By T. D. Thornton
MGG Investment Group, LP, is already nearly a year into a civil lawsuit initiated to try and recoup $24 million in loan defaults by Ahmed Zayat and his family-owned bloodstock and racing operation. Now the New York-based lender is going after the insolvent Triple Crown-winning owner and breeder in a different court by trying to get a federal bankruptcy judge to rule that some of Zayat's debts shouldn't be legally forgiven under the Chapter 7 bankruptcy protection he is seeking because those loans were the product of years of systematic fraud that Zayat allegedly orchestrated.
“The indebtedness owed by Ahmed Zayat to MGG is non-dischargeable as it is a debt for money, property, services, or an extension, renewal, or refinancing of credit, that was obtained by false pretenses, false representations and/or actual fraud within the meaning of Bankruptcy Code Section 523(a)(2)(A),” MGG stated in a Dec. 4 complaint filed in United States Bankruptcy Court, District of New Jersey.
“[I]t is a debt…that was obtained by use of a series of statements in writing that were materially false, respecting an insider's (Zayat Stables) financial condition, on which MGG reasonably relied, and that Ahmed Zayat caused to be made or published with the intent to deceive MGG,” the complaint continued. “[I]t is a debt for willful and malicious injury caused by Ahmed Zayat to the property of MGG within the meaning of [the] Bankruptcy Code.”
The specifics of MGG's fraud allegations against Zayat are not new. They were just introduced in a different court in a different legal context.
In fact, the “adversary proceeding” that MGG filed Dec. 4 covers the nearly identical timeline of alleged deceit and evasion involving racehorses and bloodstock between 2016 and 2020 that MGG first brought to light in January in its Kentucky lawsuit in Fayette Circuit Court.
That case revolves around accusations that Zayat hid the proceeds from the sale of nine lifetime breeding rights shares to 2015 Triple Crown winner American Pharoah, plus at least 15 other “valuable racing Thoroughbreds” that had been pledged to MGG as loan collateral.
Also Dec. 4, in a separate status report filing related to that case, the court-appointed receiver who has been managing and liquidating Zayat Stables reported that the operation is down to just three remaining horses after nine sold at public auction in November, grossing $566,000.
The MMG suit is one of at least three intertwined and currently active court cases involving Zayat and his racing stable.
Separately, in a federal Chapter 7 bankruptcy petition filed Sept. 8 by Zayat himself, horse farms, trainers, bloodstock businesses, veterinarians and equine transportation companies were among 132 entities listed as creditors.
Zayat stated they are due $14.7 million in “non-priority unsecured claims,” which means they are at the bottom of the hierarchy to get paid–if they get paid at all–if the plea for bankruptcy protection gets granted. This is the bankruptcy case that MGG is now trying to influence with its Dec. 4 adversary proceeding.
Complicating matters further, Zayat's personal voluntary bankruptcy pleading is different from a separate involuntary bankruptcy petition that Zayat's former financial advisor and other entities initiated against his racing stable Sept. 14.
Involuntary bankruptcy proceedings are relatively uncommon, and are generally designed to protect creditors as opposed to debtors. Involuntary bankruptcies are often filed against companies (as opposed to individuals) as an attempt to get paid when it is believed that a firm is rapidly burning through assets and/or financial malfeasance is alleged.
MGG's Dec. 4 complaint pertaining to Zayat's Chapter 7 petition demanded entry of a judgment declaring that he “is personally liable for all of the indebtedness owed to MGG under the Loan Documents in an amount to be determined by this Court and that such indebtedness owed by Ahmed Zayat is determined to be nondischargeable pursuant to [the] Bankruptcy Code [while] awarding MGG such other and further relief as this Court deems appropriate.”
The filing continued: “For several years, Ahmed Zayat's fraudulent scheme worked for his benefit. In light of the fraudulent sales of MGG's Equine Collateral, the concealment of sales revenue relating thereto, the manipulation of accounts payable, and the nondisclosure of Defaults and Events of Default under the Loan Documents by Zayat Stables…MGG was intentionally deceived and kept 'in the dark…'
“As a result, MGG was defrauded of the opportunity to accelerate its Loans at or before the time when these fraudulent actions were occurring, thereby enabling Ahmed Zayat to continue to orchestrate the wrongful sale of additional Equine Collateral and further deprive MGG of the ability to insure that such sales realized fair market value and that the proceeds thereof were applied in accordance with the Loan Documents.”
MGG's Dec. 4 filing also stated that “This Complaint is not intended to supersede or modify any of MGG's claims against Ahmed Zayat or any other party asserted in the Kentucky [lawsuit]….
“Pursuant to this Complaint, MGG is setting forth the grounds on which it objects to the dischargeability of debts owed by Ahmed Zayat to MGG, and is preserving its right to have the claims against Ahmed Zayat set forth in the Kentucky [lawsuit] consolidated with the claims set forth herein at such time as the issues relating to the Kentucky [lawsuit] are ripe for further discussion by this Court.”