The firm receives frequent inquiries that are common to many of its equine clients. This section lists many of those questions and answers. It will be updated periodically to list new questions and answers.
1. Why should you use a horse lawyer for your horse business affairs?
There is an old phrase in the race horse business which goes like this – “He’s a great businessman, but he checked his brains at the gate.” In other words, many astute businessmen and women get into the horse business because it is a pleasure-oriented activity. And because it is pleasure oriented, they do not apply the same business skills and acumen to the business that they would otherwise apply in any other business setting. In a large majority of cases, horses are purchased for amounts far in excess of the cost of a brand new car, a brand new house or a brand new office building for that matter. Yet, many times horses are purchased on a hand shake with no formal documentation at all. Would someone ever purchase a car, a house or an office building in this way? Certainly not. But, for some reason – arguably due to history, custom and usage – the horse business has been one that has been very casual about written contracts. This is particularly true when horses are purchased for pleasure – for example, for one’s children or for true pleasure usage.
The main reason one should always seek out a horse attorney when transacting horse business is to avoid the unpleasantries, uncertainty and definite costs of litigation or the threat of litigation when something goes wrong. Horses are expensive, and so are attorneys. The best use of any attorney is to get him or her involved early in the process to remove the uncertainty, vagaries and casualness which is attendant in many horse transactions. There is no guaranty that by doing so there still won’t be a problem in the future, but having an equine attorney involved should help lessen the chances of an ugly and costly dispute.
The questions listed below and their answers are ones frequently encountered by our equine law firm. Obviously, every situation is different, but these questions and the fact situations behind them arise frequently.
2. Should I confirm my agreements by written documents?
Generally speaking, it is always better to have an agreement in writing as opposed to one based upon a handshake or an oral agreement. This is so for several reasons. First, a written agreement forces the parties to look at the issues before they reach an agreement. This may flush out areas of ambiguity or uncertainty. Second, an agreement which is in writing is generally much more reliable than one that is not. If care is taken in the first instance, a writing will do a lot to remove uncertainty and ambiguities. If it is properly drafted it should be a clear statement of the parties’ intentions. Third, and in the event of a dispute or any litigation following the dispute, everyone will look to the writing to know what the parties intended. The parties themselves will, their lawyers will, their financial advisors will and the courts most certainly will look at the agreement. So, it is in your best interest to have your transaction documented by some form of written agreement. Lastly, a written agreement can avoid unintended consequences. For example, there are times (as discussed in greater detail below) where an owner and a trainer will agree to purchase a horse, share in expenses, and then share in profit. They don’t intend to create a partnership between them, but under the law their relationship would be deemed a partnership in the absence of some type of written expression to the contrary. And even then, it still might be deemed a partnership. Finally, written agreements are your best way to protect your rights and to provide for a remedy should your rights be violated. Is there a better reason than that to use a written agreement?
3. Do I need to run my equine horse business like a business?
As was mentioned above, many people first get involved in the equine horse business because it is fun. Later, they find that it serves as a good tax shelter for income generated from other sources. But, they run their operation like they did originally, meaning they commingle funds in a personal account, they don’t have a business plan, they treat it like a “hobby” and they generally fail to adhere to normal practice when one operates a separate business. Then, when they are audited by the Internal Revenue Service or by some state taxing agency, they wonder why the government challenges tax deductions they have taken over the years. Most people in the horse business will recognize this as the “Hobby Loss Rule” Codified in the Internal Revenue Code under 183. Without getting into all the details here, keep in mind that it is important, if you want to take tax deductions for your horse-related activities, that you form and operate your horse business like a business. Keep a separate checking account, pay horse expenses from that separate checking account, put income in the separate checking account, and make an effort to make a profit each year, etc. In short, run it like a business. This area can become very complicated, but the short answer is if you attempt to run the business for profit you will fair much better in the event there is a later audit of claimed deductions against other income.
4. Are equestrian law of each state differ concerning the way that horse businesses might be treated, if so why is this important?
The United States has generally two levels of equestrian law. Federal law and state law. Federal law applies and preempts all state law. That means it is universally recognized in every state. State law, however, is only generally recognized in the state where the law has been adopted. For example, California state law would not necessarily be recognized in Arizona, although it might be persuasive. So, for people in the horse business this is important when issues arise as to what is known as “conflict of laws” or the law of the contract. In short, if you happen to be a resident of the state of California but you are transacting with a resident of the state of Texas, you want to be very careful to ensure in your agreement that the equestrian law which will apply in the event of a dispute will be California law. Why would you want to do this? The reason is that Texas has very favorable insolvency laws and these laws benefit the resident of Texas far more than they would benefit the resident of California. California’s laws are more creditor oriented. That means that if you happen to live in California and you are selling a very high priced horse to someone who happens to live in Texas, among other things, you would talk to a equine lawyer and you would want your choice of law to be the state of California in the event of any dispute between the contracting parties. Moreover, each state may have different laws regarding deficiency judgments. That means that if someone personally guaranteed a note for the sale of a horse and the horse acted as collateral as well, should you have to take the horse back, sue on the note and ultimately sell the horse, and should there be less than enough money to pay off the note you could still proceed against the individual who guaranteed the note. Each state has different laws regarding deficiency judgments especially with respect to personal property – which is how a horse would be defined in most states.
5. Isn’t a horse’s breed registration the same thing as legal title?
As an equine law firm we can say that you would be surprised to know how many people in the horse business believe that a horse’s breed registration is the same thing as legal title. To them, a breed registration means the same thing as your pink slip for your car. Under the law, however, this is not true. A horse’s breed registration is indicative of title, but it is not title. That means that although it would tend to show who owns the horse, it does not amount to legal title. Legal title is established either through a separate Bill of Sale or other written document. This is important because a Bill of Sale will or should have certain references to express and implied warranties regarding the horse being sold. (This is discussed below.) However, this is not to be confused with one not wanting to hold the registration or the certificate of registration as a form of “collateral” if a loan was made against the horse or for some other reason. Again, this area can be rather complicated, the point being, however, that breed registration is not the same thing as legal title. As explained before, having a well done written document could save you much headache and even large legal fee with horse lawyer or attorney.
6. What is an express or implied warranty?
Generally speaking, again because some states differ, in most sale contracts involving horses there will be warranties which apply unless they are expressly disclaimed. What does that mean? When a horse is for sale, it is normally understood that the seller has the right to sell the horse with no encumbrances. It also means that the seller is selling the horse with the understanding that the horse is fit for its intended purpose – racing, hunter/jumper, or for breeding purposes, etc. Express warranties are those which are expressly written into the sales or purchase contract. This could be anything from an express warranty as to the horse’s bloodlines, an express warranty as to its ability to breed, or an express warranty as to the horse’s fertility, among other things. If you recall, when we were talking about why you would want a written agreement, it is especially appropriate to have a written agreement done by a horse lawyer when a horse is being purchased or sold. These written agreements will contain the express or implied warranties which we have briefly touched on here. These warranties are many times the subject of litigation between parties. And, unless these warranties are carefully dealt with in the written agreement, they can mean success or failure to the interested party. In summary, warranties are important in all sale transactions.
7. How do I protect myself when I sell my horse on terms?
There are times when horses are purchased for less than all cash. In these situations, the normal way of taking care of the shortfall is by means of a promissory note. The promissory note is the promise by one party to pay the other party money. In addition, parties want this agreement to be securitized in some way, or have the promise supported by collateral, typically it would be the horse which is the subject of the sale. Normally, this would be done through the use of what is known as a “security agreement.” That means that the purchaser of the horse consensually gives to the seller a lien against the horse to secure the seller until such time as the promissory note is fully repaid. This would also be known as a secured loan. Also, the security being granted can be “perfected” in a number of ways – the usual approach being by the filing of what is known as a UCC-1 financing statement. Most states have adopted the Uniform Commercial Code in one fashion or another, and normally the security agreement is perfected by the filing of the UCC-1 with the appropriate office of the subject state. Why is this important? It’s important because it puts a third-party on notice that you as the seller/secured party have a first priority interest in the horse before all others. That means that if the buyer subsequently tried to borrow money against the horse or sell the horse, that third-party purchaser could not claim that they were innocent and didn’t know you had an interest. This has the affect of protecting you as the original owner and seller of the horse. In short, no one can take the horse to pay off a subsequent loan or debt until you are first paid.
8. If I do a business deal with my trainer or horse broker, are there any unintended consequences?
As alluded to above, there are many occasions where trainers, jockeys, breeders, owners, or almost anyone in the horse business, get together and buy a horse, lease a horse, breed a horse, or do almost anything together. As part of that agreement they agree to share profit and loss. And, most of the time, they do not have a written agreement defining what their relationship is as between them. In these situations, if there was a problem under most state’s laws, the relationship would be deemed a general partnership. And, under most state’s laws, that would mean that each partner is 100% liable for acts and omissions of the other partners. Moreover, there would be no limit on liability to each individual partner. This comes as a shock to many people who had no idea that they were forming a general partnership when they agreed to simply share in the costs of maintaining a horse or the profits if the horse is raced. The moral of the story is use written agreements to confirm your relationship and avoid a general partnership unless that is what you truly intend the relationship to be. Therefore, when it comes to business deal, the best way to protect you is having an equine attorney to write or enforce your written agreement document.
9. Is insurance available for loss of use of the horse or in the event the horse dies?
Many people in the horse industry are familiar with full mortality insurance policies. These are policies that provide for complete payoff of the horse’s value should the horse die under acceptable circumstances. Also, many policies offer what is known as loss of use proceeds if a horse suffers a debilitating injury which prevents it from performing its primary task – for example, a show horse not able to perform its intended function. (This type of insurance is normally not available for race horses.) And, in extreme situations fertility insurance is also offered, but it is expensive and there are many exclusions which apply. There are also many people who self-insure which means that they bear the risk of loss and don’t take on insurance at all. The critical point here is that if you are going to buy a policy of full mortality or loss of use insurance for your horse, be sure to review the policy carefully and use a reputable and experienced insurance broker. These types of policies are very complicated and if a mistake is made in coverage a claim could be denied which in the hands of a more capable insurance agent would have resulted in a paid claim. Again, be careful when you are acquiring equine insurance.
10. Someone has committed “fraud” against me and I want to sue them immediately, should I?
Anybody can make the allegation that “fraud” was committed against them, but it is another thing to prove this in a courtroom. Fraud demands a very high standard of proof. In most states, fraud must be proven by clear and convincing evidence, not merely by a preponderance of the evidence. What does that mean? Clear and convincing is a much higher level of proof. It means that the proof has to be more than just having more probability than that proof which is offered against it, it must be proven very clearly that the fraud actually occurred. It is almost like a scene out of a T.V. sitcom where the witness who is accused of committing the fraud actually admits to it on the witness stand. It is a very difficult thing to prove, and it is a rare situation where a jury or a judge will find that fraud actually occurred in the absence of almost overwhelming evidence in favor of it. The reason why fraud has such a high standard is because the consequences which occur if it is proven are so severe. In most states if fraud is proven, since it is an intentional tort, punitive damages are available as an additional remedy for the wrong. And because punitive damages can have such a devastating effect against a defendant, fraud must be particularly proven.
In the contractual context, if fraud is proven, it can undue a contractual obligation or have an entire agreement set aside if the fraud relates to the inducement to enter into the contract, or the reason why you did sign the contract. Fraud can also be used as an excuse and as a ready means of avoiding all kinds of liabilities or obligations if the other party lied to you in an effort to get you to act in reliance upon what they said and by so acting it caused you detriment. For example, if you were sued by someone who sold you a horse claiming that the horse was fertile and you owed them money on a promissory note, but it later turned out that the horse was not fertile and the seller knew it, not only would you be able to defeat their lawsuit on the note, but you would also be able to recover from them your damages sustained by reason of the fact that you bought the horse in the first place. These damages could include a return of your original purchase price, pre-judgment interest on the original purchase price, costs of the lawsuit, in some states your attorney’s fees, and potentially other damages as well as punitive damages. In conclusion, though, keep in mind that fraud is very difficult to prove and even if it is raised, it would normally not be raised in isolation, that means that you might also make a claim of negligence which is much easier to prove. In any event, before any lawsuit is pursued, the party seeking to initiate the lawsuit should carefully evaluate why a fraud claim would be brought in the first instance and its likelihood of success at trial if the case doesn’t settle sooner.