Judge Rules for Continued Receivership in Zayat Case

In a hearing in Lexington Feb. 6, Fayette County (Ky.) Judge Kim Bunnell denied a motion from an attorney from Ahmed Zayat's Zayat Stables to dissolve the court's appointment of a receiver related to a pending lawsuit. She called for the owner to have all racing paperwork and required accounting documentation turned over to the receiver by Feb. 14.

Bunnell's Thursday ruling comes after a Jan. 22 emergency hearing in which the judge ruled that a receiver should be appointed in response to a lawsuit filed by the New York-based MGG Investment Group 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 the receiver.

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

A motion filed last week by Jay Ingle, attorney for Zayat, claimed the order appointing receivership was flawed procedurally and without proper authority, but the judge disagreed, noting the loan agreement established between the two parties allowed for a receiver to be appointed without a hearing.

"This is not the kind of agreement drawn up on a napkin," she stated in court.

The bulk of Thursday's hearing concerned the transfer of Zayat's racing documents and a listing of stable horses, with MGG arguing that Zayat had not provided the receiver with the required information, such as a comprehensive list. Ingle countered that MGG was utilizing the receiver with the possible intent of pursuing a breach of contract or fraud claim.

Bunnell hinted she may authorize the search of data on Zayat's computer server to allow the receiver full access to files related to his horse business, action Ingle told her he may appeal.

Ingle opposed a computer-server search, stating files on Zayat's server are a mixture of private and horse-related matters, and some files may be protected by privilege, such as correspondence between an attorney and a client.

The troubled finances of Zayat Stables came to the fore during Thursday's hearing, with W. Craig Robertson III, a lawyer for MGG, citing a receiver's report that noted Zayat's one active racing bank account held less than $2,000 at the time of Woodward's initial examination. She has since requested earnings checks from racehorses that have competed recently for Zayat Stables at racetracks around the country.

The debts are not limited to those against MGG. Mike Maker filed a legal complaint last week against Zayat Stables, alleging default of more than $120,000 by Zayat in unpaid training bills, and the receiver's report discussed in court Thursday indicated Woodward and consultant Gatewood Bell had yielded "dozens" of inquiries from farm operators, veterinarians, trainers, and other creditors. The report commended the responsible parties for continued care to the animals despite a shortage of payment. 

Trainers "are owed hundreds of thousands of dollars that Zayat Stables has not paid," Robertson told the court. "For example, Rudy Rodriguez, a trainer in New York, has a judgment against Zayat Stables for almost $400,000 in unpaid training bills and that was reduced by $200,000 because Zayat gave him some of our collateral to reduce the bill." 

Zayat was not in attendance during the hearing, but in a statement last week called Maker's lawsuit "absurd" and "outrageous."

Ellen Kennedy, an attorney for Woodward, told the court that some of Zayat's assets are in the process of being liquidated, while other horses will continue to race, some of the more valuable ones perhaps with expensive mortality insurance, others without it. 

Kennedy said "five or six" Zayat-owned horses have been entered as supplemental entries into the upcoming Fasig-Tipton Winter Mixed Sale in Lexington Feb. 10-11 and more could join the sale, or later sales geared more toward the attributes of the individual horses. Primarily short yearlings, broodmares, and broodmare prospects are sold at the Fasig-Tipton Winter Mixed Sale.

Upon the receipt of racing and sale proceeds, it is unclear which creditors will be paid and to what extent. The receiver has been tasked with maximizing the value of the Zayat horses, which could lead to a preference toward expenses related to future earnings.