The opinion of the court was delivered by: McLaughlin, J.
This case involves a dispute over the possession and ownership of three horses. Plaintiff R&R Capital ("R&R") is an investment company owned by Ira Russack and operated with the help of his brother Harvey Russack. R&R entered into a series of business ventures with defendant Lyn Merritt and her fiancé Leonard Pelullo. Some of these investments involved the purchase of horse farms in Chester County, Pennsylvania, and the purchase of horses.
As part of the reorganization of some of their business ventures, R&R agreed to purchase three "pinhooking" horses. The identity of the corporate entity from which R&R bought the horses is disputed. R&R contends it purchased the horses from defendant Merritt and her wholly-owned company, defendant Mer-Lyn Farms, LLC. Merritt contends R&R purchased the horses from Pandora Farms, LLC, one of the jointly-owned business ventures between Merritt and R&R. In any event, after R&R purchased the horses, the horses were left under Merritt's care and management.
Some months after the sale, the relationship between R&R and Merritt broke down. R&R filed suit against Merritt in New York state court, alleging that she and Pelullo had defrauded them and seeking an accounting of their jointly-owned businesses. R&R subsequently filed this action in this Court seeking, originally, to obtain possession of the three horses. R&R later amended its claims in this Court, continuing to seek possession of two of the horses but seeking to rescind its purchase of the third horse on the ground that Merritt had concealed the fact that the horse was suffering from laminitis at the time R&R purchased it. Merritt has asserted a counterclaim for her costs in training, caring, and feeding for the horses.
The Court held a bench trial on October 25 and 26, 2006, on R&R's claim and Merritt's counterclaim. In August 2008, R&R filed a motion for contempt alleging that Merritt had violated an order of this Court enjoining her from selling or otherwise disposing of the horses while in her possession. The motion alleges that Merritt has gelded and leased one of the horses which R&R sought to replevin. R&R filed a supplemental motion for contempt in January 2009 alleging Merritt may also have leased the other horse at issue in the replevin claim. In its motions, R&R states it no longer seeks replevin of the allegedly gelded horse and seeks sanctions awarding R&R the purchase price of both horses at issue in the replevin claims and the dismissal of Merritt's counterclaim for expenses related to them. In opposition to the motion, Merritt has suggested that this case may have been mooted by the New York litigation.
The Court will schedule a hearing on R&R's motions for contempt in a separate Order. In this Memorandum and its associated Order, the Court will address the issues raised in the bench trial. The Court will make its findings of fact and issue a verdict on R&R's claim for rescission for sale of the third horse, which is not at issue in R&R's motion for contempt. The Court will also make findings as to R&R's claim for replevin of the first two horses and Merritt's counterclaim for expenses, but will not render a verdict on those claims, pending the Court's decision on the contempt motions. To the extent Merritt wishes to argue that issues in this matter are moot, she may do so at the contempt hearing.
The Court finds for R&R on its claims for rescission of the contract of sale for the third horse. The Court finds that the party from whom R&R purchased this third horse was Merritt and that she must return the purchase price of $150,000 for this horse to R&R once R&R tenders to her ownership of the horse. On Merritt's counterclaim, the Court finds that Merritt has established that R&R is liable for $28,432.76 in expenses for the horses. On R&R's claim for replevin, the Court finds that R&R would be entitled to possession of the two horses at issue in this claim, upon satisfaction of Merritt's counterclaim.
A. Ira and Harvey Russack Meet Lyn Merritt and Leonard Pelullo and Decide to Invest
Together Ira and Harvey Russack are brothers. Both Russacks had been involved for many years in the retail apparel business in New York. In 2002, Ira Russack received several millions of dollars from an unexpected real estate deal, renting a property he owned in lower Manhattan to a company that had been displaced by the September 2001 attacks on the World Trade Center. 10/25/06 Tr. at 19-20, 162; 10/26/06 Tr. at 7, 10.
To invest his money, Ira Russack formed R&R Capital. R&R is entirely owned by Ira Russack, but is managed by Harvey Russack. Harvey Russack holds the position of managing director of R&R and takes care of day-to-day bookkeeping and other managerial responsibilities. Ira Russack signed off on all investments made by R&R. 10/25/06 Tr. at 164; 10/26/06 Tr. at 21.
In 2003, the Russacks were introduced by their cousin, Michael Blumenthal, to Lyn Merritt and Leonard Pelullo. Pelullo was a real estate developer. Blumenthal described Pelullo to the Russacks as a "real estate genius" who could provide them with "good investment opportunities" in real estate. Pelullo refers to Merritt as his fiancée; Merritt refers to Pelullo as her boyfriend. Merritt owned a litigation support business, which did document management and organization for law firms in Florida, Pennsylvania, and New York. She also, beginning in 2002, owned land in Chester County, Pennsylvania, where she lived with Pelullo and raised horses. 10/25/06 Tr. at 8-11, 14, 157, 162-63. 10/26/06 Tr. at 7; 8/11/06 Pelullo Dep. at 8-10, 14.
The first meeting between the Russacks, Merritt, and Pelullo took place in Michael Blumenthal's office in New York. Soon afterwards, the Russacks met with Pelullo and Merritt in Chester County, Pennsylvania, to discuss forming a partnership to invest in real estate. During that visit, the Russacks were introduced to the area's horse culture. After this meeting the Russacks agreed to go into business with Pelullo and Merritt. 10/25/06 Tr. at 163; 10/26/06 Tr. at 8-9, 21-22.
When Pelullo first met the Russacks in 2003, he had a criminal record. The evidence presented to the Court as to the specifics of Pelullo's convictions is confused. By his own account, at the time he was deposed in August 2006, Pelullo had been convicted of federal charges in at least two separate criminal proceedings, one in Philadelphia, Pennsylvania, and one in Newark, New Jersey. Pelullo testified that the charges for which he was convicted included criminal racketeering. Merritt testified that these charges included embezzlement and money laundering. 10/25/06 Tr. at 14-16; Pelullo 8/11/06 Dep at 10-12.
Pelullo was out of prison from January 2002 through June 2005. When Pelullo and Merritt first met the Russacks in 2003, Pelullo had been released from prison because his then-pending conviction had been set aside on habeas review and this habeas decision was itself on appeal. In 2005, the appellate court reversed the habeas decision releasing him, and Pelullo returned to prison and is expected to be released in 2016. Pelullo has consistently maintained that he is innocent of all charges against him. 10/25/06 Tr. at 16-17; 8/11/06 Pelullo Dep. at 10-12, 84.
Both Michael Blumenthal and Pelullo disclosed Pelullo's criminal record to the Russacks before they decided to go into business together. In disclosing his record, Pelullo maintained his innocence. Despite knowing of Pelullo's criminal history, Ira Russack decided to go into business with him, believing that he was innocent and trusting the judgment of his cousin, Michael Blumenthal. Ira Russack made this decision together with his brother Harvey. 10/25/06 Tr. at 104-05, 156-57; 10/26/06 Tr. at 8, 10, 22-23; 8/11/06 Pelullo Dep. at 14.
B. The Business Arrangements between R&R and Lyn Merritt
In late 2003, R&R began investing in real estate with Merritt and Pelullo. All told, R&R invested in six properties in Chester County and three properties in Philadelphia. In early 2004, R&R began investing in horses with Merritt and Pelullo. This investment in horses began after R&R invested in a 145 acre property in Brandywine, Pennsylvania. Pelullo and Merritt told the Russacks that in order to challenge an existing easement on the property and to obtain advantageous tax credits, they needed to have professional horses living on the property. 10/25/06 Tr. at 163-65; 10/26/06 Tr. at 9; 8/11/06 Pelullo Dep. at 20-21.
R&R, Merritt, and Pelullo put six horses on this property in early 2004. For the Russacks, owning horses introduced them into the horse culture of Southeastern Pennsylvania, which in addition to enjoying for its own sake, they believed offered them access to real estate opportunities. By the fourth quarter of 2004, R&R, Merritt and Pelullo had between sixty and seventy horses on several farms, including broodmares, foals, race horses, and pleasure horses. Most of the horses were jointly-owned by R&R and Merritt; a few were owned by Merritt personally. As the number of horses grew, the purchase prices for them grew more expensive, as did the associated training, transportation, and other costs. 10/25/06 Tr. at 17-18, 119-20, 207-08; 10/26/06 Tr. at 67-68.
As vehicles for their investments in horses and real estate, R&R and Merritt created a number of jointly-owned limited liability companies ("LLCs"). All of these LLCs except one are jointly owned by Merritt and R&R. The exception is owned by Merritt, R&R, and Pelullo's son. Pelullo does not have an ownership interest in any of the LLCs. 8/11/06 Pelullo Dep. at 20-21.
One of the LLCs was Pandora Farms, LLC ("Pandora Farms"). It was jointly owned by R&R and Merritt and was a vehicle for purchasing and owning horses. Capital for Pandora Farms came from both R&R and Merritt, and any payment to the LLC from either owner was usually treated as a capital contribution. 10/25/06 Tr. at 26, 105-07, 147, 209-10; 10/26/06 Tr. at 20.
Merritt is the managing member for all of the jointly-owned LLCs, including Pandora Farms. Merritt owns a management company called Mer-Lyn Farms, LLC ("Mer-Lyn") that she used to manage the LLCs. Mer-Lyn is entirely owned by Merritt and the Russacks have no ownership interest in it. Mer-Lyn handled payroll and other expenses for the LLCs and was authorized to pay expenses on their behalf. Bills incurred by the LLCs would be paid by Mer-Lyn and then later allocated to the appropriate LLC when the accounts were reconciled. 10/25/06 Tr. at 32, 38, 105-07, 147, 240; 10/20/06 Pelullo Dep. at 21.
There is a written agreement between Merritt and R&R governing Mer-Lyn's right to act on behalf of the LLCs. This agreement is in the form of a letter on Mer-Lyn's letterhead, signed by Merritt and countersigned by Ira Russack on behalf of R&R. The letter is dated December 11, 2004, approximately a year after R&R and Merritt began investing together. It states that Mer-Lyn "has been and will continue to provide services and advance funds" on behalf of the LLCs, including Pandora Farms, and specifies that Mer-Lyn can, among other actions, enter into "agreements with and pay vendors, contractors, and suppliers" and "from time to time advance funds" on behalf of the LLCs. The letter states that such services "shall be allocated and charged" to the LLCs without markup or profit. Def. Ex. 11; 10/25/06 Tr. at 240-41; 10/26/06 Tr. at 19-20.
The horses that R&R and Merritt purchased were mostly bought at auction. Merritt or Pelullo would do the bidding at these auctions. If Pelullo did the bidding, he did so on Merritt's behalf. After horses were purchased, the bills for the horses would sometimes come to Mer-Lyn. Mer-Lyn was then authorized to pay the bills, allocate the expense to the appropriate LLC, and then ask R&R to contribute to the purchase price. Although Mer-Lyn was authorized to pay bills and advance money, it was not authorized to purchase assets without R&R's approval. 10/25/06 Tr. at 18-20, 33, 107, 208, 241.
Neither of the Russacks had any substantial expertise with horses before going into business with Pelullo and Merritt. The Russacks relied on Merritt and Pelullo for advice about what horses to buy. 10/25/06 Tr. at 14, 181-82; 10/26/06 Tr. at 48, 56-58.
C. The Purchase of the Three Pinhooking Horses from FasigTipton
The three horses at issue in this suit are referred to by their parentage. The three horses are "by Pulpit, out of Lipstick" ("Lipstick/Pulpit"), "by Mr. Greeley, out of Splashing Wave" ("Splashing Wave"), and "by Belong To Me, out of MamboJambo" ("Mambo-Jambo"). These three horses were purchased as pinhooking horses. Pinhooking horses are young horses that are bought with the intention of training them and then reselling them at a later sale. The time between purchase and sale for a pinhooking horse is variable and can be between six months and a year. 10/25/06 Tr. at 20-22; 10/26/06 Tr. at 70, 91. Pl. Ex. 1-3.
The three horses were purchased in Sarasota Springs, Florida, at a sale run by Fasig-Tipton, a well-regarded auction house. Splashing Wave was purchased on August 10, 2004, and Mambo-Jambo and Lipstick/Pulpit were purchased on August 12, 2004. The horses were purchased by Pelullo, using a consultant named John Servis. Pelullo did not attend the auction and instead had Servis bid for him. 10/25/06 Tr. at 21-23, 28-29, 107; 10/20/06 Pelullo Dep. at 23-24.
Prior to the horses being purchased, Pelullo and Ira Russack had a conversation about a budget for the Fasig-Tipton auction. Ira Russack set a budget of between $500,000 and $600,000. Ira Russack and Pelullo spoke after the auction, and Pelullo told him what horses had been purchased and their cost. Russack was principally concerned with the cost, rather than the identity of the horses. 10/26/06 Tr. at 26-27; 8/11/06 Pelullo Dep. at 51; 10/20/06 Pelullo Dep. at 22-23.
Trial testimony is conflicting as to whether either of the Russacks was ever told that Pelullo was purchasing pinhooking horses at the auction or whether they were told what entity would be the purchaser. Harvey Russack testified that he did not learn that pinhooking horses had been purchased at the August 2005 auction until October 2005. Neither Pelullo nor Merritt testified that they specifically told either Russack that pinhooking horses would be purchased at the auction, although Pelullo testified that he had gone over the names of potential purchases with Ira Russack prior to the sale and told him after the sale which horses had been bought. Pelullo and Merritt both testified that the pinhooking horses were purchased for Pandora Farms, and Pelullo testified that he had specifically told Ira Russack after the sale that Pandora Farms had been the purchaser.*fn1 Both Russacks testified that they did not recall being told that the horses were purchased for Pandora Farms.
Based on this testimony, and considering the credibility of the witnesses and the demeanor of those who testified at trial, the Court finds that the Russacks were not told at the time of the August 2004 auction that Pelullo was purchasing pinhooking horses. The Court finds that the Russacks were told that the horses to be purchased at the auction were to be allocated to Pandora Farms. 10/25/06 Tr. at 166-67, 212-213; 10/26/06 Tr. at 26-27; 8/11/06 Pelullo Dep. at 34, 51.
The ownership papers for each of the three pinhooking horses consist of a Jockey Club "certificate of foal registration." The certificate is required in order to sell or race a thoroughbred. A section of the certificate records any transfer of ownership, and a purchaser ordinarily receives the certificate after paying for the horse. On each of the Jockey Club certificates for the three pinhooking horses, the identity of the owner to whom the horse is being transferred is written as "Linda Merritt." Merritt contends that her name appears on the certificate in error and that the owner should have been listed as Pandora Farms. Pl. Ex. 1-3; 10/25/06 Tr. at 23-26, 29.
The purchase price for Splashing Wave, excluding miscellaneous fees, was $140,000. The purchase price excluding fees was $227,000 for Mambo-Jambo and $150,000 for Lipstick/Pulpit. Pl. Ex. 5, 7; 10/25/06 Tr. at 59-60, 176.
Invoices from Fasig-Tipton were introduced into evidence for Splashing Wave and Mambo-Jambo. These invoices were dated August 14, 2004, and were addressed to Linda Merritt at Pandora Farms. No invoice was introduced into evidence for Lipstick/Pulpit.*fn2 Although Fasig-Tipton sent invoices for Splashing Wave and Mambo-Jambo in August, these invoices were not paid until October. The checks to Fasig-Tipton paying the invoices for Splashing Wave and Mambo-Jambo were dated October 12, 2004, signed by Lyn Merritt, and drawn on the account of MerLyn Farms. Pl. Ex. 5-8; 10/25/06 Tr. at 30-32.
Although Fasig-Tipton was not paid for Splashing Wave until October 2004, on August, 23, 2004, Merritt sent an email to Harvey Russack itemizing expenses incurred by Pandora Farms and requesting that R&R pay half the amount listed. One of the expenses is $140,000 for "Fasig-Tipton," which Merritt testified referred to the purchase price for Splashing Wave. Harvey Russack prepared a wire transfer request for Ira Russack's approval, and on August 24, 2004, Ira Russack authorized a wire transfer from R&R in the requested amount to Pandora Farms. This amount included $70,000 as half the purchase price of Splashing Wave. Pl. Ex. 75, 76; 10/25/06 Tr. at 63-64.
The purchase price for Lipstick/Pulpit was paid by a wire transfer from R&R directly to Fasig-Tipton on October 20, 2004. R&R's payment for Lipstick/Pulpit was part of R&R's purchase of all three pinhooking horses, discussed below. Pl. Ex. 11; 10/25/06 Tr. at 59-60.
D. Lipstick/Pulpit's Condition After Purchase
Lipstick/Pulpit was purchased from Fasig-Tipton on August 12, 2004, and delivered by van. Before being transported, Lipstick/Pulpit and the other horses purchased were checked by a veterinarian and found to be in good health. Shortly after Lipstick/Pulpit was delivered from Fasig-Tipton, Merritt's employees noticed that she was lame. Lipstick/Pulpit was rested overnight, but the next day her condition had not improved. Pelullo called a veterinarian, Dr. Reid, to examine the horse. He diagnosed Lipstick/Pulpit as suffering from "laminitis," also referred to as "foundering." Laminitis is a rotation of the coffin bone in the foot of a horse, which causes severe pain and can eventually puncture the sole of the foot. Pelullo asked Dr. Reid to prepare a report. Pelullo anticipated that the report might be sent to Fasig-Tipton to put them on notice of problems with the horse. 10/25/06 Tr. at 39-40; 10/26/06 Tr. at 71-72; 8/11/06 Pelullo Dep. at 112, 126-27.
On August 15, 2004, Merritt drafted an email to FasigTipton, stating that she was "rejecting the purchase" of Lipstick/Pulpit and that a veterinarian report would follow. This email, which identified Merritt as a representative of Pandora Farms, was misaddressed and was not received by FasigTipton. On August 23, 2004, Merritt sent Fasig-Tipton an overnight letter on Pandora Farms letterhead, again stating that she was rejecting the purchase of Lipstick/Pulpit and enclosing an August 18, 2004, letter from Dr. Reid describing Lipstick/Pulpit's condition. Pl. Ex. 12; 10/25/06 Tr. at 39, 51-52.
Dr. Reid's August 18, 2004, letter, addressed "to whom it may concern," said that, upon examination, Lipstick/Pulpit was "markedly lame in both forelimbs with the right worse than the left" but otherwise appeared in good health. The letter says Dr. Reid ordered radiographs of the horse's front feet which showed slight downward rotation of the coffin bone of the left front foot, "more noticeable rotation" of the coffin bone in the right front foot, and other findings "consistent with the diagnosis of Laminitis." The letter said the "change in the right foot also suggests the Laminitis is chronic." The letter concluded that "due to the age of the filly, degree of lameness and significant radiographic changes I feel this filly has a poor prognosis for racing and a guarded prognosis as a brood mare." Pl. Ex. 13.
A representative of Fasig-Tipton replied to Merritt's letter and Dr. Reid's report in a letter of August 26, 2004, addressed to Pelullo. In this letter, Fasig-Tipton noted that there were strict time limits for lodging objections to purchases at their sales and that Lipstick/Pulpit was examined on Pelullo's behalf by a veterinarian after purchase. Fasig-Tipton says it has spoken with the original owner of the horse and the original owner's veterinarian who said the horse was not lame before the sale and questioned Dr. Reid's suggestion that the horse's laminitis is chronic. The letter concludes by suggesting that Lipstick/Pulpit may have suffered from the rapid onset of laminitis after the sale and that Fasig-Tipton regards the sale of Lipstick/Pulpit as final and expects payment in full. Pl. Ex. 15.
After Dr. Reid examined Lipstick/Pulpit in August 2004, he prescribed anti-inflammatory drugs and rest to see if the horse would recover. Lipstick/Pulpit was kept on "stall rest" for August, September, and the first part of October 2004, meaning she was kept in her stall and not exercised. On October 8, 2004, Lipstick/Pulpit was examined by veterinarians at the New Bolton Center of the University of Pennsylvania School of Veterinary Medicine. These New Bolton veterinarians sent a letter to Dr. Reid dated October 12, 2004, reporting on their examination. The letter stated that radiographs of Lipstick/Pulpit's front feet revealed mild rotation of her front right foot and possible rotation of her left forelimb. The letter concluded that Lipstick/Pulpit should continue to wear glue-on shoes and her feet should be trimmed every four weeks. Once trimming had "returned the alignment of the distal phalanx with the dorsal hoof wall and she is sound she may gradually be introduced to controlled exercise." Pl. Ex. 16; 10/25/06 Tr. at 54-55; 10/26/06 Tr. at 75-78.
Lipstick/Pulpit remained stall-bound through November 2004. In December 2004, the horse was again examined at New Bolton. The December 15, 2004, letter from the New Bolton veterinarians to Dr. Reid states that radiographs of Lipstick/Pulpit's front feet indicate that the hoof balance of both feet is "remarkably improved" and that she had no evidence of rotation in the left front foot and 4 degrees of rotation in the right front foot. The letter concluded that, "[i]f she is sound after her next foot trimming she may have shoes placed and be introduced to controlled exercise." Pl. Ex. 17; 10/26/06 Tr. at 79-80.
After the December 2004 examination, Lipstick/Pulpit was released from stall rest and allowed to be loose for 30-40 minutes a day in a sand paddock that reduced the chance of her re-injuring her feet. By early January 2005, Lipstick/Pulpit had sufficiently recovered that she was able to be sent to Florida to be trained. By the spring of 2005, Lipstick/Pulpit was sufficiently recovered ...