager in that Hemisphere, along with those duties it owed as a Co-Owner.

[Record No. 273, pp. 1, 3, compare with Record No. 280, pp. 1-2 (the defendants' pretrial memorandum providing a more expansive assessment of claims remaining).]

Based on these representations, it appears that the plaintiffs intend to only pursue theories of individual liability under specific agreements rather than their previously proposed global conspiracy theory of liability predicated, in part, on the alleged derivative status of the defendants. Thus, these remaining claims can be divided into two categories: (i) claims involving Ready's Image in the Southern Hemisphere; and (ii) claims involving the Mare Agreement.

II.

Summary judgment is appropriate when there are no genuine disputes regarding any material facts and the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a); see Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Chao v. Hall Holding Co., 285 F.3d 415, 424 (6th Cir. 2002). A dispute over a material fact is not "genuine" unless a reasonable jury could return a verdict for the nonmoving party. That is, the determination must be "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986); see Harrison v. Ash, 539 F.3d 510, 516 (6th Cir. 2008). In deciding whether to grant summary judgment, the Court views all the facts and inferences drawn from the evidence in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

III.

The plaintiffs allege that the defendants breached their contractual obligations concerning the management of Ready's Image in the Southern Hemisphere as well as their duty to remit payment for securing mares to breed with Ready's Image under the Mare Agreement. The defendants contend that the plaintiffs have failed to produce any evidence to either support their claims. They also argue that the plaintiffs have not rebutted the evidence offered in support of Lincoln-Walmac's counterclaims. Finally, the defendants assert that there are no genuine issues of material fact and that they are entitled to judgment as a matter of law on all pending claims.

A. Breach of Contract and Covenant of Good Faith and Fair Dealing

The elements of a breach of contract claim under Kentucky law are: (i) the existence of a valid contract; (ii) breach of the contract; and (iii) damages or loss to the party alleging breach. Oliver v. Hilliard, No. 2010-CA-1138-MR, 2013 Ky. App. Unpub. LEXIS 201, at *14 (Ky. Ct. App. Mar. 1, 2013); see also Lenning v. Com. Union Ins. Co., 260 F.3d 574, 581 (6th Cir. 2001). Thus, to recover, a party must establish the existence and breach of a contractually imposed duty. Strong v. Louisville & Nashville R. Co., 43 S.W.2d 11, 13 (Ky. 1931). And implicit in every contract in Kentucky is the covenant of good faith and fair dealing which has been interpreted to require the contracting parties to do everything necessary to carry out the contract. James T. Scatuorchio Racing Stable, LLC v. Walmac Stud Mgmt., LLC, 941 F.Supp.2d 807, 816 (E.D. Ky. 2013) (citations and quotation marks omitted). To establish a breach, a complaining party must "provide evidence sufficient to support a conclusion that the party alleged to have acted in bad faith has engaged in some conduct that denied the benefit of the bargain originally intended by the parties." O'Kentucky Rose B. Ltd. P'ship v. Burns, 147 F.Appx. 451, 458 (6th Cir. 2005).

1. Mare Agreement

a. Breach of the Mare Agreement (Count 3)

The plaintiffs contend that Walmac Farm and Walmac Stud breached the Mare Agreement.[5] The defendants do not dispute that the Mare Plaintiffs performed under this contract and concede that breeding to Ready's Image generated net proceeds of $79, 134.70. However, Walmac Stud and Walmac Farm argue that they are entitled to summary judgment because the amounts owed to the Mare Plaintiffs under the Mare Agreement were properly setoff against amounts Courtney Sullivan, Kevin Scatuorchio, and Scatuorchio, LLC owed under the COA and Installment Agreement. [Record No. 213-1, p. 24]

The Mare Plaintiffs do not dispute that Kentucky law recognizes set-off. However, as the defendants note, "[u]nder this principle, parties are allowed to set-off mutual obligations to each other." [Record No. 213-1, p. 24 (emphasis added)] In Marcum v. Wilhoit, 162 S.W.2d 10 (Ky. 1942), the Supreme Court of Kentucky stated that:

The generally applicable law governing the right to set-off is that there must be mutuality of obligation; i.e., the debts must be owing between the same persons and at the same right. There is, however, a generally recognized exception to the rule where to deny a set-off would entail inequity and hardship which its ...

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