Zayat Motions to Dissolve Order Appointing Receiver

Following a Fayette County, Ky. judge's order for a receiver to oversee Zayat Stables and all its horses, Zayat Stables submitted a motion Jan. 27 to dissolve the order appointing a receiver.

At a Jan. 22 emergency hearing Judge Kim Bunnell ruled that a receiver should be appointed in response to a motion filed by attorneys for MGG Investment Group, a New York-based firm that filed suit Jan. 21 against Zayat Stables and Ahmed Zayat. Elizabeth Woodward, the director of forensic accounting and litigation support at the Lexington accounting firm Dean Dorton, was appointed Jan. 23 as receiver in the case.

MGG is seeking at least $23 million in damages and claims Zayat's breeding rights to 2015 Triple Crown winner American Pharoah  were being held as collateral against previously outstanding debts incurred by the owner.

The motion submitted Monday by Zayat Stables claims the order appointing receivership was flawed procedurally and without proper authority. It suggested the court should modify the order to liquidate the equine collateral at issue instead of grant a receiver the right to take over the company's operations.

"This lawsuit should never have been filed, as lenders and borrowers regularly work out issues related to collateral without the need for a receiver or any judicial oversight at all. That is exactly what could and should have happened here, as the parties were in negotiations that would bring maximum value out of MGG's collateral and likely make it whole," the motion read, noting that Zayat Stables and MGG were in discussions to ensure the loans were paid. "At most, any legal action should have been a straight-forward breach of contract claim where a secured lender exercises its rights to liquidate its collateral and be paid its debt."

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According to the motion, Zayat Stables fell behind on its loan payments to MGG for the first time in October 2019 and approached MGG's CEO Kevin Griffin with a proposed solution to liquidize the collateral in a way to maximize its value and likely pay off the loan. MGG obtained bloodstock agent Gatewood Bell of Cromwell Bloodstock and a cooperation agreement was drafted by the firm.

The motion claims that MGG ceased negotiations and failed to tell the court that Zayat Stables had regularly made payments on its loans in a timely manner for three years and paid MGG over $16 million in principal, amortization, and interest during that time. The motion also states that MGG breached the loan agreements by overcharging Zayat Stables more than $900,000 in 2017 and only corrected the the charge once it was discovered by Zayat Stables.

"MGG repeatedly claimed in its Complaint and Motion that Mr. Zayat or his family had personally 'pocketed' proceeds from the sale of American Pharoah breeding rights, but failed to tell the Court that Zayat Stables provided bank statements to MGG showing that the proceeds were placed in due course into Zayat Stables' operating accounts to be used solely in the business of Zayat Stables to support and maintain the collateral and to make payments under the loans to MGG itself (among other routine business expenses paid with such proceeds)," the motion stated.

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The motion argues Zayat Stables was denied the opportunity to defend itself at the emergency hearing and was materially prejudiced. It claims Zayat Stables' New York attorney and Zayat were provided with a courtesy notice by MGG's New York counsel at the time of the filing, but that neither Zayat Stables nor Zayat have yet been served with process. Zayat Stables tried to quickly obtain representation that same day but was unable to do so with few hours notice.

Zayat Stables maintains that because it was not present or given the opportunity to respond in writing, it was not able to correct factual inaccuracies such a MMG claiming that "collateral was in jeopardy because Zayat Stables was withholding information, but failed to inform the Court that Zayat Stables had cooperated fully and even provided MGG with access to its bank accounts," that "horses were in danger of going unfed and uncared for, but failed to tell the Court that the Equine Collateral is boarded and maintained by farms and trainers across the country, with horses entering races every week," and that "MGG sought and obtained a receivership order that the media aptly noted was geared more towards governing day-to-day operations than liquidating collateral, but did so despite the fact that its rights are limited to taking control and disposing of the collateral."

The motion suggests if the court is not inclined to dissolve the order appointing receivership, then it should modify the order and direct the receiver to manage and liquidate the equine collateral. It adds that Bell can assist the receiver as they inventory the horses and verify ownership with The Jockey Club, and that an orderly liquidation can be held at Fasig-Tipton's April and/or July Sales, depending on what is best to maximize the value of the horses.

The motion states "it is very possible, if not likely," that sale proceeds will generate more than $23 million to satisfy the debt, and if so, that Zayat Stables' breach will have been cured and MGG will have no damages to pursue. If the necessary amount is not generated, the motion agrees parties can assess the amount and proceed with litigation if necessary.