A motion has been filed in a Kentucky federal court asking to convert the bankruptcy protection of former broodmare lease operator ClassicStar LLC from Chapter 11 business reorganization to Chapter 7 liquidation.
The U.S. Trustees office claims in the motion that ClassicStar had liquidated virtually all of its “hard” assets prior to filing for bankruptcy in September 2007, and saw an “absence of a reasonable likelihood of rehabilitation,” according to documents filed in March in the U.S. Bankruptcy Court, Eastern District of Kentucky in Lexington.
“Creditors and the United States Trustee do not know what the debtor’s current financial situation is,” the motion said. “Arguably, there is no one ‘watching the store.’ "
Claims by more than 200 creditors total close to $1.4 billion in the bankruptcy action.
ClassicStar and others are separately facing multiple civil lawsuits originated in several states, at least 18 of which have been consolidated into one case in Kentucky federal court. According to allegations made in various court filings, ClassicStar and other defendants defrauded clients out of up to $600 million in investments.
Plaintiffs claim the alleged fraud was performed by overselling interests in mare-lease packages that also failed to produce promised significant tax breaks to clients, investors who were largely new to the racing and breeding game. Some defendants are also accused of swapping out price-inflated Quarter Horse matings for Thoroughbred matings, and for exchanging mare programs for energy company stock investments that never came to fruition.
In addition to original ClassicStar principals Tony Ferguson and the father-and-son team of David and Spencer Plummer, a combined group of 30-plus defendants include a finance company allegedly affiliated with the Plummers, as well as various individuals and entities involved in financial planning and accounting firms, among others, who allegedly advised various plaintiffs.
The creditors’ committee in the bankruptcy action, which includes several plaintiffs in the civil litigation, has joined the motion for conversion to Chapter 7.
“It really doesn’t have a business to reorganize,” said Elizabeth Lee Thompson, a Lexington attorney representing the creditor’s committee. “The best hope for recovery is to pursue those claims through Chapter 7, or through the civil litigation.”
Attorneys representing ClassicStar in the bankruptcy action did not return calls seeking comment. Ferguson and the Plummer camp have repeatedly denied participation in alleged fraudulent activities in previous interviews and court filings, and blame each other for ClassicStar’s troubles in related cross-claims in the civil litigation.
Some of the defendants are subjects of a related federal criminal investigation by the Internal Revenue Service and the U.S. Attorney’s Office in Oregon. Armed with a search warrant, agents affiliated with the IRS in February 2006 took business records and related subject matter at the former ClassicStar farm property located near Versailles, Ky.
The farm property was sold for a combined $8.6 million in two transactions a few months prior to ClassicStar’s declaration of bankruptcy in September 2007. One section was sold to a limited liability company affiliated with Tampa businessman John Sykes, who relocated his Cloverleaf Farms II operation from Florida to the property and renamed it Woodford Thoroughbreds. The other parcel was sold to a limited liability partnership affiliated with Ferguson.
From 1999 through early 2005, about 100 broodmares were purchased at public auction by David Plummer or ClassicStar affiliates for a combined total of more than $51 million. Many of them were used in the lease programs.
Some broodmares were later sold at auction or privately, and 65 were auctioned for nearly $21 million combined in a dispersal held at the 2006 Fasig-Tipton Kentucky November mixed sale. A court order signed by U.S. District Court Judge Joe Hood, who is now overseeing the combined federal lawsuit being heard in Lexington, cleared the way for that dispersal, allowing the sale proceeds to be extended to secured creditors such as Fifth Third Bank and Fasig-Tipton, which had previously extended mortgages totaling $14 million on the former ClassicStar farm property.
Some other broodmares not previously sold were apparently acquired by Woodford Thoroughbreds at some point in 2007. At least 11 broodmares most recently affiliated with ClassicStar have produced 2008 foals bred in the name of the Kentucky operation, including a Storm Cat filly out of the Mr. Prospector mare Bless, who was purchased for $4 million by ClassicStar at the 2002 Keeneland November breeding stock sale.