Fraud in Horse Sales: Florida's Rule 5H and Unfair and Deceptive Acts by Equine Sellers, Agents, and Others.

• Author: Chapman, Avery S.

Florida is unique in the nation by reason of having the most comprehensive statutory and common law addressing fraud in the equine industry. Given the great economic impact of the equine industry to state and national economies, (1) several other states have attempted to address the issues of horse sale fraud, but none have gone so far as Florida in addressing and mandating certain minimum requirements for disclosures and consent during the purchase and sale of a horse.

The taking of secret profits, kickbacks, and undisclosed commissions are, unfortunately, a historic part of commercial practice in the equine industry. Undisclosed agency and compensation arrangements among owners, sellers, agents, trainers, sponsors, and other "facilitators" are common in the horse world and have normalized unfair and deceptive acts that would not be permitted in other industries. The problem is not limited to Florida, nor, indeed, the United States. In England, secret commissions are known, ironically, as "sweeteners." (2)

However, in Florida, an agricultural rule passed seven years ago has begun gaining traction with more cases being brought, and settled, in Florida courts to curtail long-entrenched deceptive practices by horse trainers, sellers, and agents. This is to say that parties injured by historic practices are starting to avail themselves of their rights. The reason? Florida law goes further than any other state in proscribing improper conduct in the purchase and sale of horses and prescribing a path toward remedies for wrongful conduct.

Florida's Rule 5H-26 (3)

With an equine population trailing only Texas and California, (4) Florida is now the third state that has enacted a law specifically imposing affirmative duties of disclosure upon the seller of a horse, as well as agents and anyone paying consideration to any party or agent to an equine sales transaction. Florida's Rule 5H is the strongest incarnation of law and rulemaking in the nation to address fraud by both misrepresentation and concealment, undisclosed dual agency, and secret profit-taking in horse sales. Other states have grappled with these issues in specific equine disciplines, such as racehorse sales, but have not developed law that is nearly as comprehensive as Florida law in mandating disclosures and consent.

In 2008, Florida joined Kentucky and California with a legislative initiative to prevent fraud and encourage honest transactions. Specifically, the Florida Department of Agriculture and Consumer Services, Division of Marketing and Development, after public hearings, promulgated Florida Agricultural Code Rule 5H-26.001 et seq. (Rule 5H). (5) The express purpose of Rule 5H "is to address unfair and deceptive trade practices surrounding the sale and purchase of horses in Florida. This rule enhances consumer protection by implementation of minimum requirements relating to the sale and purchase of horses in Florida." (6)

Rule 5H codifies the common law concerning fraud by misrepresentation, fraud by concealment, and negligent misrepresentation across all manners of equine transactions and is not limited to racehorses. That rule also imposes obligations of written disclosures and consent agreements on sellers and agents in Florida horse sales. Previously in 2007, the Kentucky Legislature had passed Kentucky Revised Statute [section]230.357, which defined dual agency in equine transactions, required a written bill of sale and full disclosure of such types of agency, and otherwise required disclosure of undisclosed payments, commissions, and similar kickback-like payments. However, that statute was limited only to the racehorse industry. (7) The limited vision of regulation of only the racehorse industry had been established, in 1994, in California wherein that state enacted California Business and Professional Code [section]19525, which required a written bill of sale, disclosure of any commission received in the purchase and sale of a racehorse, and written consent of that payment. (8)

Florida has developed equine transactions law further still, and Florida law is markedly broader in industry application than both Kentucky and California in that Florida's Rule 5H covers the sale of all horses in Florida, regardless of equine discipline or industry, and enumerates specifically and the type and number of fraudulent acts prohibited. (9) Specific requirements include minimum information on a bill of sale, which must accompany the purchase and sale transaction, (10) as well as numerous affirmative disclosures and written consents. (11)

In comparison, California's C.B.P.C. [section]19525 simply covers only a limited class of equine sales transactions: those involving racehorses and the racing industry. (12) Likewise, Kentucky's later K.R.S. [section]230.357 remains constricted to the racehorse industry as well but expanded the scope of prohibited practices and activities. Although the laws of all three states except horses purchased through auctions, (13) Florida's Rule 5H governs any type of horse without restriction as to its use or purpose. (14) In addition, and unlike California's code, which requires only a bill of sale stating the purchase price and execution by the purchaser, seller, or their agents, (15) Florida's Rule 5H requires eight distinct pieces of information, including affirmative disclosures of any warranties or representations being made or relied upon. (16) Similarly, Florida's Rule 5H goes further than Kentucky by lowering the threshold price in private sales triggering the disclosure and bill of sale requirements from $10,000 to any sale of a horse. (17) Notably, Florida's law offers a particular prescription for a remedy for violation of Rule 5H: If the violation causes actual damages, then the violation is deemed an unfair and deceptive trade practice under FDUTPA, thus, triggering the remedies available thereunder. (18) Unique among the three states, Florida is the first state to expressly provide that violation of any provision of Rule 5H, which causes actual damage is a per se unfair and deceptive trade practice. (19) Other states sometimes apply their unfair trade practice acts to equine transactions, (20) but none except Florida have specifically declared such conduct, if causing actual harm, a per se violation. (21)

In this way, a violation of Rule 5H operates as a form of strict liability for actual damages, attorneys' fees, and costs incurred by the harmed party. (22) This specific per se provision was not included in the original rule; instead, it was added in the incipient drafting of the rule during the public comment period. (23) By making a Rule 5H violation, which causes actual damage a per se Florida Deceptive and Unfair Trade Practices Act (FDUTPA) violation, a party harmed by a Rule 5H violation may immediately access the additional remedies of FDUTPA, including the recovery of reasonable attorneys' fees and costs, and injunctive and declaratory relief. (24)

This per se violation approach of Rule 5H, introduced early in the iterations of drafts of Rule 5H, reflects the legislative evolution of the equine fraud statutes of California and Kentucky from specific prohibitions and requirements in the racehorse industry to broader protections for the public consumer in any Florida equine purchase and sale transaction. Thus, Rule 5H is a natural extension of the goal of FDUTPA, which, according to the legislature, is "to protect the consuming public and legitimate business enterprises from those who engage in unfair methods of competition, or unconscionable, deceptive, or unfair acts or practices in the conduct of any trade or commerce." (25)

The cause-and-effect link created by Rule 5H to FDUTPA to rein in fraud and malfeasance in horse sales is not accidental. The Florida Supreme Court has held that FDUTPA applies to private causes of action arising from single unfair or deceptive acts in the conduct of any trade or commerce, even if it involves only a single party, a single transaction, or a single contract. An unfair practice is "one that 'offends established public policy' and one that is 'immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers.'" (26)

* Seller's Obligations Under Rule 5H--Under the robust requirements of Rule 5H, a seller in a Florida horse sale must "at a minimum": (27)

* Provide to buyer a written bill of sale, which must "accompany" the sale; (28)

* Provide a written statement in the bill of sale that seller is the lawful owner of the horse and legally entitled to convey ownership; (29)

* Obtain written consent of the buyer that the buyer is consenting to use of a dual agent; (30)

* Provide written disclosure to the buyer of any commissions...