Bankruptcy Judge Rules in Support of Zayat Receiver

A U.S. bankruptcy court judge ruled Oct. 9 in favor of retaining Elizabeth Woodward and consultant Gatewood Bell in their roles as the managers of financially troubled Zayat Stables, rebuffing an attempt by creditors in New Jersey to replace them with a trustee.

Judge Vincent Papalia with the U.S. Bankruptcy Court District of New Jersey in his ruling stated: "The receiver and her consultant are qualified to maintain the assets of Zayat Stables and liquidate the collateral in a manner that is in the best interest of the creditors in this case."

The judge noted that Woodward is dependent on access to funding through MGG Investment Group that may be used to operate the stable as she continues to sell off its assets, and this arrangement is "immediate and critical in order to preserve the value of the collateral pending the orderly sale and liquidation." In addition, this arrangement shows the expenses of the receivership to be "fair, reasonable, and the best available to the receiver under the circumstances" and that it reflects "the receiver's exercise of prudent business judgment consistent with her fiduciary duties."

MGG is a New York-based financial company embroiled in an ongoing breach of contract and fraud lawsuit with Zayat Stables. The company requested the appointment of Woodward as receiver in late January as part of its lawsuit because it was concerned that assets used as collateral for more than $24 million in loans were being sold without its knowledge. Woodward is the director of forensic accounting and litigation support at the Lexington accounting firm Dean Dorton, and she enlisted the help of Bell, whose entire professional career has been with the Thoroughbred business. Bell owns Cromwell Bloodstock.

Papalia also ruled that Woodward was specifically excused from a provision in the Bankruptcy Code that requires anyone holding an asset that belongs to a debtor or bankruptcy trustee to turn over that asset when a bankruptcy case is filed. This exemption allows Woodward to continue her work unimpeded.

As of Sept. 30, Woodward has collected $1,474,277 in purse proceeds and other funds and spent approximately $915,982 on board bills, veterinary expenses, administrative fees, and commissions, according to her most recent monthly reported filed Oct. 2. Zayat Stables has ownership interest in 13 remaining horses in nine locations. In previous court documents, Woodward indicated she intends to sell 11 horses and two stallion shares by the end of December, including the following who have been entered in the upcoming Keeneland November Breeding Stock Sale: the racehorse Amandrea, who has been cataloged as Hip 3212; a Kitten's Joy  weanling out of Fateer that is Hip 250; the mare Fateer, who is Hip 249; the grade 1-placed 3-year-old Gozilla, who is Hip 2996; and the American Pharoah  3-year-old filly Scarlett Agnes, who is Hip 2816.

In a petition filed Sept. 17, Zayat Stables' creditors Joseph Bodner and Steven Keefer sought to have Woodward and Bell replaced with a trustee because they didn't believe the maximum value was being achieved for the assets being sold. This petition followed an involuntary Chapter 7 bankruptcy petition they filed that forced Zayat Stables into bankruptcy. Zayat Stables founder Ahmed Zayat had already filed for personal Chapter 7 bankruptcy protection Sept. 8. Keefer, a former financial consultant for Ahmed Zayat, is owed $275,000 and a company Keefer owns called U.S. Elite is owed $188,500, while Bodner is owed $150,000. They are among 132 non-priority, unsecured creditors with unpaid bills or who made private loans to Ahmed Zayat or Zayat Stables.

In his order, Papalia said straightforwardly the interests of Zayat Stables' creditors are better served with Woodward as receiver. Woodward is to continue filing regular reports and will make available to a trustee, identified by the involuntary bankruptcy proceeding, reasonable access to Zayat Stables' books and records. The judge's order takes effect immediately, but because an interim trustee for the involuntary bankruptcy has not been appointed yet, a final hearing has been scheduled for Nov. 12 to allow time for that trustee to address any conditions or provisions.

"All parties are hereby directed to cooperate in good faith and not to interfere with the duties that the receiver is authorized to perform in accordance with the Receiver Order and this Order," Papalia wrote.