West Hills Farms, LLC v. ClassicStar Farms, Inc.
2013 U.S. App. LEXIS 14518
| 6th Cir. | 2013Background
- The Mare Lease Program, run by ClassicStar (formerly New Classic Breeders) and marketed by GeoStar affiliates, sold mare-lease interests to investors to generate tax deductions tied to horse-breeding losses and capital-gains treatment for foals.
- ClassicStar sold far more mare-lease packages than it had horses; it substituted lower-value horses or phantom horses, and used sham financing from National Equine Lending Company (NELC) — actually funded by ClassicStar — to inflate investor payments and deductions.
- GeoStar and ClassicStar encouraged conversions of mare-lease interests into oil-and-gas investments (including FEEP and Gastar stock) to siphon funds into GeoStar projects; many of those conversion assets were illusory or never contributed.
- IRS disallowed the related tax deductions; several participants (including Plummers and defendant Parrott) pleaded guilty to conspiracy to defraud the United States. Plaintiffs (investors) alleged RICO, fraud, and breach of contract, seeking damages.
- After consolidated multidistrict litigation and extensive discovery, the district court granted summary judgment for plaintiffs on RICO, state-law fraud, and breach of contract, awarding trebled RICO damages (~$49.4M) plus prejudgment interest (~$15.6M). The Sixth Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Intent to defraud for predicate mail/wire fraud | Defendants knowingly oversold leases, used sham loans and placeholders, and promoted FEEP to conceal the fraud | Defendants lacked knowledge; Plummers perpetrated the fraud and GeoStar was a distant parent | Court: No genuine dispute — record shows GeoStar principals knew or recklessly ignored overselling and sham financing; intent established |
| Proximate causation under RICO | Plaintiffs were injured "by reason of" defendants’ pattern: out-of-pocket losses plus tax liabilities | Defendants: investors knew warning signs (horse substitutions, NELC ties, biased opinion letters, FEEP weaknesses) so defendants did not proximately cause losses | Court: Held plaintiffs need not show reliance; defendants’ concealment of core facts made their conduct a substantial, foreseeable cause of plaintiffs’ losses |
| Existence/distinctness of a RICO enterprise | The ClassicStar Enterprise (GeoStar, ClassicStar, Gastar, NELC, Plummers, others) formed an association-in-fact distinct from GeoStar | Defendants: enterprise is merely GeoStar and its agents/subsidiaries so distinctness fails | Court: Enterprise sufficiently distinct — subsidiaries and unaffiliated NELC performed different roles and GeoStar used separate entities to facilitate the scheme |
| Prejudgment interest (rate & availability) | Plaintiffs: prejudgment interest appropriate to make them whole; state statutory rate reasonable | Defendants: prejudgment interest inappropriate over treble damages and federal rate should apply; district court misapplied state "liquidated" standard | Court: Within district court’s broad discretion to award prejudgment interest on RICO; award at Kentucky statutory 8% not an abuse given delay/obstruction and equitable factors |
Key Cases Cited
- Martin v. Cincinnati Gas & Elec. Co., 561 F.3d 439 (6th Cir. 2009) (summary-judgment standard reviewed de novo)
- Anderson v. Liberty Lobby, 477 U.S. 242 (1986) (genuine issue of material fact standard for summary judgment)
- Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986) (no genuine issue when the record as a whole could not lead a rational jury to find for nonmovant)
- Moon v. Harrison Piping Supply, 465 F.3d 719 (6th Cir. 2006) (elements of a §1962(c) RICO claim)
- Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479 (1985) (RICO remedial purpose and civil cause of action)
- Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258 (1992) (but-for and proximate causation requirement in civil RICO)
- Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639 (2008) (no strict reliance requirement for mail/wire fraud-based RICO causation)
- Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158 (2001) (distinctness principle: individual and corporation can be distinct RICO entities)
- Boyle v. United States, 556 U.S. 938 (2009) (broad scope of association-in-fact enterprises under RICO)
- Reves v. Ernst & Young, 507 U.S. 170 (1993) (participation in an enterprise’s affairs defined)