Updated: Jul 7, 2020
This post should not be construed as legal advice
Above this post is a photo (courtesy of the American Akaushi Association’s website) of Akaushi breed of cattle, a brand indigenous to Japan and utilized to produce Kobe beef. This post represents an odd issue: what if a contract dispute involved a breed of livestock controlled by one company? How does one put market value on those livestock when comparable sales do not exist? That is exactly what a recent U.S. District Court Southern District of Texas opinion involving the above cattle breed deals with in Bear Ranch, LLC v. HeartBrand Beef, Inc.
In the 1990s, HeartBrand Beef acquired and imported the cattle from Japan (under a provision in a trade agreement that has since been closed). HeartBrand sells some of the cattle to third parties under agreements restricting the sale of the cattle without HeartBrand’s permission, requiring registration of all offspring with the American Akaushi Association, and preventing collection and selling of semen from any cattle purchased or their offspring.
Bear Ranch bought some Askaushi cattle under the trade agreement and some cattle on a handshake deal with HeartBrand. Eventually, the business relationship soured; Bear Ranch filed a lawsuit and HeartBrand* filed a countersuit. A jury trial found for HeartBrand on counterclaims that Bear Ranch fraudulently induced HeartBrand to approve a purchase and Bear Ranch had failed to comply with the original sales agreement.
In the jury verdict, the jury awarded HeartBrand $23 million in damages for unjust enrichment. Unjust enrichment is a contract principle that one party should not be allowed to profit at the expense of another person. The federal district court, in reviewing the jury verdict, found the $23 million in damages for unjust enrichment may overvalue the unjust enrichment and at the same time may undervalue the unjust enrichment because no true market existed for these cattle. Because of the speculative nature of the values, the district court judge opted for an asset-based remedy through a constructive trust.
A constructive trust is an equitable remedy used by courts when one party has a better claim to property held by a person with legal title to the property. For example, Bob Bookkeeper embezzles money from Green Acre Farms and uses the embezzled cash to purchase a vacation home. A court could impose a constructive trust on the vacation home. Bob would have to convey title of the home to Green Acre. The constructive trust allows Green Acre to recover the money lost from the embezzlement.
With the constructive trust here, Bear Ranch would hold the cattle bought on the handshake deal till HeartBrand demanded their return and paid for the acquisition (these cattle were bought from another ranch), production, and maintenance costs. To the judge, this seemed like a fair solution for a product with no true market existing. In this case, the constructive trust allows HeartBrand to maintain title to the cattle, but allows Bear Ranch to be paid for any increases in value and other costs associated with the cattle (feed, vaccines, etc).
The trial court also issued an injunction for any additional Askaushi owned by Bear Ranch to follow the terms of the original contract. This would include all the cattle not covered under the constructive trust.
The real take away point is, when involved in a contract dispute involving claims that one party was unjustly enriched by the other party, courts will have options to make the one party whole again. Typically this could be through awarding monetary damages, but this case highlights a view the court may take in trying to place value on that unjust enrichment. Experts will be needed to help find the value of that unjust enrichment.
Honestly the situation in this case is very unique. The Askaushi cattle are unique (at least in the United States), where one group controls genetics. The court found it hard to place a value on the cattle due to the lack of comparable sales to determine the value of unjust enrichment that Bear Ranch had received. Now, imagine Bear Ranch and HeartBrand were dealing in Herefords, Angus, Jerseys, or any other common breed of cattle. Comparable sales of those cattle will be much easier to establish the unjust enrichment.
But if we are dealing with something unique like Askaushi cattle, then a constructive trust may be acceptable in the case of unjust enrichment. The other thing that “helped” in this case was that Bear Ranch had sold none of the held cattle. Had Bear Ranch sold some of those cattle, it would have showed the real value of the unjust enrichment and potentially limited the need for a constructive trust.
Bear in mind that these remedies will not apply in every case. This post just scratches the surface of contract remedies. Stay tuned for more remedies discussion in the future.
*For those interested in reading the details of the business relationship, I will send you a copy of the opinion.
Bear Ranch, LLC v. HeartBrand Beef, Inc., Civ. No. 6:12-CV-00014, 2015 WL 5178120 (S.D. Tex. Sept. 4, 2015).