Appeals Court Backs Dismissed Claims Tied to Zayat Suit

The Kentucky Court of Appeals in a unanimous Nov. 12 order upheld circuit court rulings that dismissed claims made by a New York investment firm against farms and individuals that bought breeding rights and horses from Zayat Stables. MGG Investment Group is embroiled in a fraud and breach of contract lawsuit against Zayat Stables that borrowed around $30 million from the firm and used its equine assets as collateral, including nine breeding rights to 2015 Triple Crown winner American Pharoah. Beginning in 2017, Zayat began selling some of its assets and did not notify MGG about these transactions. Zayat sold the following: stallion prospect El Kabeir to Yeomanstown Stud for $500,000; grade 1-placed American Cleopatra (a full sister to American Pharoah) sold privately to Hill 'n' Dale Farm for $1.3 million; the breeding rights to American Pharoah to LNJ Foxwoods (two rights) and Orpendale (seven rights) for $3.3 million; breeding rights to the grade 3-placed, stakes winner Lemoona to Flintshire Farm and Brad Sears for $150,000; and a 50% interest in the stallion Solomini to McMahon of Saratoga for $125,000. Zayat eventually defaulted on its loans with MGG in September 2019 and when a liquidation agreement could not be reached, MGG filed its suit Jan. 21, 2020. About three weeks later, MGG amended its complaint to include the farms and individuals that purchased the horses and breeding rights. During February and March a parade of motions to dismiss were filed by the buyers and subsequently all granted by Fayette (Ky.) Circuit Court Judge Kimberly Bunnell largely on the same legal grounds. A provision in the U.S. Food Security Act states: "a buyer who in the ordinary course of business buys a farm product from a seller engaged in farming operations shall take free of a security interest created by the seller, even though the security interest is perfected; and the buyer knows of the existence of such interest." Also under the Food Security Act, Kentucky is a "direct notice" state, which means MGG was required to meet specific "direct notice" requirements in order to secure its interest in the horses or breeding rights. Bunnell's orders noted that MGG did not comply with those requirements. In the case of Yeomanstown Stud, Bunnell did dismiss the charges without prejudice (meaning not permanently dismissed and with the option of being brought back to court) because she felt MGG's claim might be entitled to a condition known as "equitable tolling," which is related to statute of limitation restrictions. Any legal action related to the taking of personal property must begin within two years of the alleged taking. Yeomanstown bought El Kabeir from Zayat Stables Sept. 20, 2017, and MGG filed its complaint against Yeomanstown Feb. 11, 2020, more than four months after the statute of limitations expired. MGG argued in its appeal that the clock on the statute of limitations should have started not when the transaction occurred but when MGG discovered it had occurred. Courts make some allowance with lawsuits filed after the statute of limitations deadline if—in this case the sale of El Kabeir—MGG could not have readily discovered the sale. The appeals court found, however, that MGG "with reasonable diligence" could have learned about the sale of El Kabeir because it had the authority to visit, examine, or inspect Zayat Stables' equine assets or request equine appraisals at any time at Zayat Stables' expense. "MGG's failure to exercise these inspection rights is fatal to any claim that the injury it suffered was 'inherently unknowable' within the statutory period," the appeals court wrote in its order. The appellate court order affirmed the dismissals of all claims against Hill 'n' Dale, LNJ Foxwoods, McMahon, Orpendale, Flintshire, Sears, and Bemak N.V., which is an overseas company that facilitates transactions for Orpendale and Ashford Stud. The court also sent the Yeomanstown motion to dismiss back to the circuit court for it to issue a judgment dismissing all claims with prejudice, meaning the action is permanent and cannot be revisited. Zayat Stables was put under the management of court-appointed receiver Elizabeth Woodward starting Jan. 22, 2020. With assistance of Gatewood Bell, Woodward cataloged the stable's assets, handled bills related to the stable, and maximized the value of the horses through racing, training, and sales. As of April 2020, Zayat Stables owned 32 horses kept in 17 different locations and had ownership interests in another 15 that Woodward had to track down, according to her reports. In Woodward's most recent report filed Feb. 16, 2021, Zayat Stables was down to two horses. She had collected, as of Dec. 31, 2020, approximately $1,716,215 in purse proceeds and sales and spent $1,136,775 on board bills, training fees, veterinary bills, and costs and commission associated with sales. Because Ahmed Zayat filed for Chapter 7 bankruptcy in New Jersey, any net proceeds are turned over to the bankruptcy trustee.