By T. D. Thornton
The New York lending firm that last month initiated a $23-million lawsuit against Ahmed Zayat and his financially troubled Zayat Stables, LLC, has broadly amended its civil complaint in a Kentucky court. As of Tuesday, the suit now additionally targets 10 prominent bloodstock individuals and entities that the plaintiff alleges played a role in the “fraudulent scheme” orchestrated by Zayat family members “to sell at a steep discount several millions of dollars of Zayat Stables' assets” that had been pledged as collateral for $30 million in loans.
The wide-ranging updated complaint filed Feb. 11 by MGG Investment Group, LP, in Fayette Circuit Court is seeking the return of individual horses previously owned by Zayat Stables to the court-appointed receiver now handling the case, plus the return of any breeding shares that changed hands. In instances where matings have already taken place based on the transfers of those breeding rights, the plaintiff also wants any proceeds related to future offspring held in “constructive trust for the benefit” of MGG.
“There is an actual and justiciable controversy between Plaintiff and Defendants Orpendale [Coolmore Stud], Ashford Stud, LNJ Foxwoods, Hill 'n' Dale, Yeomanstown Stud, My Racehorse, Flintshire Farm, Brad Sears, Thomas Clark Bloodstock, and McMahon Thoroughbreds in that Plaintiff holds priority security interests over all of the assets that Zayat Stables held when it entered the Loan Documents,” the complaint states.
“MGG also brings claims for intentional interference with contract against two affiliated horse breeding organizations, Orpendale [Coolmore] and Ashford Stud, for their facilitation of the purported sales which they knew would cause Zayat Stables to breach its loan agreements,” the complaint states.
To remedy this alleged interference by Coolmore and Ashford–which the suit claims is related to the Zayats' purported sale of nine lifetime breeding shares to 2015 Triple Crown winner American Pharoah–MGG is requesting an award of damages against Coolmore and Ashford “in an amount to be proven at trial, but no less than $10.89 million.”
The amended complaint also newly names five Zayat family members as defendants based on “intentional interference with contract” for their alleged roles in the American Pharoah breeding rights sales. They are: Ahmed Zayat's wife, Joanne; his sons, Justin and Benjamin, and his daughters, Ashley and Emma. The complaint seeks from them “an amount to be proven at trial, but no less than $14 million.”
In response to the expanded lawsuit, Elizabeth Woodward, the case's court appointed receiver, issued the following statement Wednesday night.
“This morning, the receiver was notified that MGG amended its complaint to add several additional parties. Neither the receiver, nor her consultant Gatewood Bell, participated in the preparation or filing of the complaint. She takes no position on the issues raised in the original complaint or the amendments to it and does not intend to do so. The Circuit Court's Order appointing the receiver directs her to take possession of the collateral and maximize its value, which is the work she is doing. The receiver works for and reports to the Court, not MGG, or any other party.”
The Back Story
The initial lawsuit MGG filed Jan. 22 relates to a 2016 loan agreement with Ahmed Zayat to finance his existing debt, which has been well documented in the racing press and in the courts over the past decade. On its corporate Linked In page, MGG describes itself as “a private direct lender focused on the deeply under-served and less competitive lower-middle market.”
In September 2019, Zayat allegedly began defaulting on his loan payments. The lawsuit alleges that as the two parties began discussing liquidation proposals that involved selling off Zayat Stables' equine collateral to bring the payments current, the firm found out that starting in 2017, Zayat family members had already begun selling off shares in breeding rights and in horses that, three years later, Ahmed Zayat was claiming were still on the books as security against his loans.
In the original filing, the lawsuit stated, “Even though MGG is not aware of all of the deceptive actions of Zayat Stables and Mr. Zayat, it has already uncovered several million dollars of equine collateral…that Zayat Stables and Mr. Zayat have purported to sell out from under the agent's security interests in violation of the Loan Agreements.”
A Jan. 22 court order granted MGG's motion to appoint a receiver “to take charge of, operate, preserve, maintain and care for all of the assets of the Defendant Zayat Stables, LLC.”
On Feb. 6, Ahmed Zayat asked the judge in the case to dissolve the receivership order. His attorney argued that the order to appoint a receiver went well beyond the sale of collateral, allowing for a full takeover of Zayat's company and all of its assets. TDN reported that the defendants' fear was that giving “unfettered and unchecked” access would allow MGG to pursue fraud claims.
The court denied the Zayat motion to dissolve that order, and the amended Feb. 11 version of the lawsuit appears to be based upon a deeper dive by the plaintiff that now involves the buyers in those purportedly fraudulent sales of equine assets.
Who's being Sued and for What?
Beyond the claims against Zayat family members and the parties involved in the “intentional interference with contract” cases listed above, MGG is seeking other remedies aimed at getting equine assets returned to the receiver.
Several of the counts involve legal terms that don't surface regularly in horse-related litigation.
One is replevin, which according to the website FindLaw is defined as “an action to recover personal property that was wrongfully taken or detained. Unlike other forms of legal recovery, replevin seeks the return of the actual thing itself, as opposed to money damages (the more commonly-sought after remedy).”
Another is constructive trust, which FindLaw defines as something “imposed by a court in order to prevent unjust enrichment by someone who has wrongfully obtained an interest in another person's property by obligating them to return the property to its original owner.”
A related component in these claims centers on MGG's filing of Uniform Commercial Code (UCC-1) statements. According to Investopedia, filing UCC forms in a business loan's contact and then again with the state where the principal business is conducted “gives the lender publicly secured rights to the collateral, which makes it easier for them to take action against the borrower and ultimately receive a court order to seize the property if a default occurs.”
MGG is claiming in its suit that it did file the necessary UCC-1 statements, and it is alleging that because of this, any buyers of equine assets from the Zayats since 2016 either knew or should have known that those assets were publicly listed as loan collateral.
In theory, anyone purchasing a pricey equine asset like a racehorse or a stallion share should perform transactional due diligence that cross-checks against such UCC filings. But in practice, it's unclear how many buyers in the Thoroughbred industry actually take that precaution.
In replevin and constructive trust counts against Coolmore, Ashford, and LNJ Foxwoods, the suit is seeking the return of nine total American Pharoah breeding shares that allegedly sold for a cumulative $3.3 million, “far below Zayat Stables' appraised value of its interests.” In addition, the suit seeks the placement in trust of any offspring and/or proceeds therefrom.
In replevin and constructive trust counts against Hill 'n' Dale, the suit is seeking the return of the broodmare American Cleopatra, who in 2017 allegedly sold for $1.3 million, “far below Zayat Stables' appraised value.” In addition, the suit seeks the placement in trust of any offspring and/or proceeds therefrom, “including the American Cleopatra/Tapit foal.”
In replevin and constructive trust counts against Yeomanstown Stud, the suit is seeking the return of the stallion El Kabeir, who in 2017 allegedly sold for $500,000, “far below Zayat Stables' appraised value.” In addition, the suit seeks the placement in trust of any offspring and/or proceeds therefrom.
Unjust enrichment counts against Flintshire Farm and its manager, Brad Sears, are related to replevin and constructive trust counts against Thomas Clark Bloodstock in the alleged sale and then resale of the breeding rights to the mare Lemoona. The complaint alleges that Sears bought Lemoona's rights from Zayat Stables for $150,000 in March 2019, then resold those rights to Thomas Clark Bloodstock “at a $100,000 mark-up.” Clark purchased Lemoona at last month's Keeneland January sale.
More than four months after that sale, the suit alleges that Zayat still carried Lemoona as a collateral asset on his stable's books, and that he even had an independent appraisal commissioned “in July 2019 that determined Lemoona to be worth $925,000.” The suit is seeking the return of the mare, plus offspring-related proceeds to be placed in trust.
In replevin and constructive trust counts against My Racehorse, the suit is seeking the return of the racemare Amandrea. In October 2019 Zayat Stables allegedly sold a 55% interest in her for $115,000, “far below Zayat Stables' appraised value of its interests.” In addition, the suit seeks the placement in trust of any offspring and/or proceeds therefrom (although it is unlikely Amandrea has been bred considering she shows a published workout at Louisiana Downs Feb. 9).
In replevin and constructive trust counts against McMahon Thoroughbreds, the suit is seeking the return of the stallion Solomini. On Dec. 3, 2019, Zayat Stables allegedly sold its remaining 50% interest in him for $250,000 “far below Zayat Stables' appraised value of its interests.” In addition, the suit seeks the placement in trust of any offspring and/or proceeds therefrom.
The suit is also seeking an overarching “judicial declaration that Plaintiff holds priority security rights over all the Equine Collateral that Zayat Stables improperly transferred in violation of the Loan Documents.”