Secret Commissions Revisited

In September 2005, Jess Jackson filed a lawsuit that reverberated throughout the Thoroughbred racing world. Jackson, the late attorney and billionaire founder of Kendall- Jackson Wines, sued three of his former Thoroughbred racing industry advisors, alleging fraud, breach of fiduciary duty and unjust enrichment in connection with horse sales. Since 2003, Jackson had invested heavily in Thoroughbred bloodstock and Kentucky horse farms. The suit alleges that bloodstock agents and others Jackson hired to act on his behalf lined their pockets at Jackson’s expense by inflating the prices of horses sold to Jackson and accepting secret commissions from third parties. As of June 2006, the suit was currently pending.

At the same time, Jackson refused to accept insiders’ advice that secret commissions and dual agency are “just the way the industry works” and lobbied for change. Jackson’s lobbying efforts led to the passage of a Kentucky law designed to decrease fraud in horse sales. In March 2006, Kentucky Governor Ernie Fletcher signed House Bill 446, which applies to sales of horses used for racing or showing, including young prospects and breeding stock. Penalties for violating the law include treble damages and recovery of costs and attorneys’ fees.

Key Provisions of the Law

1. Each sale, purchase or transfer must be accompanied by a written bill of sale that includes the purchase price and is signed by the buyer and seller.
2. It is unlawful for an agent to represent both the buyer and the seller in a transaction unless the agent discloses the dual representation in advance in writing, and both buyer and seller agree to the dual agency in writing. If an agent represents both the buyer and the seller, buyer and seller can request copies of all financial records relating to the transaction.
3. It is unlawful for an agent to accept payment or any item of value worth more than $500 from anyone other than his principal unless (a) the agent and the person making the payment disclose the compensation in writing to both the buyer and the seller AND (b) the agent’s principal consents in writing to the payment.

There is one important exception to the new law: Show horse transactions of less than $10,000 are not covered.

How This Law Affects You

’Even if you are not a Kentucky resident, this new law will apply to you if:

You buy a horse in Kentucky.

Example: You are a New Jersey resident. You hire a bloodstock agent, who advises you to purchase a certain Thoroughbred yearling at the Keeneland sale. You are entitled to a receipt from the auction house showing the purchase price. Your bloodstock agent cannot represent any other party in the transaction unless the agent has advised you in writing in advance of the sale and you have agreed in writing. Your agent also cannot accept compensation of more than $500 from anyone other than you in connection with the sale unless the agent discloses it in writing and you agree.

You sell a horse in Kentucky.

Example: You are a New York resident. Your trainer advises you to sell several of your 2-year-olds by consigning them to the Keeneland sale. Your trainer cannot represent any other party in the transaction unless your trainer has advised you in writing in advance of the sale and you have agreed in writing. Your trainer also cannot accept compensation of more than $500 from anyone other than you in connection with the sale unless your trainer discloses it in writing and you agree.

You buy a horse from a Kentucky resident.

Example: You are an Ohio resident purchasing a Quarter Horse cutting stallion from a seller in Kentucky. Your trainer is assisting you with the sale and negotiates a purchase price of $12,500 on your behalf. You are entitled to receive a written bill of sale signed by the seller (not just your trainer) that includes the purchase price, and your trainer cannot accept any compensation of $500 or more from anyone other than you in connection with the sale unless he or she discloses it to you in writing and you agree in writing.

You sell a horse to a Kentucky resident.

Example: You are a Maryland resident selling a Thoroughbred racing broodmare. You advertise the horse on the internet, and a Kentucky resident agrees to purchase the mare for $6,500. You must provide the purchaser with a bill of sale signed by you that includes the purchase price. Even though the mare is only $6,500, the exception for transactions that are $10,000 or less only apply to show horses.

You are an agent in the sale of a horse to a Kentucky resident.

Example: You are a Tennessee Walking Horse trainer residing in Tennessee. A client consigns a horse to you to sell. Another trainer, a Virginia resident, negotiates the purchase of the horse for $22,500 for her client, a Kentucky resident. You must provide the buyer with a written bill of sale signed by your client that includes the $22,500 purchase price. Your own signature on the bill of sale would be insufficient — your client’s signature is necessary.

You are an agent in the purchase of a horse by a Kentucky resident.

Example: You are a reining trainer residing in West Virginia, and you have a client who resides in Kentucky. Your client wishes to purchase a Paint stallion from an owner in North Carolina. You arrange the purchase for $31,000 from the North Carolina owner’s trainer. Your client is entitled to receive a bill of sale for $31,000 signed by the North Carolina owner (not just the North Carolina owner’s trainer). You cannot accept any compensation of $500 or more from anyone in the transaction other than your client unless you disclose it in writing and your client agrees in writing.

So, even if you have never visited Kentucky, this law might have an effect upon you and the manner in which you conduct your business. You might wish to utilize the Equine Sales Agent Commission Agreement form offered by Equine Legal Solutions.

Exceptions

Even if your transaction involves a Kentucky resident, the law will not apply to you if:

• You are selling a show horse for less than $10,000.
• You are buying a show horse for less than $10,000.
• You are an agent in a sale of a show horse for less than $10,000.

Resources

Full text of bill and legislative history: http://www.lrc.ky.gov/record/06RS/HB446.htm