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Top Kentucky court rules race horses, breeding rights are agricultural commodities

Under the court’s interpretation of a 1985 farm bill, security interests in thoroughbred race horses and their lucrative breeding rights are extinguished when the horses are sold.

FRANKFORT, Ky. (CN) — An investment firm that loaned over $30 million to the owner of Triple Crown-winning thoroughbred American Pharaoh lost its security interest in the horse and its breeding rights when the horse was sold, the Kentucky Supreme Court ruled.

The case, argued in February, hinged on the state high court's interpretation of the Food Security Act, or FSA, a federal omnibus farming law passed in 1985 that eliminated security interests in agricultural commodities at the time they were sold.

MGG Investment Group LP claimed in its state court lawsuit and subsequent appeal that the unique nature of race horses and their breeding rights prevented application of the FSA because the horses did not fit the definition of agricultural commodity.

It sought to reinstate its security interests in several race horses, the most prominent of which was American Pharaoh, obtained when it loaned Zayat Stables $30 million in 2016.

Zayat eventually sold the horses used as collateral in the deal without notifying MGG, including American Pharaoh, and the buyers of the horses were named in the lawsuit filed by the investment firm.

MGG argued an amendment to the commonwealth's Uniform Commercial Code, or UCC, carved out an exception for thoroughbred racehorses because they are not used in farming.

The investment firm's argument was rejected at each level of the Kentucky court system, and last week's ruling from a unified Kentucky Supreme Court held that any changes in the commonwealth's law were preempted by the FSA and that the specific amendment cited by MGG was implemented to clarify the classification of equine interests.

"[The amendment] solved the narrow problem of how horses were classified," the opinion says, "but it did not simultaneously carve thoroughbreds out of the FSA and reapply the farm products exception."

Chief Justice Laurance VanMeter wrote the court's opinion, in which he determined the "literal meaning" of the word "horse" necessarily includes thoroughbred race horses.

The court rejected MGG's claim that race horses are "too exceptional" to be considered livestock and determined if lawmakers had intended to exempt any horses from the definition, they would have done so.

"The FSA's implementing regulations instruct that farm products 'must be specific commodities, species of livestock, and specific products of crops or livestock,'" VanMeter said. "The master list of such farm products includes, 'cattle and calves, goats, horses, hogs, mules, sheep and lambs, other livestock.' The master list places no limitations on what the FSA considers to be an applicable 'horse.'"

The court also emphasized the "Keeneland Rule," drafted by Kentucky legislators in 1976 and amended in 2000, which specifically directs sellers of race horses to the "notice provisions of the FSA" regarding their security interests.

"The modern notice provision of the Keeneland Rule would be meaningless unless our legislature recognized that the FSA applied to thoroughbreds," VanMeter said.

While breeding rights of any livestock are not explicitly mentioned in the FSA, VanMeter and the other justices found no issue with their inclusion in the legislation.

The court pushed back on MGG's portrayal of breeding rights as a nebulous concept and found the categories of farm products in the FSA are "capacious enough to cover the breeding rights of thoroughbreds."

"Although MGG attempts to cast the breeding rights as mere legal abstractions," VanMeter wrote, "the reality is that the breeding of thoroughbreds involves very tangible products that easily comport with both common-sense and the FSA's definition of a farm product.

"The rights to those products are indistinguishable from the products themselves for the purposes of the FSA. Resultingly, the breeding rights are also farm products under the FSA and those appellees who purchased the rights took free of MGG's security interest."

Attorney David Royse of Ransdell, Roach, and Royse PLLC in Lexington, Kentucky, who argued the case on behalf of the buyers, was understandably happy with the outcome.

"We are naturally pleased with the Kentucky Supreme Court’s unanimous ruling affirming the decision of the Kentucky Court of Appeals and the Fayette Circuit Court in Lexington," he said. "We believed the law was very clear on this matter and are grateful the courts agreed."

Attorney Kannon Shanmugam of Paul, Weiss, Rifkind, Wharton and Garrison LLP in Washington, who represented MGG, had no comment on the ruling.

Categories: Appeals Business Law Sports

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