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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This Should be Required Reading for Every Trainer and Owner

by Andrew J. Mollica, Esq
and Len Green, CPA

What an industry!

The recent, well-publicized ongoing legal sagas of both Ahmed Zayat and Ken Ramsey have brought issues surrounding owner-trainer financial relationships into clear focus. Yet, the truth is that no-pay or slow-paying owners probably have been a small, but existing part of racing since the game was invented.

Despite its topical nature, the problem is not going away anytime soon, and the reason is simple: horse racing is a 21st-century industry that is based on an 18th-century business model. At this late date, virtually all owner-trainer relationships are still based upon oral contracts.

While established contract law renders verbalized agreements legally binding, the pragmatic reality is that oral contracts are not easy to enforce and are even more difficult to litigate. In this regard, the words of the late, great movie producer Samuel Goldwyn ring true: “Oral contracts are not worth the paper they are written on.”

Consider that for any contract to be enforceable in court there must be a “mirror image” displayed between the offer of one participant and the acceptance of the other. Agreement terms reflect one another very well when they are written down and subscribed by each party. The establishment of an oral contract almost always degenerates into a he-said/she-said scenario and eventually turns on the credibility (or lack thereof) of the respective parties.

It's for this reason that judges and juries look askance at purported contracts not memorialized in writing and often refuse to find for the litigant (in this case the trainer) who is seeking contract enforcement.

Coady

Suggested Solutions

Clearly, written contracts would make things much easier, both to abide by and to litigate, but a future proliferation of written contracts between owners and trainers would be sea change that is nowhere in sight. Why? The reason is simple: most racetrackers (and people in general, for that matter) hate change.

This said, many would argue that mucking up the existing system–in place for decades if not centuries–with written contracts and more lawyers is not worth the effort. Ironically, it's exactly the opposite; where a writing is missing, it actually encourages non-performance by the owner, and actually clogs the system with more cases, more lawyers, and big problems.

Let's take a common example. An owner and trainer orally agree upon a $100 per-horse day rate–at many tracks, today's standard of what trainers charge.

The question posed is whether a written agreement or an up-front retainer is really necessary for such a simple, straightforward agreement. Consider that by the time a trainer gets her first check from the owner, she has already fronted that owner the training fees for about 45 days. If our hypothetical owner gave our imaginary trainer 10 horses, by the time the trainer bills the first $30,000 at the end of the first month, she is in serious trouble if the owner fails to make timely payment. Worse, the owner might send a check for less, claiming that the day rate verbally agreed to is much less than what the trainer is claiming.

In businesses like law, construction or big-ticket specialty retail, up-front payments, deposits or retainers are the norm. But it is not the standard in the horse industry.

Why are they virtually nonexistent in our industry? The answer is simple. Most successful trainers would tell you they could never ask for either a retainer or a written contract for fear they would not get the horses offered by the owner into their barn, and therein lies the rub.

The late Hall of Fame trainer P.G. Johnson used to say, “An empty stall is better than a no-pay horse.” What Johnson was saying is true: an empty stall does not cost the trainer any money, but the horse of a no-pay owner triggers the same care, custody and control responsibilities (and costs) of any other horse in the barn. Of course, that's when the downward spiral begins.

Coady

The simple fact is that obtaining clients and horses to train is very competitive.

Many times, new owners, who can afford to spend large sums of money on purchasing horses, are greatly influenced to select their trainers based on which trainers win the big races.

Trainers increase their opportunities to win these big races based on the number and quality of the horse they train.

Trainers need horses to train, so when an owner falls behind, the trainer is put in an even more unenviable position. The options are limited: demand payment and most likely lose the horses, or stay the course and hope for a miracle.

The clear answer is demand payment, and don't get further behind. Yet, trainers often keep their no-pay owners on an ever-elongating leash in the faint hope the horse will earn money and the bill will be paid. The consequences of this decision are evident in the headlines today.

Bottom Line

Is there any tax benefit for writing off the accounts receivable as a bad debt?

No.

Most trainers are paid on a cash basis. They only record income as they are paid.

Therefore, they receive no tax benefit for not getting paid.

The Legal Remedy

In every state in the Union except one (Vermont), trainers, or stablemen, have the protection or remedy commonly referred to as an agister's, or stablemen's, lien. In New York, the law is codified as 183 of the New York State Lien Law and in New Jersey it is codified in 2A:44-51.

Under these statutes, a trainer having care, custody and control of a horse has an automatic lien on the horse against unpaid bills. To perfect the lien, the trainer must both formally notify the owner of the indebtedness and the intention to satisfy the debt by selling the horse at public auction. The power of the tool is obvious, because if the horse is worth appreciably more than the bill owned, the wayward owner will usually run to the barn, cash in hand, rather than lose his valuable, income-producing asset in an agister's sale.

Sarah Andrew

Despite this potent legal remedy, most trainers never utilize it.

For one, they often receive bad advice, sometimes from the stewards, who inform them that they had better give up the horse to the non-paying owner lest they be sued and that they should instead sue the owner to get a judgment or, worse yet, they are encouraged to hold the foal papers. None of these “steward tips” have any validity under the law.

First, if an owner is going to sue a trainer, she will do it whether the trainer has possession or not, so the advice is simply bad.

Second, if the trainer turns possession of the horse back to the owner, the trainer loses possession, hence his statutory lien is now forfeited and the trainer has lost the remedy and most likely any chance of recovering her money.

Third, holding the foal papers is an illegal act and, moreover, foal papers are soon to go the way of bobby socks and land-line telephones, as electronic papers become the norm. This is very bad advice as well.

Aside from this, trainers who are owed vast sums of money often don't perfect their liens because they are afraid they will be looked at as bad guys in the industry, while others simply don't want to pay the legal fees to get their money.

Whatever the reason, trainers who are owed money have a legal recourse, but they have to make the hard decision to perfect their liens and sell the horse. If they don't, we have seen the results.

In sum, although it may be unlikely to ever become a reality, all agreements with owners involving the trainer's care and custody of the horse should be expressed in a clear, concise, comprehensive, straightforward writing signed by the parties, and one of the terms that should not be left out is the payment of an up-front training fee.

Lastly, the question should not be whether to auction off the horse of a non-paying owner, but rather how quickly it can be done after the first training bill is more than 30 days late.

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November Auction Anticipated for Zayat Horses Under Receivership

Attorneys representing MGG Investment Group, LP, which is the plaintiff in a $24.5 million Kentucky civil lawsuit alleging fraud and loan defaults against Ahmed Zayat and his family’s Zayat Stables, LLC, disclosed in a legal document filed Sept. 18 that the court-appointed receiver in that case intends to hold a November auction to sell off horses that are being held as collateral against the unpaid debts.

News about this anticipated November auction was made public in the form of a letter dated Friday and filed in United States Bankruptcy Court, District of New Jersey (Newark) by MGG’s counsel.

That letter pertains to a separate court proceeding initiated Sept. 14 by three other creditors who are attempting to force an “involuntary bankruptcy” petition against Zayat Stables. If the forced bankruptcy moves forward, it could keep MGG (and other creditors who are not part of either court action) from collecting on debts that MGG claims are backed by its own “first priority perfected security interest in all of Zayat Stables’ personal property, equine collateral, accounts and proceeds.”

Complicating matters further, Zayat himself (as an individual, not as his racing stable) filed for Chapter 7 protection Sept. 8 in a federal bankruptcy court in New Jersey, claiming to be $19 million in debt. And within that filing, the insolvent 2015 Triple Crown-winning breeder and owner disclosed that he is a party to three other active lawsuits involving money woes.

So right now the tangled financial mess involves numerous creditors jockeying for position to secure spots in a disputed pecking order that could determine which might be first to recoup proceeds from the Zayat horses held in the Kentucky receivership.

That’s important, because the federal court with jurisdiction in Zayat’s personal bankruptcy has already notified the 132 non-priority, unsecured-claim creditors in that case that “no property appears to be available to pay creditors.” So reaping proceeds from the sale of Zayat Stables’ horses appears to be the only means for some of the creditors to get paid.

The Sept. 18 letter from MGG’s attorneys was an attempt to slow down the process in the forced bankruptcy attempt. The day before, the three petitioning creditors in that involuntary bankruptcy case (Zayat’s former financial advisor is one of the parties) filed an Application for Order Shortening Time, in which they requested that an expedited hearing be set for Sept. 22.

“We are writing to request that any hearing on the Motion be scheduled for no earlier than Sept. 29 as the Petitioning Creditors have not presented any emergent circumstances that would require a hearing to be held as quickly as Sept. 22,” the MGG counsel wrote.

“The underlying premise of the Motion appears to be the Petitioning Creditors’ dissatisfaction with a Kentucky State Court receivership proceeding commenced by MGG on January 22, 2020 in the Fayette Circuit Court, in which Elizabeth Z. Woodward has been appointed receiver. The Receivership proceeding, which has been pending for almost eight months, has been heavily contested by Zayat Stables, which has not only failed in its efforts to date to get the Receivership dismissed, but has suffered the entry of judgment against it in the amount of $24,534,166.13.

“Substantially all of the ‘issues’ raised by the Petitioning Creditors in support of their Motion have already been advanced in the Receivership by Zayat Stables, to no avail.

The Receiver and her retained professionals have, under contentious circumstances, made substantial progress in monetizing Zayat Stables’ assets in a manner typical for the liquidation of equine collateral and consistent with accepted industry practices.”

The letter continued: “We are informed that the Receiver does not anticipate selling any of the horses or other components of MGG’s Collateral until a scheduled auction in November 2020, to be conducted by a recognized Thoroughbred auction house, such as Keeneland; nor will any of the proceeds of the MGG Collateral being held or to be collected by the Receiver be disbursed other than for the ordinary course care and maintenance of the Zayat Stables’ horses.

“Notwithstanding that MGG has a first priority security interest in all of the assets that the Receiver is charged with liquidating, and notwithstanding the fact that MGG has made substantial protective advances to the Receiver to preserve the MGG Collateral, MGG will not seek the Receiver make any distributions to MGG until there has been a disposition of the Motion or a further order of this Court,” the letter concluded.

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Analysis: Fasig-Tipton Racing Age Sale Marked Latest Chapter Of Lengthy Zayat Stables Dispersal

The dismantling of Zayat Stables' equine stock in order to pay off a multi-million dollar trail of debt has spanned months of public and private transactions, and the latest stop on that road once again proved that the perception of value can vary wildly between a seller and the marketplace.

Six horses under Zayat ownership were offered Monday at the Fasig-Tipton July Horses of Racing Age Sale, bringing a combined $337,000.

The same group of six horses were valued at a combined $3.5 million in an assessment of owner Ahmed Zayat's equine holdings submitted to creditor MGG Investments in mid-December 2019 as a liquidation plan to pay off a $23-million loan and stave off a lawsuit. MGG ultimately filed suit in late January over allegations that Zayat had defaulted on the loan, and Zayat's equine operations were placed in the hands of a third-party receiver to maximize income for paying off creditors through racetrack earnings and liquidation of the stable.

A lot can happen in seven months to fluctuate the value of a Thoroughbred, and assigning valuation to a horse is far from an exact science, but bringing in 9.62 percent of assessed value through the sale ring is a remarkably wide gap in opinion.

In comparison, six Zayat horses were offered in February at this year's Fasig-Tipton Kentucky Winter Mixed Sale with an estimated value of $1.9 million, and just four of the six finished above reserve for a combined $366,000 – about 19 percent of the estimated total. One mare, offered in-foal to American Pharoah, accounted for $310,000 of that total amount.

Though the chasm between hopeful assessment and market reality for the July offerings was Grand Canyon-sized, the explanation for the far-flung differences goes far beyond the extremely generous valuations.

First, there is the issue of timing. One method of assessing value to a Thoroughbred is through income projection – basing their worth on their opportunities to achieve in the future as much as what they already have achieved.

This is the most apparent among the July offerings in Salow and Zyramid, a pair of colts who were 2-year-olds at the time of the assessment. Both colts are well-bred, meaning a stallion career would be easily attainable with a few graded stakes wins, especially on the Triple Crown trail or in the Triple Crown races themselves. Every 2-year-old in December is a potential lottery ticket with a few fortunate bounces, and their respective seven-figure values reflect that potential.

Fast-forward to July, and many of the doors that were open seven months ago are now closed, as many of the elite 3-year-old races have been run. Even with the Kentucky Derby and Preakness Stakes pushed back into the fall due to COVID-19, the opportunity to become a Triple Crown winner already left the station without either horse even in the gate for the race, and past form suggests a monumental jump in form would be needed to join the elite in their class.

Salow, a 3-year-old son of Distorted Humor, was ultimately the centerpiece of the Zayat slate at the July sale, going for $175,000 after winning on debut in a Gulfstream Park turf race on July 3. Zyramid, on the other hand, has been winless since last year's Saratoga meet and sold for $20,000, tied for the lowest of the group.

Though his value took a hit due to the opportunities that are no longer available to him, Salow was the rare horse in the Zayat dispersal to offer some semblance of blue sky on his resume, with his 2 3/4-length debut win.

This brings about the second point toward the price gap in the dispersal offerings – the horses didn't do much to help themselves in the time between the assessment and the sales.

None of the horses were stars before or after the December assessment, but just 27.6 percent of the six horses' combined $199,545 in career earnings at sale time came after the assessment. This is with two of the horses being unraced at the time of the valuation, and another two having raced just once. Four of the six entered the sale as maidens. Whether an assessor is basing their valuation on comparative value with other horses with similar resumes or by earning potential, the projection is going to take a dive as the spring rolls into summer.

This was most apparent in the case of Super Sol, a 5-year-old Awesome Again horse who was valued at $500,000 in the December assessment. It was a generous figure for a horse with no black type whose only start of 2019 came on Jan. 6, and he just made his 2020 debut during the recent Keeneland summer meet, where he finished last in an optional claiming race.

Working in his favor was a bit of back class. The horse won two races in a row in Southern California during his 3-year-old season, breaking his maiden by four lengths and taking a Los Alamitos Thoroughbred meet optional claimer by three lengths.

Super Sol went on to sell for $30,000.

Zyramid also had one of the longer resumes of the group, winning once and making 88 percent of his lifetime earnings before the December assessment. He was tried in the Grade 2 Saratoga Special Stakes and G3 Iroquois Stakes, but finished well off the board on both occasions. His 3-year-old season started with a distant third in an Oaklawn Park allowance, followed by far-back out-of-the-money tries at Oaklawn and Lone Star Park.

Salow was the only horse in the group to earn five figures post-assessment, making $24,000 for his maiden score. That victory alone made the colt the fourth-highest earner for the Zayat Stables operation in 2020.

Rounding out the group were Mony, Perlman, and Paynted, a trio of 4-year-old lifetime maidens who were valued from $300,000 to $400,000 in December, and sold at a high point of $60,000 (Mony) and a low of $20,000 (Paynted).

Mony, a son of Scat Daddy, has shown the most upside of the group. In addition to being a son of Scat Daddy, whose foals have become increasingly scarce and sought after following the sire's untimely death and the Triple Crown success of son Justify, Mony most recently finished a gaining second in a Gulfstream turf maiden special weight on July 5.

One final factor that's important to note in the review of the dispersal against its original valuation is intent.

Several of the horses pointed for the July sale in the December assessment have since been sold privately, including River Boyne, who found new owners after winning the G2 San Gabriel Stakes in January. He was valued at $750,000 in the assessment, at which point, River Boyne had never won a graded stakes race.

There is a strong likelihood that the horses that were pointed toward the July sale and made it all the way to the ring were ones where attempts to move on from them privately were unsuccessful. In that case, the open market becomes the most efficient way to turn the horses into cash, even if it's for pennies on the dollar from where they were appraised.

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