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In re ClassicStar Mare Lease Litigation

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

January 19, 2019

IN RE CLASSICSTAR MARE LEASE LITIGATION
v.
WILMINGTON TRUST FSB, et al., Defendants. and SEA SONG FARMS, LLC, et al., Plaintiffs,

          MEMORANDUM OPINION AND ORDER

          JOSEPH M. HOOD, SENIOR U.S. DISTRICT JUDGE

         This matter is before the Court upon the Motions to Dismiss of GeoStar Corporation (“GeoStar”), and Frederick J. Lambert [DE 86; Response at 95, Reply at 116][1]; Spencer Plummer [DE 88; Response at ¶ 96, Reply at ¶ 112]; and S. David Plummer [DE 93; Response at ¶ 100; Reply at ¶ 114].[2]

         I.

         Plaintiffs aver a series of losses arising out of initial purchases of participation in a mare leasing program that was represented as sound but, known only to Defendants, never intended to actually provide the participation at the level promised due to a shortage of thoroughbred mares for breeding pairs.

         In their Second Amended Complaint, they describe a series of business decisions by and involving the defendants that brought the scheme to life. They aver that, in or around July 2001, Geostar gained ownership and control of ClassicStar and that Geostar owned approximately 15% of Gastar, a publicly-traded oil and gas exploration company. Second Amended Complaint ¶38. Geostar's owners, officers and directors (Defendants Ferguson, Robinson, Parrot, and Lambert) were also officers, directors and control persons of Gastar. Second Amended Complaint ¶ 39. Geostar through its officers and directors, controlled the activities and finances of ClassicStar. Id. The officers and directors of Geostar, including Ferguson and Lambert, had complete control over ClassicStar's operating account at Key Bank, and said account was routinely “swept” from 2001 through 2006 to fund the oil and gas operations of Geostar. Id.

         Ferguson was the Managing Member of ClassicStar and also a principal shareholder of Geostar, owning nearly 20% of its issued and outstanding stock. Second Amended Complaint ¶40. Ferguson was an officer, director, founder and a control person of Geostar and ClassicStar by virtue of his positions as an officer, director, managing member and/or significant shareholder. Id.

         Lambert was the controller of Geostar (and Gastar). Second Amended Complaint ¶ 47. Lambert was the primary person at Geostar in charge of accounting. As the controller of Geostar (and Gastar), Lambert was intimately involved in the transfer of funds to and from those entities and ClassicStar. Id. Lambert was also involved in the “exchanges” of equine interests of Program participants for Gastar stock and other oil and gas interests which perpetuated the alleged scheme to defraud participants in the Mare Lease Program. Id. Plaintiffs describe Lambert as a corporate insider of ClassicStar by virtue of his position as an officer of Geostar, which owned and controlled ClassicStar. Id. Lambert, along with Ferguson and others, controlled and implemented the financial and accounting procedures employed by ClassicStar and Geostar which perpetuated the allegedly fraudulent scheme. Id.

         Spencer Plummer served as Vice President of Classicstar and replaced his father, S. David Plummer, as President on or about April 9, 2003. Second Amended Complaint ¶ 36. He was an officer of ClassicStar until he was terminated on or about February 1, 2006. Id. Spencer Plummer was actively involved with all facets of ClassicStar and the ClassicStar Programs. He participated in meetings in the spring of 2004 with other Defendants where it was decided to exchange thoroughbred horses for performance horses or for oil and gas interests to further the scheme by covering up the shortage of thoroughbreds available to the Programs. Id. Spencer Plummer and his father, S. David Plummer, received millions of dollars from ClassicStar, Geostar and/or their affiliates. Id.

         Plaintiffs allege that Defendants Geostar, Ferguson, Lambert and others deliberately created, marketed, promoted and sold ClassicStar Programs (hereinafter “Programs”), a means of leasing a thoroughbred mare for a breeding opportunity, with a total value many times greater than the thoroughbred interests owned by ClassicStar and/or its affiliates. Second Amended Complaint ¶¶ 12, 13, 14. As part of a scheme to market the Programs to as many wealthy individuals as possible, Geostar, Ferguson and Lambert, along with the Plummers, Thomas E. Robinson, John W. Parrott and ClassicStar, LLC, set out to find, and successfully engaged, a nationwide team of promoters, including Wilmington Trust and a number of attorneys, touting the tax benefits and the potential returns on an investment in the Programs.

         Once participants invested in the Programs, Defendants Geostar, Ferguson and Lambert, with the assistance of others, including Robinson, Parrot, and Wilmington Trust, perpetuated the fraudulent scheme by enticing Program participants, like Plaintiffs, to exchange, their equine interests for other investments including oil and gas working interests and Gastar stock. Second Amended Complaint ¶ 26. In reality, the assets promised in exchange for the equine interests either did not in fact exist, were worthless, or were never delivered. Id. Geostar utilized the Classicstar Programs as a source of cash, using the Programs to raise money for the oil and gas operations of Gastar (which as noted above was controlled by Geostar and its primary shareholders). Second Amended Complaint ¶ 41.

         Geostar, through Ferguson, Lambert and other officers and directors, managed and controlled all aspects of ClassicStar, including but not limited to its marketing, its scheme to switch out thoroughbred interests with standardbred or oil and gas interests, the fraudulent transfer of cash from victims, like Plaintiffs, through ClassicStar into the pockets of all the defendants, and the multiyear scheme to hide the underlying lack of breeding participation opportunities. Id. Plaintiffs aver that, in addition to re-leasing the mares and re-charging the attendant costs, Geostar, Ferguson, Lambert, Spencer Plummer, and S. David Plummer, among others, knew that the Programs were inadequate to meet the participation promised because they were aware that 60% of all funds invested in the Programs (after paying 7% commissions to promoters like Wilmington Trust and others) were being siphoned off the Programs and utilized to invest in oil and gas drilling operations for the benefit of Geostar, . Second Amended Complaint ¶ 92. Pursuant to a contract entitled “Amendment to Membership Purchase Agreement” between ClassicStar Farms, Inc., and S. David Plummer, Spencer Plummer and Debora Plummer (S. David Plummer's wife), effective October 31, 2001, the Plummers contracted to sell their interests in Tartan Business, L.C. The contract provides that once the Plummers received the final $1 Million of the $6 Million consideration, then 60% of the funds raised in selling the Programs would be invested in oil and gas exploration. Id. As an example, Spencer's Agreement provide that “Once the full cash portion of the Purchase Price has been paid to Seller, ClassicStar shall retain forty percent (40%) of all funds and proceeds received from Mare Lessees for working capital. The remaining sixty percent (60%) of such funds and proceeds received from Mare Lessees by ClassicStar shall be sent to Buyer in exchange for a commensurate amount of interests in the Drilling Program converted to ClassicStar. Id. (emphasis in original omitted).

         Plaintiffs allege $17 million in out-of-pocket losses having invested $7 Million in thoroughbred horses in 2003 and another $5.3 Million in 2004, with the IRS seeking millions more from them Second Amended Complaint ¶ 112. In reality, according to Plaintiffs, the assets promised in exchange for the equine interests purchased either did not in fact exist, were worthless, or were never delivered. Id. The moving defendants now seek to dismiss portions of Plaintiffs' claims as set forth below.

         II.

         In evaluating a Rule 12(b)(6) motion, the factual allegations of the Complaint “must be enough” that the right to relief is “above the speculative level” and is “plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-56 (2007); Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). If the complaint pleads facts “merely consistent with” liability, it “stops short of the line between possibility and plausibility of entitlement to relief.” Id. “A claim has facial plausibility when the ...


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