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In re Classicstar Mare Lease Litigation

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

January 19, 2019

CLASSICSTAR, LLC, et al., Defendants. and J&L CANTERBURY FARMS, LLC, et al., Plaintiffs,




         All told, Plaintiffs invested $10.5 million in Mare Lease Programs offered by ClassicStar, LLC, and touted as an easy way to enter into the thoroughbred industry. 2d Am. Compl. ¶¶ 27-28, 176. ClassicStar had a shortage of thoroughbred mares to support its sales of ClassicStar Mare Leases, but, notwithstanding these shortages, Forman and the Plummers along with other RICO defendants, continued to market and sell Mare Leases to unsuspecting investors, including Plaintiffs. 2d Am. Compl. at ¶¶ 65-85.

         In November of 2003, Plaintiffs invested roughly $6 million in Mare Lease Programs. Id. at ¶ 81. In order to disguise the fact that there were insufficient mares available, three months later, in February, 2004, GeoStar Corporation, acting in concert with the other RICO defendants, offered to purchase the Plaintiffs' 2003 Mare Lease Program in exchange for Gastar stock; the offer contained a guaranteed put option, by which the Plaintiffs would be guaranteed a minimum profit of $2, 000, 000 by January 1, 2007. Id. at ¶ 92. In March, 2004, the Plaintiffs agreed to sell their mare leases to GeoStar in exchange for Gastar stocks, an arrangement that took effect in August, 2004. Id. at ¶ 96, 103. At the same time, Plaintiffs agreed to purchase another set of Mare Leases, ultimately investing an additional $4.5 million in the Program in December, 2004. Id. at ¶ 113.

         Three months later, in March, 2005, some of the defendants asked the Plaintiffs if they would be willing to exchange their Mare Lease Programs for outright ownership interests in male and female quarter horses. Id. at ¶ 114. In order to overcome the Plaintiffs' reluctance to exchange their leasehold interests in thoroughbred horses for ownership interests in quarter horses, the ClassicStar Defendants offered a “put” option on the quarter horse interests, effective July 1, 2007, whereby ClassicStar would repurchase the horse interests for $4.95 million, which represented a 10% profit to the Plaintiffs. Id. at ¶ 117. In March, 2005, the Plaintiffs entered into an agreement whereby they exchanged their Mare Leases for ownership interests in quarter horses. Id. at ¶ 118. The agreement was signed by Spencer Plummer. ClassicStar and the Plummers represented that the quarter horses were being cared for by the Plummers at their ranch located in Utah. Id. at ¶¶ 121, 144.

         Notwithstanding their knowledge that the Plaintiffs were the owner of the horses as a result of their agreement, the Plummers subsequently sold the quarter horses. Id. at ¶ 148. This was all part and parcel of the scheme to churn the Mare Leases so that investors would not uncover the fact that ClassicStar did not have sufficient mares to support the number of leases it was selling. Once an investor entered into the investment scheme by purchasing a Mare Lease, the RICO defendants counseled the investor to sell their Mare Leases in return for a different investment. Id. at ¶¶ 92-95; see also Plummer's Cross-Claims at ¶ 34, 39, attached as Exhibit “A.” Once the Mare Lease interests were exchanged for the other investments, the many defendants, including investment advisors Wilmington Trust, PCG, and Forman would then urge investors to purchase more Mare Lease Programs, purportedly to retain the tax benefits of investing in the thoroughbred industry. Id. at ¶¶ 106-08. Plaintiffs allege that all of these defendants acted with knowledge of the unsustainability of the leasing program due to a shortage of breeding pairs.

         II. Standard of Review and Applicable Law

         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 plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id.

         “When analyzing questions of federal law, the transferee court should apply the law of the circuit in which it is located.” In re Temporomandibular Joint (TMJ) Implants Prod. Liab. Litig., 97 F.3d 1050, 1055 (8th Cir. 1996). “When considering questions of state law, however, the transferee court must apply the state law that would have applied to the individual cases had they not been transferred for consolidation.” Id. In this instance, that is the law of the Commonwealth of Pennsylvania.

         III. Discussion

         A. RICO and the PSLRA

          As an initial matter, the Court rejects Forman and the Plummers' argument that § 107 of the Private Securities Litigation Reform Act bars Plaintiffs' RICO claims.

         As amended by the PSLRA, the RICO statute provides:

(c) [a]ny person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee, except that no person may rely upon any conduct that would have been actionable as ...

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