By T. D. Thornton
Two weeks after being granted an extra month to determine if Ahmed Zayat is hiding assets while seeking Chapter 7 bankruptcy protection, the court-assigned trustee in the case told a federal judge Friday that the allegedly insolvent owner and breeder of Triple Crown champ American Pharoah (Pioneerof the Nile) is still trying to evade scrutiny by withholding records.
And trustee Jeffrey Testa further warned that the longer the case drags on, the higher the risk is that Zayat will wipe away cloud-storage financials before the trustee can examine those documents.
Testa now wants the judge to “compel turnover” of Zayat's trove of electronic records, and to “direct” Zayat to cooperate with the investigation, according to an Apr. 16 United States Bankruptcy Court (District of New Jersey) filing.
In that document, the legal team for the trustee wrote that because of the “serious and disturbing allegations of fraud at play in this case,” the court “should not leave it to chance that Mr. Zayat or his designees will act competently” to maintain the integrity of the evidence.
“Given the overwhelming allegations of fraud and expected sought-after delay, the Chapter 7 Trustee simply cannot wait any longer for access to the Cloud,” the filing states. “Although Mr. Zayat has represented that the Cloud is secure and that he is aware of his obligations, the longer the information on the Cloud remains in the hands of Mr. Zayat the more susceptible it is to manipulation or destruction, and this ongoing and unreasonable delay impedes the Chapter 7 Trustee's investigation.”
The job of trustee in a voluntary bankruptcy case is to make sure that a debtor's claim of insolvency is on the up-and-up. In Zayat's case, he alleged in his initial filing last September that he has $19 million in debt but only $314.22 in assets, with a huge chunk of that money owed to Thoroughbred-related creditors.
People who file for bankruptcy protection generally try to cooperate with their assigned trustees, because without the trustee's seal of approval, their debt likely won't get forgiven by a judge.
But Zayat's case has been riddled with accusations of his stonewalling and evasion since the outset of the initial hearings. Zayat, through his attorney, has repeatedly denied those claims and stated that he has been a willing and cooperative petitioner.
Not only can a trustee file an objection if aspects of the filing don't seem legit, but if alleged fraud is uncovered in a bankruptcy petition, the Federal Bureau of Investigation can investigate, and the U.S. Department of Justice can prosecute.
The trustee's request to the judge on Friday capped a week of drawn-out, back-and-forth demand letters and phone conferences between the trustee and Zayat's legal team over whether and how the access to his cloud-storage records would be granted.
According to the filing, just when the trustee thought the parties had agreed on safeguards that would satisfy Zayat's concerns about not wanting anyone to read his family's personal emails, Zayat on Apr. 15 instead proposed an unworkable alternative, which essentially was that the trustee should ask for specific financials it believed were stored in the Cloud and Zayat would retrieve them for the trustee.
“This proposed process was simply a close cousin of Mr. Zayat's previous proposals designed, in the Trustee's view, to dictate and control the process contrary to law [and] leave the Cloud unsecured, delay, and make Mr. Zayat the lynchpin of any document search and review,” the filing states.
“Mr. Zayat's primary basis for refusing to grant the requested access is that the Cloud allegedly commingles and contains his emails and those of his family members that are supposedly unrelated to the Debtor's business and that might comingle and contain, among other things, HIPAA-implicated, non-business, and attorney client-privileged communications,” the filing continues.
“The fact that Debtor's principal and his family members supposedly decided to mix business and non-Debtor affairs does not negate Debtor's statutory duty to turn over property of the estate and recorded information to the Chapter 7 Trustee,” the filing asserts. “There is simply no valid reason why the Chapter 7 Trustee should not be granted access to independently secure the Cloud. The law does not support Mr. Zayat's position…
“Given these circumstances and Mr. Zayat's decision not to allow the Chapter 7 Trustee to have access to and independently secure the Cloud and its contents raise serious concerns on the part of the Chapter 7 Trustee that the cloud and its contents might not be secure while under Mr. Zayat's exclusive possession and control, and that the Chapter 7 Trustee might be obstructed in reviewing documents that can lead to recoveries for the benefit of all creditors.
“The Chapter 7 Trustee has already taken steps to engage a reputable IT partner–Epiq–to take control of the Cloud, preserve it, and copy its contents. Mr. Zayat will have access copies to any information on the Cloud once it is secured; thus there is and will be no prejudice to Mr. Zayat or his family members,” the filing states.
MGG Investment Group, LP, the lender that is separately suing Zayat and his family members for allegedly obtaining a $24-million loan by fraud and then not repaying it, has alleged in court documents that the trustee needs to examine bank accounts in the names of Zayat's wife (Joanne Zayat) and son (Justin Zayat) because “they appear to have been used as conduits through which Sherif El Zayat, the Debtor's brother, loaned money to Ahmed Zayat.”