Zayat Stables asks judge to reconsider takeover, says lawsuit is ‘a soap opera’
Zayat Stables on Monday filed motion to block the takeover of owner Ahmed Zayat’s racing and breeding operations by a court-appointed receiver in Lexington.
Last week, Fayette Circuit Court Judge Kimberly Bunnell appointed a receiver to assume control of Zayat Stables after New York investment firm MGG sued Zayat, alleging he has defaulted on $23 million in loans.
In the filing late Monday, Zayat Stables asked that their motion to dissolve last week’s order appointing the receiver be heard at the court’s next motion hour on Jan. 31 at 8:30 a.m. “or as soon thereafter as the parties may be heard.”
According to Zayat Stables, the order “was flawed procedurally and without proper authority substantively and should not have been entered.”
Alternatively, the motion asks the court “to modify the order to tailor it to the rights granted to the plaintiff to liquidate the collateral at issue rather than granting the receiver the broad rights to take over all operations of the company.”
Ahmed Zayat, who also was sued, has not filed a response to the suit. According to the filing, he has yet to be served in the suit and has no Kentucky counsel.
Zayat has not responded to requests by the Herald-Leader for comment. But he told The Bloodhorse, an industry publication, that he was “blindsided” by the lawsuit.
A memorandum filed with the motion accuses MGG of not acting in good faith, noting that Zayat Stables had been working with MGG on a plan “that would have ensured MGG received back every cent of its investment.”
The memo said there is no need for a lawsuit or a receiver.
“Rather than continue to work in good faith to negotiate a liquidation plan, MGG ceased negotiations and rushed to court to file a complaint carefully drafted to gain media attention,” according to the filing.
MGG filed a lawsuit against Zayat Stables and Ahmed Zayat in Lexington on Jan. 21, alleging among other things that Zayat had secretly sold off assets of the stable, including nine breeding rights to Triple Crown winner American Pharoah, that were part of the collateral on MGG’s 2016 loan.
American Pharoah stands at Coolmore’s Ashford Stud in Versailles for a reported $200,000 stud fee. He is one of the top young sires in the breeding industry with a lucrative future. Last year he covered more than 170 mares.
In Tuesday’s filing, Zayat Stables acknowledges selling the shares, which allow an owner to bring one Thoroughbred mare a year to the stallion each year to produce a potentially valuable foal. But Zayat Stables denies “pocketing” the money as MGG alleges.
Instead, Zayat Stables filed bank records that it says show the money from the sales of the shares was paid immediately to MGG.
According to the filing by Zayat Stables, MGG painted a picture of Zayat Stables as “a rogue borrower” who tried to avoid its obligations. But the stable said MGG failed to tell the court that Zayat Stables regularly made payments on its loans in a timely manner for three years; paid MGG more than $16 million; and that MGG overcharged Zayat Stables more than $900,000 in 2017, a situation corrected after Zayat Stables brought the overbilling to MGG’s attention.
Zayat Stables disputes MGG’s claim that a receiver is needed to make sure the horses are fed and cared for because “MGG knew well that the horses were under the care of reputable trainers and that 10 of the horses raced in the three weeks prior to filing, including a Grade II stakes winner on January 4, 2020.”
Desert Stone, won the San Gabriel Stakes at Santa Anita and another Zayat Stables runner, Challah, finished second in a Santa Anita race on Jan. 26, according to the filing. “That is hardly the picture of unfed and uncared for horses that MGG painted for the court,” the filing said.
The memorandum also outlines how Zayat Stables, a prominent Thoroughbred operation that produced the homebred champion American Pharoah as well as other top racehorses and stallions, came to financial difficulty.
“In 2019, however, it faced liquidity issues and had difficulty maintaining sufficient cash on hand to meet its loan obligations,” according to the filing.
The pressure began in 2017 with the overbilling by MGG, according to the filing, which meant Zayat Stables had less money to spend on horses at the yearling and bloodstock sales at Keeneland and Fasig-Tipton that fall. By mid- to late 2018, Zayat Stable needed additional cash, according to the filing, so the sales of American Pharoah breeding rights began.
But, the filing acknowledges, that was not enough for Zayat Stables to meet is loan obligations and in the fall of 2019 they notified MGG they would miss a payment and began negotiations on a business solution.
On Jan. 16, according to the filing, MGG proposed a liquidation using the services of Gatewood Bell of Cromwell Bloodstock. Zayat Stables was attempting to finalize a cooperation agreement when MGG filed suit, according to the court documents.
That turned a breach of contract “into a soap opera,” according to the filing, on the eve of the racing industry’s biggest honors, the Eclipse Awards.
Zayat Stables said it asked MGG to seal the complaint “in order to eliminate marketplace confusion and maximize the value of the Equine Collateral,” but MGG refused.
That has created confusion with Zayat Stables trainers and “reluctance to enter horses in races,” according to the filing.
The motion filed Tuesday asks the court to dissolve the receivership or modify the order to allow a liquidation of the stables, possibly through a dispersal sale at Fasip-Tipton in April or July.
