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.”

The post Proposed $5M Zayat Settlement Gives Only $30K to ‘Unsecured’ Claimants appeared first on TDN | Thoroughbred Daily News | Horse Racing News, Results and Video | Thoroughbred Breeding and Auctions.

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Bankruptcy Trustee Warns of Risk that Zayat Will Wipe Away Electronic Records

Two weeks after being granted an extra month to determine if Ahmed Zayat is hiding assets while seeking Chapter 7 bankruptcy protection, the court-assigned trustee in the case told a federal judge Friday that the allegedly insolvent owner and breeder of Triple Crown champ American Pharoah (Pioneerof the Nile) is still trying to evade scrutiny by withholding records.

And trustee Jeffrey Testa further warned that the longer the case drags on, the higher the risk is that Zayat will wipe away cloud-storage financials before the trustee can examine those documents.

Testa now wants the judge to “compel turnover” of Zayat's trove of electronic records, and to “direct” Zayat to cooperate with the investigation, according to an Apr. 16 United States Bankruptcy Court (District of New Jersey) filing.

In that document, the legal team for the trustee wrote that because of the “serious and disturbing allegations of fraud at play in this case,” the court “should not leave it to chance that Mr. Zayat or his designees will act competently” to maintain the integrity of the evidence.

“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.”

The job of trustee in a voluntary bankruptcy case is to make sure that a debtor's claim of insolvency is on the up-and-up. In Zayat's case, he alleged in his initial filing last September that he has $19 million in debt but only $314.22 in assets, with a huge chunk of that money owed to Thoroughbred-related creditors.

People who file for bankruptcy protection generally try to cooperate with their assigned trustees, because without the trustee's seal of approval, their debt likely won't get forgiven by a judge.

But Zayat's case has been riddled with accusations of his stonewalling and evasion since the outset of the initial hearings. Zayat, through his attorney, has repeatedly denied those claims and stated that he has been a willing and cooperative petitioner.

Not only can a trustee file an objection if aspects of the filing don't seem legit, but if alleged fraud is uncovered in a bankruptcy petition, the Federal Bureau of Investigation can investigate, and the U.S. Department of Justice can prosecute.

The trustee's request to the judge on Friday capped a week of drawn-out, back-and-forth demand letters and phone conferences between the trustee and Zayat's legal team over whether and how the access to his cloud-storage records would be granted.

According to the filing, just when the trustee thought the parties had agreed on safeguards that would satisfy Zayat's concerns about not wanting anyone to read his family's personal emails, Zayat on Apr. 15 instead proposed an unworkable alternative, which essentially was that the trustee should ask for specific financials it believed were stored in the Cloud and Zayat would retrieve them for the trustee.

“This proposed process was simply a close cousin of Mr. Zayat's previous proposals designed, in the Trustee's view, to dictate and control the process contrary to law [and] leave the Cloud unsecured, delay, and make Mr. Zayat the lynchpin of any document search and review,” the filing states.

“Mr. Zayat's primary basis for refusing to grant the requested access is that the Cloud allegedly commingles and contains his emails and those of his family members that are supposedly unrelated to the Debtor's business and that might comingle and contain, among other things, HIPAA-implicated, non-business, and attorney client-privileged communications,” the filing continues.

“The fact that Debtor's principal and his family members supposedly decided to mix business and non-Debtor affairs does not negate Debtor's statutory duty to turn over property of the estate and recorded information to the Chapter 7 Trustee,” the filing asserts. “There is simply no valid reason why the Chapter 7 Trustee should not be granted access to independently secure the Cloud. The law does not support Mr. Zayat's position…

“Given these circumstances and Mr. Zayat's decision not to allow the Chapter 7 Trustee to have access to and independently secure the Cloud and its contents raise serious concerns on the part of the Chapter 7 Trustee that the cloud and its contents might not be secure while under Mr. Zayat's exclusive possession and control, and that the Chapter 7 Trustee might be obstructed in reviewing documents that can lead to recoveries for the benefit of all creditors.

“The Chapter 7 Trustee has already taken steps to engage a reputable IT partner–Epiq–to take control of the Cloud, preserve it, and copy its contents. Mr. Zayat will have access copies to any information on the Cloud once it is secured; thus there is and will be no prejudice to Mr. Zayat or his family members,” the filing states.

MGG Investment Group, LP, the lender that is separately suing Zayat and his family members for allegedly obtaining a $24-million loan by fraud and then not repaying it, has alleged in court documents that the trustee needs to examine bank accounts in the names of Zayat's wife (Joanne Zayat) and son (Justin Zayat) because “they appear to have been used as conduits through which Sherif El Zayat, the Debtor's brother, loaned money to Ahmed Zayat.”

The post Bankruptcy Trustee Warns of Risk that Zayat Will Wipe Away Electronic Records appeared first on TDN | Thoroughbred Daily News | Horse Racing News, Results and Video | Thoroughbred Breeding and Auctions.

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