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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The trustee assigned to the case is now alleging that three children and the wife of the financially strapped owner and breeder of Triple Crown champ American Pharoah are refusing to cooperate in providing documentation the trustee had subpoenaed from them to try and trace millions of dollars in possibly fraudulent transfers.

“[T]he Trustee's investigation reveals that the Debtor and his family members have engaged in a pattern of intermingling of assets and ongoing financial transactions among themselves,” the attorney bankruptcy trustee Donald Biase wrote in a July 13 filing in United States Bankruptcy Court (District of New Jersey).

“Notably, the [Zayats] have made only paltry productions in response to the subpoenas directed to them. Worse, their counsel has engaged in extensive redactions of the bank account statements they did produce based upon nothing but their own unilateral determinations of relevance, and has also simply omitted bank records for important periods,” the filing continued.

Ahmed Zayat's case seeking Chapter 7 bankruptcy protection has now dragged past the 10-month mark and has been hallmarked by the trustee's multiple allegations of stalling, evasion and non-cooperation. Zayat has repeatedly denied those claims via court filings.

The primary role of a court-appointed trustee in a bankruptcy case is to ensure that a debtor who files for federal bankruptcy protection is not hiding assets that could instead be used to pay creditors–many of whom in Zayat's case are Thoroughbred trainers for his now-liquidated racing stable and various racing- and bloodstock-related entities.

An objection to a bankruptcy protection plea can be filed if a trustee believes aspects of the required documentation are not on the up-and-up. A judge can either dismiss a case on his own or by acting on a trustee's objection. A judge can also deny the discharge of a particular debt.

If alleged fraud is uncovered in a bankruptcy filing, the Federal Bureau of Investigation can investigate, and the U.S. Department of Justice can prosecute if it believes a crime has been committed.

Back on June 4, the trustee issued a Rule 2004 subpoena to Zayat's wife, Joanne Zayat, and three of their four children, Emma, Benjamin and Justin Zayat. A business entity controlled by Justin, JPZ Holdings, LLC, was also subpoenaed.

Federal Rule of Bankruptcy Procedure 2004 authorizes the Trustee to investigate the “acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor's estate, or to the debtor's right to a discharge.”

Specifically, the trustee wanted to see detailed information from the family's allegedly intermingled accounts with banks, credit card companies, other lending-related institutions.

The subpoena also wanted access to four TVG betting accounts “belonging individually to or jointly with, including as an additional or authorized user…any member of the Debtor's Family…or JPZ Holding,” as well as any passwords associated with such accounts.

On June 23, the four above-named Zayat family members (the “movants”) asked the court to quash the trustee's subpoena, alleging that “Each Subpoena is exceptionally broad and seeks wholesale financial records and other personal and proprietary financial information regardless of whether it has any relationship whatsoever to the Debtor or the Estate.”

In the trustee's July 13 memorandum in opposition to that proposed quashing, Biase contended that the motion to quash “is an exercise in gamesmanship, obstruction, and delay…. [T]hree of the Movants [Justin, JPZ Holdings and Joanne] were tied especially closely to the finances of the Debtor and to Zayat Stables.”

The filing continued: “Justin Zayat was the President of Zayat Stables, and so far as can be determined his sole source of income during the relevant period was Zayat Stables. Justin Zayat was also the beneficiary of nearly $1 million in transfers at a time when the financial condition of the Debtor and Zayat Stables were deeply troubled. Justin Zayat's company, JPZ Holdings, has also received millions of dollars in payments from the Debtor's brother and creditor, Sherif Zayat.

“Joanne Zayat, the Debtor's wife, was the recipient of over $1 million dollars of direct transfers from Zayat Stables. She is jointly named on every material bank account used by the Debtor, and is also a joint account holder with Justin Zayat.

“The accounts of Justin Zayat, Joanne Zayat and JPZ Holdings have been and are continuing to be used by the Debtor's brother, Sherif Zayat, to pay the Debtor's claimed $72,000 in monthly expenses. Joanne Zayat was also directly involved in obtaining loans from close friends and acquaintances for the benefit of the Debtor and/or Zayat Stables, and she has recently been repaying one of those creditors out of a bank account held in the name of her speech pathology business.

“In short, if the Trustee is to understand the conduct and financial transactions of the Debtor, he must necessarily obtain financial information relating to these third parties,” the filing contended.

The trustee further argued that the subpoenas at issue “are not only fully justified, but many are made necessary because the Debtor himself refused to produce records from a number of the financial institutions at which he has accounts.”

Biase explained the convoluted process by which Zayat, during the course of his bankruptcy plea, even directed the Trustee to serve his own financial institutions with subpoenas, “only to then have the Debtor's family members then move to quash those very subpoenas….”

“The Trustee's investigation also has revealed a substantial number of misstatements and omissions in the Debtor's bankruptcy schedules that were only uncovered through the issuance of Rule 2004 subpoenas to third parties, including overstatements of outstanding debt totaling hundreds of thousands of dollars.

“It is this ongoing pattern of obstructive activity, coupled with the Debtor's shifting and highly questionable statements in his schedules…that more than justified the Trustee's issuance of the subpoenas at issue. That same ongoing pattern of delay, obstruction, and gamesmanship requires that the Motion be denied in its entirety,” the filing stated.

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That trustee told the court in an April 16 filing that he still does not have access to Zayat's documents held on the Cloud, and he wants the court to both “compel turnover” of the files and to “direct” Zayat to cooperate.

“Given the overwhelming allegations of fraud and expected sought-after delay, the Chapter 7 Trustee simply cannot wait any longer for access to the Cloud,” the filing states. “Although Mr. Zayat has represented that the Cloud is secure and that he is aware of his obligations, the longer the information on the Cloud remains in the hands of Mr. Zayat the more susceptible it is to manipulation or destruction, and this ongoing and unreasonable delay impedes the Chapter 7 Trustee's investigation.”

Read more at the Thoroughbred Daily News.

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One formerly valuable colt had to be given away during the most recent month of transactions: Lexington-based receiver Elizabeth Woodward wrote that she released the ownership of a 3-year-old Empire Maker-Duke’s Dream colt “to offset boarding, training and veterinary charges which exceeded the estimated fair market value of the horse.”

That colt was the seventh-session KEESEP sales topper in 2018, acquired for $450,000 in a partnership purchase between Zayat Stables and St. Elias Stable. The receiver’s report, however, stated Zayat Stables had 100% ownership interest in the colt at the time he was relinquished.

“He looked the part,” Zayat told TDN back in 2018 just after the hammer fell. “He was very well-balanced, he had a great walk and a great pedigree…. Everything was going for him.”

In more general terms concerning the financial state of Zayat Stables, the report stated that “As of Oct. 31, 2020, the Receiver has collected approximately $1,624,277 through the collection of purse proceeds and other funds held for Zayat Stables and from sales of the horses referenced herein. She has expended approximately $1,029,293 on operations, such as board bills, veterinary bills, and administrative fees and commissions necessary to be paid for the sales to date.”

Woodward reported the collection of $135,068 from the September sale of an American Pharoah–La Vita Bella yearling as the largest single transaction since her last report was filed with the court. That filly hammered at FTKSEP for $300,000.

Two of Zayat Stables’ horses raced in October: Bob and Jackie (Twirling Candy) ran third in the Oct. 3 GII City of Hope Mile S. at Del Mar, earning $24,000. Alex Joon (Flatter) ran second in an Oct. 29 N1X allowance at Churchill Downs, earning $9,800.

Zayat Stables was ordered into receivership back in January as part of a $24.5 million civil lawsuit by MGG Investment Group, LP, a lender alleging fraud and loan defaults by  Ahmed Zayat and his family-owned bloodstock and racing operation.

That lawsuit revolves around accusations that Zayat Stables hid the proceeds from the sale of nine lifetime breeding rights shares to 2015 Triple Crown winner American Pharoah, plus at least 15 other “valuable racing Thoroughbreds” the lender held as collateral.

The MMG suit is one of three intertwined and currently active court cases involving Ahmed Zayat and his racing stable.

In a federal Chapter 7 bankruptcy petition filed by Ahmed Zayat Sept. 8, Thoroughbred trainers, horse farms, bloodstock businesses, veterinarians, and equine transportation companies were among 132 entities listed as creditors. They are due $14,755,1717 in “non-priority unsecured claims,” which means they are at the bottom of the hierarchy to get paid–if they get paid at all. Zayat Stables is listed as a co-debtor to 112 of those 132 non-priority unsecured claims.

Separately, Ahmed Zayat’s former financial advisor is among the entities who initiated a Sept. 14 federal “involuntary bankruptcy” petition against Zayat’s family-owned racing stable.

Although once prevalent, involuntary bankruptcy proceedings are now relatively uncommon in U.S. 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.

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In court documents, Zayat is claiming $19,371,466 in total liabilities versus total estimated assets of $1,892,815.

Thoroughbred trainers, horse farms, bloodstock businesses, veterinarians, and equine transportation companies are among the 132 entities listed as creditors who are due $14,755,1717 in “non-priority unsecured claims.” In his legal filing, Zayat marked most of those debts as “disputed.”

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 is appointed to liquidate assets and discharge debts.

Zayat’s family-owned racing operation, Zayat Stables LLC, is listed as a co-debtor to 112 of those 132 non-priority unsecured claims. In the filing, Zayat described his racing business as “insolvent.” He noted that a Kentucky receiver is in the process of liquidating those equine assets as a result of an ongoing $23 million lawsuit filed in January by a New York lender alleging fraud and loan defaults.

Zayat’s personal assets are primarily comprised of a single-family home in Teaneck (with adjacent unbuilt-upon lots) that has an estimated valuation of $3.55 million. His filings claim $1.775 million in equity in that property.

Zayat is claiming zero dollars in current monthly income. His filing indicates that his household’s income is entirely comprised of $13,875 in monthly wages that his non-debtor spouse earns as a speech pathologist. Two dependent children live with Zayat and his spouse. He reports monthly liabilities of $72,903 and claims to own no stocks, bonds, or pension accounts.

Five entities head the list of $4,616,294 in claims secured by the family residence via mortgages or loan agreements. Upon liquidation, they would get paid first according to Chapter 7 protocols.

The Internal Revenue Service and 12 individual state taxation agencies have the next dibs on debt as priority unsecured claimants. Each is listed as being owed “unknown” amounts.

Among the non-priority unsecured claimants who would be last to get paid (if at all) are trainers Rudy Rodriguez ($394,437), Richard Baltas ($316,070), Bob Baffert ($227,884), Brad Cox ($194,836), Todd Pletcher ($125,598), Mike Maker ($120,921) and Steve Asmussen ($102,541).

The documents state that Zayat has non-priority unsecured debts to the shipping company Brook Ledge of $164,401, and there are over $200,000 in debts from veterinary providers including Hagyard Equine Medical, Kentucky Equine Medical Associates, Kesmarc, Rood & Riddle, Stephen Selway, and Teigland, Franklin & Brokken.

By far the largest debt on the list is the $7.9 million listed for the Manhattan-based Cedarview Capital Management LP.

Zayat’s bankruptcy filing will undoubtedly have ripple effects upon the four cases of civil litigation in which he stated he or his racing company are currently defendants. The most prominent among them is the above-mentioned $23 million suit filed by MGG Investment Group, LP, in Fayette Circuit Court in Kentucky.

That lawsuit revolves around accusations that Zayat Stables hid the proceeds from the sale of nine lifetime breeding rights shares to 2015 Triple Crown winner American Pharoah, plus at least 15 other “valuable racing Thoroughbreds” held as collateral, including retired Zayat color bearers and bloodstock-rights assets Bodemeister, Eskendereya, El Kabeir and Zensational.

A hearing in that case had already been scheduled for Sep. 9, and the court overseeing that suit and the parties to it have already been notified of Zayat’s Tuesday bankruptcy filing.

Years before Zayat Stables bred and raced champion American Pharoah, Ahmed Zayat was in the news and in the courts for money troubles. In 2009, Fifth Third Bank sued Zayat for $34 million, alleging he had defaulted on loans.

That suit resulted in a 2010 federal bankruptcy court deal to repay the loans while reorganizing Zayat Stables. At the time of settlement, Zayat said in a statement that “Zayat Stables will come out of this in a stronger financial position than ever, and it will allow us to devote all of our energies to what is most important: nurturing, developing, and racing the next generation of great American horses.”

According to the U.S. Courts website, Chapter 7 bankruptcy protection provides for liquidation of a debtor’s non-exempt property and the distribution of the proceeds to creditors.

However, to qualify for Chapter 7, a debtor must first meet strict income requirements. If a debtor’s current monthly income is more than the state median, the Bankruptcy Code requires application of a “means test” to determine whether the chapter 7 filing is presumptively abusive.

If a debtor doesn’t pass the means test, filing for Chapter 13 bankruptcy could be an option. But that version pays off debt through a repayment plan over a three- or five-year period instead of via liquidation.

The court on Wednesday appointed a trustee to oversee the bankruptcy. She is Barbara Edwards, an attorney based in Fair Lawn, New Jersey.

An Oct. 5 telephonic hearing date has been set, at which Zayat is required to attend and face under-oath questioning. Creditors may attend, but are not required to do so.

The deadline for anyone wishing to object to the bankruptcy discharge or to challenge whether certain debts are dischargeable is Dec. 4.

In the Sep. 9 filing that appointed the trustee, the court added a notation that reads, “No property appears to be available to pay creditors. Therefore, please do not file a proof of claim now. If it later appears that assets are available to pay creditors, the clerk will send you another notice telling you that you may file a proof of claim and stating the deadline.”

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