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R & R Capital, LLC v. Merritt

June 9, 2009

R & R CAPITAL, LLC
v.
LYN MERRITT, ET AL.



The opinion of the court was delivered by: McLaughlin, J.

MEMORANDUM AND ORDER

This action concerns property rights in three horses. The plaintiff, R&R Capital LLC ("R&R"), entered into a business relationship with defendant Lyn Merritt to invest in real estate and horses through a number of investment partnerships. The relationship between R&R and Merritt broke down, and R&R has filed this lawsuit against Merritt and her wholly owned company Mer-Lyn Farms ("Mer-Lyn"), as well as related lawsuits in the state courts of New York, Pennsylvania, and Delaware.

The action in this Court is a limited one, concerning only the possession of three "pinhooking" horses. The horses have been referred to in this litigation by their parentage: "by Mr. Greeley, out of Splashing Wave" ("Splashing Wave"), "by Belong To Me, out of Mambo-Jambo" ("Mambo-Jambo"), and "by Pulpit, out of Lipstick" ("Lipstick/Pulpit"). R&R purchased the horses in August 2004 and left them in the care of Merritt and her wholly-owned company, defendant Mer-Lyn Farms ("Mer-Lyn"). R&R seeks replevin of Splashing Wave and Mambo-Jambo and rescission of the purchase of Lipstick/Pulpit. Merritt and MerLyn have counterclaimed for unpaid expenses incurred of caring for the three horses.*fn1

R&R's rescission and replevin claims and the defendants' counterclaim were tried to the Court in a bench trial. While the Court's decision was pending, plaintiff R&R filed a motion for contempt. The motion alleges that Merritt violated an order of this Court enjoining her from selling or otherwise disposing of the horses until the case was decided. The motion alleges that Merritt leased one of the horses, Splashing Wave, to a third-party and allowed the horse to be gelded, allegedly impairing its value. As a sanction, R&R seeks to have Merritt's counterclaim for expenses for Splashing Wave stricken and to have Merritt sanctioned in the amount of the $140,000 purchase price that R&R paid for Splashing Wave.*fn2

In opposition to the contempt motion, the defendants argue that this entire action, including the Order of this Court which Merritt has been accused of violating, has been rendered moot by an order issued in the pending New York litigation between the parties. The defendants also argue that Merritt's actions do not violate the terms of the Court's Order and were necessary and proper for the care of the horse. They also allege R&R had notice that the horse would be leased and did not object.

The Court issued a Memorandum and Order on the merits of the case on April 17, 2009. In it, the Court made findings of fact concerning all of the pending claims and entered a verdict in favor of R&R on its claim for rescission. Although the Court indicated that it would find in favor of Merritt and Mer-Lyn on their counterclaim and in favor of R&R on its replevin claim, the Court did not enter a verdict on those claims because of the pending contempt motion. Because the contempt motion sought to strike the defendants' counterclaims and suggested the R&R might no longer want possession of Splashing Wave, the Court declined to enter a final verdict on all claims until the contempt motion was decided. The defendants subsequently moved for relief from the April 17, 2009, Order under Federal Rule of Procedure 60(b).*fn3

The Court held a hearing on the motion for contempt on June 4, 2009.

The Court now decides R&R's motion for contempt. The Court will not address the defendants' argument that the motion, and this action, have been rendered moot by the New York litigation. The Court will address the mootness issue in resolving the defendants' Rule 60(b) motion, which advances the same argument, and which is not yet fully briefed. The Court finds that, even putting aside the question of mootness, R&R has not established that either Merritt or Mer-Lyn has acted in contempt of the Court's Orders.*fn4

Federal courts have the inherent power to "impose... submission to their lawful mandates" and to sanction litigants and their counsel for violation of court orders. Chambers v. NASCO, Inc., 501 U.S. 32, 43-44 (1991). To award sanctions based on a violation of a court order, the United States Court of Appeals for the Third Circuit has required that the conduct at issue must have violated a clear and specific mandate of the court, giving a fair notice of what conduct will risk contempt. Liberty Lincoln-Mercury v. Ford Motor Co., 134 F.3d 557, 568-69 (3d Cir. 1998). The conduct amounting to contempt must be established by clear and convincing evidence. Robin Woods, Inc. v. Woods, 28 F.3d 396, 399 (3d Cir. 1994).

On April 14, 2006, two days after the complaint in this action was filed, the Court issued an Order preventing the defendants from disposing of the horses at issue in the case. In pertinent part, the Order states:

Defendants Lyn Merritt and Mer-Lyn Farms are enjoined from selling or otherwise disposing of the three pinhooking horses that are the subject of this litigation until the resolution of the litigation. This Order applies to Defendants, their officers, agents, servants, employees and any persons in active concert or participation with them.

This Order does not prohibit Defendants from turning the horses over to Plaintiff. (Docket No. 4). The Order expressly states that it was entered after a telephone conference with counsel and with the consent of the parties.

At the hearing on the contempt motion, Merritt did not dispute that she leased the horse, Splashing Wave, to a third-party, Katherine McKenna. Merritt and McKenna entered a letter agreement on January 15, 2008. Def. Hearing Ex. 3. Merritt signed the letter on behalf of Pandora Farms LLC ("Pandora Farms"), the entity which Merritt has contended is the owner of the horse. Under the agreement, Pandora Farms agreed to register Splashing Wave with the Jockey Club in order to allow the horse to race. McKenna agreed to train Splashing Wave at her own expense and then race the horse. Any expenses McKenna incurred were to be paid out of Splashing Wave's winnings, with any amount left after expenses to be split equally between McKenna and Pandora Farms. The agreement stated that, if the horse were sold, McKenna would get a 10% commission.

McKenna and Merritt, acting for Pandora Farms, later entered into a lease agreement, signed May 1, 2008, but effective retroactively as of January 1, 2008, for Splashing Wave, which in the interim had been registered with the Jockey Club under the name "Wave Warrior." Def. Hearing Ex. 4. This lease for Splashing Wave had the same essential terms as the ...


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