Zayat Receiver Argues Powers Not Broad Enough

A Friday hearing could bring much-needed clarity to the $23 million lawsuit against Ahmed Zayat and his financially troubled Zayat Stables, LLC, regarding whether or not the court-appointed receiver in the Kentucky case should be allowed to have broadly expanded legal powers over racing and breeding stock.

But instead of categorically fighting the receiver's Feb. 18 motion for more control over his horse business, lawyers for Zayat on Feb. 20 filed a response that asked a Fayette Circuit Court judge to grant that motion in part and to deny it in part.

“The requested changes in some instances go too far and in others not far enough,” the defendants' court response states, citing “strict prohibition on payment of trainers and other accounts receivable” and “receiver immunity” as the two main objections.

The Zayat legal team is arguing that the receiver's inability to negotiate and/or pay off comparatively small horse-expense bills is–in at least one case–causing a Grade I-placed colt to be “held hostage” over a boarding bill.

Other lower-denomination disputes over things like unpaid veterinary bills could potentially cause a racing commission to suspend the Zayat Stables' racing license, which if enforced in reciprocity in other states, would prevent the outfit's racehorses from earning purses and boosting their value.

“Zayat Stables has never objected to a liquidation of assets, but believes it must be done in an orderly fashion that maximizes the value of the equine collateral,” the response states.

The plaintiff in the loan-default suit, MGG Investment Group, LP, had requested and was granted court-appointed receivership Jan. 22 as part of its civil suit against Zayat and his family-involved business.

Lexington-based Elizabeth Woodward, the director of forensic accounting and litigation support for Dean Dorton, one of the largest certified public accounting firms in Kentucky, was appointed as the receiver.

Every court order appointing a receiver is different, and the one Woodward is working under directs her to take possession of the collateral and maximize its value. The receiver works for and reports to the court, not any of the parties in the case.

The Zayat legal team had attempted to get the court to dissolve the receivership order Feb. 6, but the judge would not allow it.

Woodward stated in court documents that as of Feb. 14, she “has transitioned from the asset location phase of her work to sales and racing of the horses under her control.”

But now that Woodward is delving into the horse-management phase, she is finding that she needs broader powers to do her job, according to her Feb. 18 motion.

“Over the course of her work, the Receiver and her agents have been contacted by many parties informing her of their claims and asserting first rights to sale proceeds and receivables,” her motion states. “Based on the frequency of demands and the heightened interest spurred by the Receiver's first sales at Fasig-Tipton Mixed Sale, the Receiver predicts these conflicting claim demands will only increase as more sales occur and proceeds are recovered.

“The Receiver submits that determining lien validity, priority and payment entitlement beyond payment of statutory liens for agisters and veterinary service is beyond the Receiver's duties set forth in the Order. Not only are questions and claims against the proceeds of sales increasing, the Receiver is in receipt of notice that some parties intend to keep possession of assets unless paid, seemingly in contradiction of the terms of this Court's Order,” the motion states.

The original motion that appointed Woodward states that “The Receiver and any party hereto may, at any time, on proper notice to the parties hereto, apply to this Court for further or other instructions and for further power necessary to enable the Receiver to properly fulfill the Receiver's duties.”

So on Feb. 18, Woodward asked for that receivership order to be modified. Her nine-point plan includes the following key requests:

• The authorization to “administer, sell, preserve, make racing decisions or otherwise maintain the Property.”
• Relief from “any personal liability in connection with any liabilities, obligations, liens, citations, code violations, or amounts owed to any of Zayat Stables' creditors…or other claimants.”
• Not being liable for “the payment or nonpayment of goods or services provided to Zayat Stables prior to the date of the original Order” and clarification that any “individual or entity receiving a copy of this Order is hereby enjoined and restrained from discontinuing service to the Receiver or the Property based upon non-payment of such goods…”
• In the event of a sale of any assets, being allowed to make payments from net proceeds “from the specific asset to be sold, for services associated with the care, feed, grazing, lodging, (Agister's Lien),” and that “to the extent related parties claim competing or conflicting liens, the Receiver is not charged with determining the validity, priority, or payment of and for these liens…”
• Clarification that “Along with her employer, employees, agents and attorneys, the Receiver shall not have claims asserted against her relating to the Receiver's duties under this Order, except for claims due togross negligence, gross or willful misconduct, or failure to comply with this Court's orders.”

The legal response from the Zayat attorneys two days later challenged the part of the modification that “would preclude the Receiver from making any payments on past accounts receivable under any circumstances while forcing trainers or other providers to continue to provide services.”

Such a provision “is overly harsh and goes well beyond the restrictions typically placed on receivers or trustees,” the Zayat response states. “As a result, it has the significant possibility of affecting the equine collateral adversely.”

This “strict prohibition,” the response states, “is likely the result of MGG's efforts to minimize its costs rather than maximize value. MGG made very clear at the hearing on the Motion to Dissolve that its funds should not be used to pay past receivables. The proposed language caters to that demand. But it goes too far and precludes the Receiver from effectively carrying out her duties in a way that maximizes recovery.”

“By way of example, some of the most valuable horses owned by Zayat Stables are 3-year-old-colts, including several trained by Steve Asmussen,” the response states. “One of those, Gozilla (Flatter) raced as a 2-year-old in Grade I races that typically include [GI] Kentucky Derby quality horses. Mr. Asmussen asked for Gozilla to be shipped to him in mid-January so he could return to training, but apparently has not received him.

“This appears to be due to a position taken by WinStar Farm that it will not release any Zayat Stables horses boarded at WinStar because it is owed approximately $33,000,” the response states. “Gozilla alone could be worth millions of dollars if allowed to race, but is effectively being held hostage because the Receiver does not have the flexibility to negotiate a relatively small past due bill in exchange for the possibility of increasing value by millions of dollars.”

Gozilla RNA'd for $170,000 at KEESEP, was bought by Zayat Stables for $150,000 at FTKOCT, then RNA'd for $395,000 at OBSAPR. The colt broke his maiden at Saratoga, then ran third in the GI Hopeful S. and fourth in the GI Champagne S. Gozilla's ownership as of his last start, according to Equibase, is a partnership of Zayat Stables and Gary Barber.

“Another example perhaps even more egregious is the inability of the Receiver under the proposed Order to resolve minor disputes that could have catastrophic consequences to the recovery of proceeds,” the response continues. “Following MGG's initiation of these proceedings and Amended Complaint, several trainers and veterinarians have filed complaints with the California Horse Racing Board [CHRB]. Some of these are for amounts less than $5,000.

“If the CHRB moves forward with a hearing, one of the possible penalties is suspension or revocation of Zayat Stables' racing license,” the response states. “That racing license is a valuable asset in the possession of the Receiver that allows Zayat Stables horses to race and increase in value, yet under the proposed Order she would be precluded from making payments in the thousands of dollars in order to avoid potential suspension or revocation.”

The Zayat response suggests a different modification: “Rather than the strict prohibition proposed by the Receiver and supported by MGG, Zayat Stables requests language that would give the Receiver discretion in those circumstances where she determines payment of past due amounts are in the best interest of maximizing the value of the assets…”

Regarding the receiver's request for “broad immunity” for her acts and for those working under her, the Zayat response instead asks the court to put “negligence” on the list of things the receiver could be liable for (as opposed to “gross negligence” that is written into the receiver's proposed modification).

“In the Motion and Proposed Amended Order, the Receiver asks for broad immunity for her acts and the acts of those working under her, which would presumably include [consultant Gatewood] Bell,” the response states. “The Receiver and Mr. Bell are professionals being asked to perform services within their professional duties and are being compensated for doing so.

“Given the importance of the task at hand and the need to make critical decisions in order to maximize value, it is reasonable to expect the Receiver and those working for her to perform within the standard of care for their professions and as other reasonable prudent Receivers and consultants would perform,” the response states. “As such, Zayat Stables requests that the broad immunity requested by the Receiver be narrowed so that the Receiver is not immune from claims based on negligent performance of her duties…”