By T. D. Thornton
Ahmed Zayat's attempt to get out from under $19 million in debt has reached yet another–and purportedly intentional–legal bottleneck.
The trustee assigned to the case is now alleging that three children and the wife of the financially strapped owner and breeder of Triple Crown champ American Pharoah are refusing to cooperate in providing documentation the trustee had subpoenaed from them to try and trace millions of dollars in possibly fraudulent transfers.
“[T]he Trustee's investigation reveals that the Debtor and his family members have engaged in a pattern of intermingling of assets and ongoing financial transactions among themselves,” the attorney bankruptcy trustee Donald Biase wrote in a July 13 filing in United States Bankruptcy Court (District of New Jersey).
“Notably, the [Zayats] have made only paltry productions in response to the subpoenas directed to them. Worse, their counsel has engaged in extensive redactions of the bank account statements they did produce based upon nothing but their own unilateral determinations of relevance, and has also simply omitted bank records for important periods,” the filing continued.
Ahmed Zayat's case seeking Chapter 7 bankruptcy protection has now dragged past the 10-month mark and has been hallmarked by the trustee's multiple allegations of stalling, evasion and non-cooperation. Zayat has repeatedly denied those claims via court filings.
The primary role of a court-appointed trustee in a bankruptcy case is to ensure that a debtor who files for federal bankruptcy protection is not hiding assets that could instead be used to pay creditors–many of whom in Zayat's case are Thoroughbred trainers for his now-liquidated racing stable and various racing- and bloodstock-related entities.
An objection to a bankruptcy protection plea can be filed if a trustee believes aspects of the required documentation are not on the up-and-up. A judge can either dismiss a case on his own or by acting on a trustee's objection. A judge can also deny the discharge of a particular debt.
If alleged fraud is uncovered in a bankruptcy filing, the Federal Bureau of Investigation can investigate, and the U.S. Department of Justice can prosecute if it believes a crime has been committed.
Back on June 4, the trustee issued a Rule 2004 subpoena to Zayat's wife, Joanne Zayat, and three of their four children, Emma, Benjamin and Justin Zayat. A business entity controlled by Justin, JPZ Holdings, LLC, was also subpoenaed.
Federal Rule of Bankruptcy Procedure 2004 authorizes the Trustee to investigate the “acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor's estate, or to the debtor's right to a discharge.”
Specifically, the trustee wanted to see detailed information from the family's allegedly intermingled accounts with banks, credit card companies, other lending-related institutions.
The subpoena also wanted access to four TVG betting accounts “belonging individually to or jointly with, including as an additional or authorized user…any member of the Debtor's Family…or JPZ Holding,” as well as any passwords associated with such accounts.
On June 23, the four above-named Zayat family members (the “movants”) asked the court to quash the trustee's subpoena, alleging that “Each Subpoena is exceptionally broad and seeks wholesale financial records and other personal and proprietary financial information regardless of whether it has any relationship whatsoever to the Debtor or the Estate.”
In the trustee's July 13 memorandum in opposition to that proposed quashing, Biase contended that the motion to quash “is an exercise in gamesmanship, obstruction, and delay…. [T]hree of the Movants [Justin, JPZ Holdings and Joanne] were tied especially closely to the finances of the Debtor and to Zayat Stables.”
The filing continued: “Justin Zayat was the President of Zayat Stables, and so far as can be determined his sole source of income during the relevant period was Zayat Stables. Justin Zayat was also the beneficiary of nearly $1 million in transfers at a time when the financial condition of the Debtor and Zayat Stables were deeply troubled. Justin Zayat's company, JPZ Holdings, has also received millions of dollars in payments from the Debtor's brother and creditor, Sherif Zayat.
“Joanne Zayat, the Debtor's wife, was the recipient of over $1 million dollars of direct transfers from Zayat Stables. She is jointly named on every material bank account used by the Debtor, and is also a joint account holder with Justin Zayat.
“The accounts of Justin Zayat, Joanne Zayat and JPZ Holdings have been and are continuing to be used by the Debtor's brother, Sherif Zayat, to pay the Debtor's claimed $72,000 in monthly expenses. Joanne Zayat was also directly involved in obtaining loans from close friends and acquaintances for the benefit of the Debtor and/or Zayat Stables, and she has recently been repaying one of those creditors out of a bank account held in the name of her speech pathology business.
“In short, if the Trustee is to understand the conduct and financial transactions of the Debtor, he must necessarily obtain financial information relating to these third parties,” the filing contended.
The trustee further argued that the subpoenas at issue “are not only fully justified, but many are made necessary because the Debtor himself refused to produce records from a number of the financial institutions at which he has accounts.”
Biase explained the convoluted process by which Zayat, during the course of his bankruptcy plea, even directed the Trustee to serve his own financial institutions with subpoenas, “only to then have the Debtor's family members then move to quash those very subpoenas….”
“The Trustee's investigation also has revealed a substantial number of misstatements and omissions in the Debtor's bankruptcy schedules that were only uncovered through the issuance of Rule 2004 subpoenas to third parties, including overstatements of outstanding debt totaling hundreds of thousands of dollars.
“It is this ongoing pattern of obstructive activity, coupled with the Debtor's shifting and highly questionable statements in his schedules…that more than justified the Trustee's issuance of the subpoenas at issue. That same ongoing pattern of delay, obstruction, and gamesmanship requires that the Motion be denied in its entirety,” the filing stated.