Report: Kentucky Supreme Court Hears Case to Recoup Money from Zayat Asset Sales

In effort to recoup money from the buyers of horses and bloodstock interests from the financially embattled Zayat Stables, the New York-based lender MGG Investments has taken its case to the Kentucky Supreme Court. Dick Downey of The Blood-Horse first broke the story.

“The Kentucky Supreme Court heard oral arguments Feb. 8 pitting MGG, a lender of millions of dollars to Zayat Stables, against buyers of some of the now-defunct Zayat operation's Thoroughbreds and breeding interests. The parties landed in court when money generated by purchases did not turn up in the hands of the lender, even though it held liens on the assets,” Downey reported.

“After the Zayat loan lapsed into default in early 2020, MGG obtained in Fayette Circuit Court in Lexington an uncontested judgment of more than $24 million. Ahmed Zayat and Zayat Stables subsequently took shelter in bankruptcy court, where MGG filed several adversary proceedings based on allegations of fraud and other misconduct. Those claims were eventually settled for substantial sums, but sums well short of the defaulted obligation,” Downey reported.

According to court records cited by Downey in his Blood-Horse story, the sales included “breeding rights to American Pharoah to LNJ Foxwoods and Orpendale, breeding rights in stakes-winning mare Lemoona to Flintshire Farm and Brad Sears, and horses El Kabeir to Yeomanstown Stud, American Cleopatra  to Hill 'n' Dale, and a 50% interest in Solomini to McMahon Thoroughbreds.”

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New Court Filings in Zayat Bankruptcy Proceedings

The trustee overseeing owner, breeder Ahmed Zayat's personal bankruptcy proceedings made several court filings Tuesday to recover roughly $90,000 in allegedly fraudulent payments to various law firms.

According to the court filings, Zayat was insolvent at the time the transfers were made, and therefore, the law firms who are the defendants in the suits received more than they would have done through the Chapter 7 bankruptcy proceedings “had the Transfer[s] not been made.”

Trustee Donald Biase alleges in his court filings that the largest transfer of money Zayat fraudulently made was $42,812.32 to Rabinowitz, Lubetkin and Tully.

Zayat also made separate $20,000 payments to law firms Landrum & Shouse and Lavely & Singer respectively, and another $7,500 to Becker & Poliakoff, the suits allege.

Biase suggests that the monies stipulated might not be the total amounts Zayat allegedly paid to each company, his attorney writing in all filings that Biase is seeking to recover both the stipulated transfers “and such other Transfers that may be unknown to the Trustee.”

TDN reached out via email to each of the law firms listed as defendants in the filings but didn't hear back from any before deadline.

When reached by phone Tuesday, Zayat declined to comment.

This latest round of legal crossfire constitutes just the latest twist in a long, complicated and often-times convoluted war of financial attrition, as creditors have sought to reclaim millions from Zayat and his now-disbanded Thoroughbred racing and breeding stable, one most famously attached to 2015 Triple Crown winner American Pharoah.

In his own Chapter 7 filing in 2020, Zayat admitted to owing some $19 million to 132 non-secured creditors, the majority of whom consisted of Thoroughbred trainers, horse farms, bloodstock businesses, veterinarians, and equine transportation companies.

Towards the end of last month it appeared as though events had drawn to a close with the approval of two settlement plans in separate bankruptcy cases. Neither settlement delivered significant compensation to these 132 non-secured creditors though.

In Zayat's personal bankruptcy case, the trustee in June negotiated a $1.5 million settlement to be paid by the debtor's brother, Sherif Zayat, one which allows Zayat and his family to continue to live in an eight-bedroom, 7,714-square-foot home in Teaneck, New Jersey, that is currently assessed at $2.6 million.

In July, the court-appointed trustee in the involuntary bankruptcy case negotiated a settlement in which Zayat and his family members divvy up $5 million between MGG Investment Group and the trustee.

MGG is the lender that alleged in a 2020 lawsuit that Zayat and his family members fraudulently obtained $30 million in loans, then never repaid a large chunk of that debt.

Of that Zayat Stables settlement, only $30,000 was earmarked for the unsecured creditors who are legally much further down the payment ladder of priority.

In each of the court documents filed Tuesday, Biase seeks judgment against the defendants “for the avoidance and recovery” of the amounts allegedly transferred, for the defendants “to immediately pay to the Trustee the sums owed,” the interest owed and costs of suit, and “for such further relief as the Court may allow.”

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Proposed $5M Zayat Settlement Gives Only $30K to ‘Unsecured’ Claimants

The court-appointed trustee in the nearly two-year-old Zayat Stables involuntary bankruptcy case is proposing a settlement in which Ahmed Zayat and his family members would pay $5 million to be allocated between MGG Investment Group and the trustee.

Of that amount, only $30,000 is earmarked to eventually go to “unsecured creditors,” some of whom are Thoroughbred industry participants owed money by Zayat Stables and are much further down the legal pecking order for otherwise getting repaid.

MGG will also get a disbursement from the funds in the bankruptcy trustee's account amounting to $1,025,145.

In return, MGG–the lender that alleged Zayat and his family members obtained a $24 million loan by fraud in 2016 then never repaid it–will issue a “waiver” giving up any further pursuit of the total $27.1 million total amount it had been seeking as a secured creditor.

MGG has also agreed to return $452,500 of the settlement money it gets from the “Zayat Parties” to the trustee, which will provide for the above-mentioned $30,000 “carve-out” that gets set aside to pay unsecured creditors.

The trustee will then be permitted to use $185,981 of that MGG payment to cover “administrative obligations” that the estate has incurred.

“[E]ntry into the Settlement Agreement serves the paramount interest of the creditors of the Debtor's estate,” trustee Jeffrey Testa wrote in a July 26 series of documents filed in United States Bankruptcy Court (District of New Jersey). “Resolution of the claims by and between the Chapter 7 Trustee MGG and the Zayat Parties through the Settlement Agreement represents a successful outcome for the Debtor's creditors.”

Not every creditor is going to agree with the trustee on that “successful outcome” statement.

Drew Mollica, the attorney for New York-based trainer Rudy Rodriguez, told TDN in a phone interview that his client has an unsecured claim of $397,000, and the $30,000 set aside for all unsecured claimants amounts only to a “drop in the bucket” for what Rodriguez is owed.

“Although I don't know all of the details and I'm going to reach out to the trustee, it seems the only carve-out for anybody but MGG is $30,000, Mollica said. “And all of the other unsecured claimants are in the same boat.”

It's important to note that this involuntary bankruptcy petition involving Zayat Stables is different from the Chapter 7 personal bankruptcy claim that the allegedly impoverished breeder and owner of Triple Crown champ American Pharoah initiated Sept. 8, 2020, when he claimed to own just $300 in cash and $14.22 in two checking accounts.

Six days later, on Sept. 14, 2020, an involuntary bankruptcy petition led by Zayat's former financial advisor was initiated against Zayat's family racing business.

Involuntary bankruptcy proceedings are relatively uncommon in United States courts. They are designed to protect creditors, not debtors, and are often filed against companies (as opposed to individuals) as an attempt to get paid when it is believed that a firm is rapidly burning through assets and/or financial malfeasance is alleged.

The trustee could have elected to keep battling MGG to try and whittle down the sought-after $27.1 million. But Testa explained in court documents that the proceedings had reached a point where resistance equated to a losing proposition for the estate.

“Litigation against MGG would involve sufficiently complex legal and factual issues, particularly regarding the substance of complex loan documents and the establishment of lender liability, which would require protracted hard-fought and arduous litigation and significant expert costs,” Testa wrote.

“In addition, as a result of MGG's properly-perfected status and outstanding amounts owed to it, the Chapter 7 Trustee has no encumbered funds to fight such a taxing battle,” Testa wrote.

“As to the Zayat Parties, litigation against them would be equally challenging, demanding, complex, and come at significant additional cost and delay,” Testa wrote. “In addition, based on the litigious history of this proceeding, any judgment obtained would almost certainly be subject to an appeal.

“The Settlement Agreement avoids these obstacles in favor of a prompt and efficient resolution without the need to expend further estate resources,” Testa wrote.

Other family members of Ahmed Zayat (identified in court documents as his wife, Joanne; four children, Justin, Ashley, Benjamin and Emma, plus a brother, Sherif) are on the hook for contributing to the $5-million settlement payment because, Testa wrote, “The Zayat Parties strenuously asserted that to their detriment they provided funds to Zayat Stables in an effort to keep the entity operating [by contributing] approximately $2.5 million more to Zayat Stables than the transfers they had received from Zayat Stables.”

The proposed settlement agreement even includes a section related to who gets the trophies and other racing mementos that the trustee has been storing since their seizure from the under-receivership Zayat Stables offices.

“Zayat and several of the Zayat Parties objected to the removal of the Memorabilia based upon the position that the Memorabilia were not estate property,” Testa wrote.

The trustee added that he now considers that property “abandoned,” which likely means that Zayat can reclaim it.

“So it looks like he keeps the trophies, and the horsemen who earned the trophies get nothing,” Mollica said.

The next step in the process is for the court to approve the settlement. If other parties file an objection by Aug. 16, then an Aug. 23 hearing will take place to hear the objection(s). If no one objects, the court will enter a notice of “no objection” and the settlement will be completed as proposed.

Asked if he would be objecting on behalf of Rodriguez, Mollica said, “I'll know more after I reach out to the trustee. I'll reserve my right.”

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$1.5m Zayat Settlement to Make Small Dent in Overall $19m Debt

The trustee in Ahmed Zayat's personal bankruptcy case has negotiated a $1.5-million settlement to be paid by the debtor's brother, Sherif Zayat, that a court document stated will “resolve all claims and causes of action” related to the multiple mortgages on Zayat's home.

The motion for approval of that settlement, if so ordered by a judge in a New Jersey federal bankruptcy court July 6, doesn't mean the end to the complicated, now 21-month-long Chapter 7 petition by the allegedly insolvent former Thoroughbred owner and breeder.

But it does mean some of that $1.5 million might trickle down to creditors once the case gets fully settled.

As an attorney for trustee Donald Biase put it in his June 6 court filing, the settlement will “provide a benefit for the Debtor's estate, which was otherwise uncertain.”

The settlement documents were filed exactly seven years and one day after Zayat's superstar homebred American Pharoah swept the 2015 Triple Crown.

The $19-million debt question for Thoroughbred trainers, horse farms, bloodstock businesses, veterinarians, and equine transportation companies who are among the 132 entities listed as non-secured creditors still hasn't changed much.

That's because the money owed to them is in the form of “non-priority unsecured claims,” which puts those people and businesses far down in the pecking order for repayment of Zayat's debts.

Under Chapter 7 bankruptcy laws, non-priority unsecured claims are at the bottom of the hierarchy to get paid–if they get paid at all–once a trustee liquidates assets and discharge debts. They get ranked behind “secured” loans in which property is pledged as collateral, like with liens and mortgages.

The June 6 filing stated that there are five known first-, second- and third-mortgage loans secured by Zayat's 7,714-square-foot home and two adjacent lots in Teaneck, New Jersey.

However, the same document stated that three of those mortgages–which were made by friends and family members and not lending institutions or banks–would be considered by the trustee as “avoidable transfers,” which means that they can be canceled and the proceeds returned to the estate for distribution to creditors. Avoidable transfers can also lead to fraud charges.

One of those property-secured loans that Biase wrote was “avoidable” was for $500,000 from the Egypt-based Sherif Zayat.

That loan was recorded as a mortgage with a New Jersey county clerk Sept. 2, 2020–six days before Ahmed Zayat filed for Chapter 7 bankruptcy protection while claiming that he had only $300 in cash and $14.22 in two checking accounts.

On September 14, 2020, an involuntary bankruptcy petition was initiated against Zayat's family racing business, Zayat Stables, LLC. That case is separate from this personal bankruptcy case, although many of the racing-related creditors overlap in both cases.

In a riches-to-rags case brimming with fraud allegations since its onset, Biase's filing stated that he has attempted to trace the tangled web of Zayat family finances via the “issuance of numerous Rule 2004 Subpoenas, reviewing thousands of pages of documents, including bank statements and tax returns, and conducting Rule 2004 depositions and extensive motion practice, including numerous motions to obtain access to the Debtor's real property, and the contents of same, by my appraisers.”

Beyond not having his Chapter 7 bankruptcy protection granted by the court if he isn't being truthful, Zayat faces a possible federal investigation and/or charges if the U.S. Department of Justice believes crimes have been committed.

Biase has repeatedly claimed the Zayat and his family have hindered his investigation with evasive tactics and non-compliance.

Zayat has consistently denied that he has engaged in any illegal activity or that he is hiding money. He has also insisted that neither he nor his family members are trying to obstruct the work of either of the trustees who are assigned to vet his personal finances and business operations.

The June 6 filing revealed one new nugget about Ahmed Zayat that had not been previously contended: “The Debtor has an ownership interest in a farm located in Egypt,” the Biase filing stated.

If true, it is unclear whether that alleged property interest could be also attached as an asset to pay creditors. The filing did not elaborate either way.

The settlement document, which was signed by all parties May 26, stated that “the Debtor, the Zayat Parties, and Sherif, and any entity they have an interest in shall waive any claim against the Debtor's estate [and] the Parties shall have released each other from any and all claims and causes of action and the Trustee shall be deemed to have abandoned the Debtor's estate's interest in the NJ Property pursuant to Section 554 of the Bankruptcy Code.”

Biase's filing stated that this type of settlement was preferable to continuing to fight the matter in court and/or by forcing a sale of the real estate.

“Though the Trustee believes that he would likely prevail on the claims against the Debtor, the Zayat Parties, and Sherif, the Trustee wishes to settle the claims, in order to save the Debtor's estate time and money that would otherwise be spent on litigation of the claims,” the filing stated.

“With respect to the NJ Property, even if the Trustee could obtain an offer of $4.8 million and avoid [the three mortgages with individuals] after deducting the first and second mortgages totaling $3.4 million and the broker's commission of $240,000, there would be non-exempt net equity in the approximate amount of $580,000…” the filing stated.

“This amount also does not include the Debtor's potential homestead exemption, the cost and time to seek approval under [the] Bankruptcy Code to sell the NJ Property, and the time and cost to avoid the [individual mortgages],” the filing stated.

“The Settlement Amount of $1.5 million greatly exceeds the potential non-exempt equity in the NJ Property,” the filing summed up.

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