Creditors of Zayat Stables have petitioned the U.S. Bankruptcy Court District of New Jersey to replace court-appointed receiver Elizabeth Woodward and consultant Gatewood Bell with an interim trustee because they allege Woodward and Bell have not been acting in the best interest of the creditors.
In a petition filed Sept. 17, creditors Joseph Bodner and Steven Keefer state that "legitimate questions" have surfaced regarding how Woodward and Bell have been managing Zayat Stables during the past nine months, specifically in regards to reduced prices for the quick sale of Zayat horses, horses sold privately to Bell at alleged "significantly deflated prices," and an alleged failure to purchase and maintain insurance on horses that, upon their death, could have provided additional funds to the stable.
"Since the petitioning creditors do not know the receiver's plans for any upcoming sales, it is urgent that the interim trustee take over the administration of the alleged debtor's estate immediately in order to prevent any additional sales without further investigation and evaluation of the circumstances surrounding each horse as well as the other collateral that is property of the alleged debtor's estate," the petition stated. "Here, the perception of value of the alleged debtor's assets has varied widely between the receiver and the petitioning creditors; therefore, the immediate appointment of an interim trustee is critical."
A hearing has been scheduled for Oct. 6 to consider the motion to appoint an interim trustee.
Woodward and Bell filed their responses to the creditors' motion Sept. 25, calling the request "riddled with omissions, mischaracterizations, and (a) clear misunderstanding of the receivership action, the receiver's work, and the equine industry itself."
Woodward and Bell also submitted separate declarations that detailed the actions they've taken since Woodward was appointed receiver Jan. 22 and the circumstances associated with decisions to sell a horse privately or at auction or race it.
"The receiver and Mr. Bell provide the court with operations data from the start of the receivership to date, such as, all horses sold at public and private sales, results, and costs of care to date. They also chart the receiver's navigation of a rocky marketplace due to the impact of COVID-19," states a combined response to the creditors' motion. "The declarations detail the receiver's diligent and competent acts in managing the liquidation of the Zayat Stables assets. Transferring the remaining property at this juncture would only rock a receiver-steadied boat."
Keefer is a former New York investment banker and former chief of staff of Al Ahram Beverages, an Egyptian brewery and beverage company formerly owned by Ahmed Zayat. The company, which Zayat bought in 1997 from the Egyptian government as part of a privatization plan, was sold to Dutch beer giant Heineken for $280 million in October 2002, according to a New York Times article.
Keefer and Bodner entered the financial chaos that has surrounded Zayat Stables all year when they filed an involuntary bankruptcy petition Sept. 14 against the breeding and racing operation under their own names and a company Keefer owns called U.S. Elite, a Hawthorne, N.J., business that sells apparel, footwear, and a variety of gear "to enhance the warrior lifestyle."
The involuntary bankruptcy petition shows Zayat Stables allegedly owes Keefer $275,000 and owes U.S. Elite $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.
The web of financial transactions that eventually snared Keefer and Bodner began in 2016, the year after Zayat Stables' homebred American Pharoah swept the Triple Crown and won the Breeders' Cup Classic (G1). Ahmed Zayat began exploring "a monumental equity deal to continue its trajectory of growth which would provide long-term liquidity for expanding the business," according to court documents. Because negotiating such a deal takes time, Zayat sought short-term loans to bridge the gap. MGG Investment Group was introduced as a potential financing source because the firm at the time was looking to expand into new markets, including the equine industry. Zayat Stables would obtain more than $25 million in loans from MGG during the summer of 2016. By the fall of 2019, Zayat Stables was struggling to pay its debts to MGG and a host of trainers, veterinarians, and farms nationwide. At this time, Zayat began borrowing money from "several alternative sources," including Keefer and Bodner, according to court documents.
Zayat Stables has been embroiled in an alleged fraud and breach of contract lawsuit with MGG since January 2020, when the Fayette County (Ky.) District Judge Kim Bunnell appointed Woodward as receiver to oversee the stable's operations because MGG was concerned assets were being sold without its knowledge. Woodward, the director of forensic accounting and litigation support at the Lexington accounting firm Dean Dorton, enlisted the help of Bell, whose entire professional career has been with the Thoroughbred business and owns Cromwell Bloodstock.
In June, Bunnell ruled in favor of an MGG petition for summary judgment that holds Zayat Stables accountable for more than $24.5 million in debt. Also in June, the court denied a motion from Ahmed Zayat and his son, Justin, that they be personally excluded from any fraud claims alleged in the MGG lawsuit.
By Sept. 8, Ahmed Zayat filed for voluntary chapter 7 bankruptcy in his own name, seeking to clear away the lion's share of more than $19.3 million in debt. In his bankruptcy filing, Zayat reported a monthly income of $13,875 and monthly expenses of $72,903. Apart from his home in Teaneck, N.J., valued at $1,775,000, the owner/breeder reports having only an additional $117,815 in assets.
Keefer and Bodner pursued the involuntary bankruptcy specifically against Zayat Stables in part to seek "the appointment of an interim trustee in order to preserve property of the estate."
In making their case for appointment of an interim trustee, Keefer and Bodner allege that Woodward and Bell had been selling Zayat horses for far below their market value. Their examples include a mare named Megalicious, a winning daughter of Songandaprayer who sold for $6,000 to MM Racing during the 2020 Fasig-Tipton Kentucky February Mixed Sale. The following month at the Ocala Breeders' Sales March 2-Year-Olds in Training Sale, a filly by American Pharoah out of Megalicious named Russian Samovar sold to Katsumi Yoshida for $650,000 out of the Wavertree Stables consignment.
"Just a month later, during very uncertain times in the financial and equine industry … the receiver sold Megalicious and her unborn foal for a total of $6,000 when just one of her foals sold for 100 times that amount a few weeks later," stated the petition for an interim trustee.
The petitioners also cited a decision not to insure an American Pharoah colt named Finally the One, whom Zayat Stables bought for $800,000 at the Keeneland September Yearling Sale from Warrendale Sales. Bred by Stonestreet Thoroughbred Holdings, the colt was a half brother to grade 1 winner Secret Circle. Zayat reportedly had a 75% ownership stakes in the colt.
"Another example of the receiver not looking out for the benefit of all the creditors is when the receiver chose not to insure Finally the One, even though it was the most expensive horse in the entire crop," the petition stated. "Unfortunately, Finally the One died, and the receiver did not receive any insurance proceeds resulting from his unexpected death."
Finally, the petition alleges that several horses were sold privately to Everett Dobson's Cheyenne Stables, which has used Cromwell Bloodstock to acquire horses, and at least one horse bought privately was purchased directly by Cromwell Bloodstock.
"Any private sale to an 'insider' prohibits the receiver from obtaining the highest and best sales price for the benefit of all creditors, which is another reason that the petitioning creditor are requesting the immediate appointment of an interim trustee in the Chapter 7 case," the petition stated.
Woodward, in her declaration to the bankruptcy court, said she and Bell have worked diligently to stabilize Zayat Stables' operations and maximize the value of its horses. Since Jan. 22, Woodward has reported to the court costs and expenses (boarding, training, vet care, etc.) of approximately $835,772 and cash-in-hand proceeds of $1,388,096 from purses and any horses sold.
The creditors allege in their motion Zayat Stables had ownership interests in more than 70 horses who were of significantly value. Woodward, however, said the actual inventory as of Jan. 22 was 46 horses.
"Of that number, almost all had values that fell far short of the state value on the liquidation plan prepared by the alleged debtor in December 2019 and attached to MGG's complaint," Woodward stated in her declaration. "In fact, many horses appeared to be a complete liability, costing more to maintain than they were worth."
Woodward has year to date sold 16 horses at public auction for total gross proceeds of $953,000 and sold 12 privately for gross sales of $960,500. Woodward added she intends to sell 11 more horses and two stallion shares by the end of December, including the racehorse Amandrea, a Kitten's Joy weanling out of Fateer, the mare Fateer, the grade 1-placed 3-year-old Gozilla, and the American Pharoah 3-year-old filly Scarlett Agnes.
Regarding efforts to maximize the assets both at sales and at the racetrack, Woodward said the creditors have not accounted at all for the impact of COVID-19, which forced the cancellation of sales and race meetings.
"Our original plan to race 16 of Zayat Stables' horses at tracks around the country was foreclosed," according to Woodward. "Further, it became increasingly difficult to transport horses boarded in approximately 20 locations to a track that might still be open, as travel around the country became increasingly restricted. These same travel restrictions hindered potential purchasers for both public and private sales because such potential purchasers were unable to travel to inspect, appraise, and finalize their due diligence with respect to the purchase of particular horses. Both the inability to preview the horses and the inability to enter horses into races to boost their résumés led to decreased purchase prices for the horses."
Regarding the decision to insure horses, Woodward said these decisions are made on a horse-by-horse basis because of the high cost.
"The petitioning creditors' insinuation that I have been lax in my efforts to insure the Zayat Stables horses is untrue and appears to be based on an uninformed belief that equine insurance is easy to procure and relatively inexpensive, which is not the case," Woodward stated in her declaration. "I have reported the insurance coverage I purchased in my reports, and to date, neither the presiding judge to whom the reports are submitted, nor MGG, which has claimed a security interest in all the horses within the estate and has the largest interest in the safeguarding of its collateral, have objected to that choice."
Bell stated in his declaration that the several examples the creditors used to show horses being sold below their value only shows "a lack of understanding of how horses are valued in the Thoroughbred industry.
"Using the value of a sibling to establish price points for Megalicious … is overly simplistic and not a reasonable method to value a horse," Bell continued. "The offspring or sibling of a prize-winning racehorse might never set foot on a track. Auction prices are set based on a horse-by-horse analysis of each individual animal. While bloodlines and mating combinations are closely studied by those in the industry, genetics is one of many factors that go into pricing, and it is not the case that related offspring must be valued the same."
Regarding the allegation he was involved in "insider" deals, Bell said he found that claim "offensive."
Bell acknowledged that Cheyenne Stable is a client but said he was aware of only one "arms-length purchase" by Cheyenne of a Zayat horse, a yearling filly by American Pharoah out of La Vita Bella that sold for $300,000 at this year's Fasig-Tipton Selected Yearlings Showcase.
"The petitioning creditors also reference the purchase of a horse under the name of my company, Cromwell Bloodstock, but fail to provide any details. I cannot respond to that other than to state that Cromwell Bloodstock did not purchase a horse from Zayat Stables and does not own any horse previously belonging to Zayat Stables," Bell stated.
Bell added that Woodward has consistently maximized the value of Zayat Stables' stock while keeping costs as low as possible without compromising on the quality of the horses' care.
"I believe that only someone with an intricate knowledge of the industry can adequately protect Zayat Stables' creditors and submit that Ms. Woodward should remain in place as receiver and complete the liquidation plan that she has in place rather than turning over the remaining Zayat Stables assets to a new trustee who would have to repeat, in many ways, much of the work that the receiver and I have done," Bell concluded in his declaration.
Other action being taken with the lawsuit between MGG and Zayat include petitions to transfer the entire case to the U.S. District Court for the District of New Jersey. A notice to remove the case from Kentucky was filed Sept. 24 by Zayat Stables, Ahmed Zayat, and Justin Zayat. The motion states moving the case would consolidate legal actions in New Jersey, where the bankruptcies were filed, and would "prevent a waste of time, energy, and money and protect litigants and witness and the public against unnecessary inconvenience and expense."
Attorneys involved with the case said a move from Kentucky state court to federal court might affect some of the charges levied in MGG's lawsuit, but it is unclear at this time how extensive those changes might be.
MGG's attorney W. Craig Robertson said he doesn't see that moving to federal court adversely affects his case.
"While we may challenge the removal to federal court, the claims remain the same no matter what court they are litigated in," Robertson said.
