Anne M. Eberhardt

Judge Orders ClassicStar Liquidation

The order converts ClassicStar bankruptcy to Chapter 7 liquidation.

A federal bankruptcy judge has signed an order to convert the Chapter 11 business reorganization of ClassicStar LLC to Chapter 7 liquidation, paving the way for creditors to pursue whatever assets they can find linked to the former broodmare-lease operator.

Judge William S. Howard signed the order April 14 following an April 10 hearing at the U.S. Bankruptcy Court Eastern District of Kentucky in Lexington. The U.S. Trustees Office had filed the motion in March, claiming ClassicStar had liquidated nearly all of its “hard” assets prior to filing for Chapter 11 protection last September.

The unsecured creditors’ committee, which represents more than 200 individuals and entities with claims approaching $1.4 billion in the action, had supported the motion, and now intends to elect a Chapter 7 trustee to pursue recovery action against ClassicStar.

“That person will pursue any claims the estate has, and also try to recover any estate has for the benefit of creditors,” said Elizabeth L. Thompson, an attorney with the Stites & Harbison law firm in Lexington who represents the committee.

ClassicStar, which is accused in multiple civil lawsuits of bilking hundreds of mostly new Thoroughbred investors out of up to $600 million in fraudulent business dealings, claimed in an objection to the conversion motion that it could continue to fund the Chapter 11 proceedings by selling an interest in a stallion share of Speightstown . The stallion interest, which ClassicStar values at $600,000, could have been sold, the debtor said, and Fifth Third Bank, which holds a lien on the interest, would have released half of the proceeds, the filing claimed.

“But the unsecured creditors committee felt this might just be another stalling tactic on part of the debtor, and felt that it was time for a conversion,” said Thompson of the committee, which is dominated by plaintiffs in the civil action. “They felt it was time for the estate’s claims to be pursued for the benefit of the creditors.”

ClassicStar in its objection filed April 9 said it had been “thwarted” from filing timely financial reports in the bankruptcy action due to the “specter of prosecution” by the U.S. Department of Justice in a related criminal investigation.

The company claimed it could no longer find anyone to serve as an authorized representative because the DOJ informed a previous appointee it might consider the signing of further documents as an act of bankruptcy fraud.

“This is not a situation in which the debtor does not want to act, or is simply refusing to act,” the objection pleading said. “In short, the debtor wants to finish out what it set out in good faith to do…bring a fair and orderly closure to its business in the best interest of its creditors.”

ClassicStar has been ordered by the court to turn over to the trustee all business and bank records for the six months prior to its filing for bankruptcy, as well as deed records, title papers, and certificates of stocks, among other items, according to a related order.

ClassicStar claims it has as part of its estate a $225-million debt owed by National Equine Lending Co., the finance entity allegedly involved in the fraud scheme. NELC, which is alleged by plaintiffs to be run by the brother-in-law of former ClassicStar principal S. David Plummer, is a defendant in some of the civil actions now being heard collectively in a Lexington federal court.

Plummer, who is at odds with current ClassicStar management over fault in the downfall of the lease operation, filed a notice April 9 in bankruptcy court claiming $160,328 had been awarded to ClassicStar from the 2007 Kentucky Thoroughbred Breeders’ Incentive Fund.

“Given that the debtor was the breeder of hundreds of foals…during its time of operations, and has been identified as the breeder of foals born this year, its right to payment from the fund will continue for a number of years to come,” the notice claimed.

Among the ClassicStar-bred horses that won races in 2007 are Astronomer Royal, winner of the Poule d'Essai des Poulains-French Two Thousand Guineas (Fr-I); grade II winners Bear Now and Burmilla; and grade III winner Desert Code.