In Kentucky’s highest court, MGG Enterprises, the agent of a consortium of New York financiers, is seeking the right to recover sales proceeds from buyers of certain Zayat Stables horses and shares of American Pharoah .
Those buyers are some of the most prominent names in the Thoroughbred industry.
In front of a group of lawyers and a packed courtroom, the Kentucky Supreme Court heard oral arguments on February 8 between MGG, who loaned Zayat Stables millions of dollars, against buyers some of the purebred and livestock benefits of the Zayat operation are now defunct. The parties went to court when the proceeds from the purchase did not reach the lender, even though the lender held the collateral.
So far, MGG has been unsuccessful in its legal efforts against the buyer and only partially against the Zayat business itself. After the Zayat loan lapsed in early 2020, MGG received at Fayette Circuit Court in Lexington an unverifiable judgment worth more than $24 million. Ahmed Zayat and Zayat Stables later took refuge in bankruptcy court, where MGG filed a number of rival proceedings based on allegations of fraud and other misconduct. Those claims were eventually settled for a substantial amount, but the amount was still short of the default obligation.
Ahmed Zayat
According to court filings, MGG’s loan package was initially $30 million and secured with “all horses” and “breeding rights, lifetime livestock rights, and/or fractional interest therein” by MGG. Zayat activities. Zayat Stables promises to report any intended sales to MGG. Instead, MGG said in court filings, “Zayat Stables, its owners Ahmed Zayat, and other members of the Zayat family have however embarked on a fraudulent and secretive scheme for several years. year for the sale of horses and breeding rights in violation of the agreement” from September 2017 to December 2019.
The sale includes the rights to breed the American Pharoah to the LNJ Foxwoods and Orpendale, the right to breed the winning mares. lemon to Flintshire Farm and Brad Sears, and the horses El Kabeir to Yeomanstown Stud, American Cleopatra to Hill ‘n’ Dale and 50% profit in recital to the Purebred McMahon.
As a result, the current litigation against those buyers and Orpendale affiliate Bemack, an offshore company associated with Coolmore’s Ashford Stud, North American operations. According to MGG’s filing with the Supreme Court, “All of MGG’s claims are based on the premise that respondents have title to MGG’s first, foremost, and perfect security interest.” for mortgaged property sold.
MGG’s claims were denied by law in Fayette Circuit Court and the Kentucky Court of Appeals confirmed. MGG’s resolution was to ask the Kentucky Supreme Court to hear the case by performing what is known as a “discretionary review”. Kentucky law has no right to a trial in the Supreme Court; rather, the high court has the discretion to decide whether to accept an appeal, which, according to the court’s rules, is done “when there are special reasons for doing so.” The Supreme Court accepted the case and heard arguments on Wednesday.
Solomini splits at Churchill Downs
Chaired by Chief Justice Laurance VanMeter, attorney Kannon Shanmugam of the law firm Paul, Weiss, Rifkind, Wharton & Garrison in Washington, DC argued for MGG. David Royse of the Lexington firm of Ransdell Roach & Royse represented Hill ‘n’ Dale and argued on behalf of the buyer.
Two sets of laws, federal and state, can determine winners and losers in an MGG appeal. There are sub-issues as to whether some of MGG’s claims were filed in a timely manner, whether MGG has taken steps to protect itself with collateral checks, and whether MGG has preserved his main legal argument at the Fayette Circuit Court or not, but the main issue being heard was voiced by VanMeter.
“Who bears the risk of dealing with fraud?” VanMeter asked in an exchange with Shanmugam, who said lenders shouldn’t take the risk that buyers can check public records for mortgages. Otherwise, Shanmugam says, it means “let the lender hold the bag in case of fraud.” Royse argued that with the passage of the federal Food Security Act of 1985, “Congress said we were transferring that risk” to lenders.
It is possible that the end result may not be the same for purebred sales and breeding rights sales. An important question is whether either or both are “agricultural products” under the FSA. The definition of agricultural product depends on how the regulation is interpreted, and that is one of the things that goes before the courts.
Under the FSA, if the property being sold is an agricultural product secured by a lien, the buyer is fully protected from claims by secured creditors even if the buyer knows about the lien. That is how the case has been decided so far.
The FSA says the term “agricultural product” means “an agricultural commodity such as wheat, corn, soybeans, or a species of livestock such as cattle, pigs, sheep, horses, or poultry used or produced in farming operations, or a product of that plant or animal in its unmanufactured state (such as whipped cotton, wool clips, maple syrup, milk and eggs), of ownership of a person engaged in agricultural activities.”
Are livestock species part of the commodity act’s definition or does the act define two types of agricultural products: commodities such as crops and livestock species such as horses? If animals are considered commodities under the act, does the definition include breeding rights or animals such as Purebred with high prices?
“I agree that Purebred is not a commodity,” VanMeter said in response to Shanmugam’s acceptance of the act. “That’s the question, how is the statute to be interpreted.”
Charles Shanahan leads the American Pharoah at Ashford Stud
The court and attorneys agreed that the case was the first nationwide on the subject to come to trial, but Royse and Shanmugam didn’t see each other more than that.
“This is the first time people argue when Congress says horse, it doesn’t mean horse,” said Royse. “A horse is a horse.” Shanmugam replied that American Pharoah was the first Triple Crown winner in many years and it was the first time since the FSA was passed that proceeds of such valuable livestock rights were disputed.
Along with VanMeter, Michelle Keller and Kelly Thompson are among the most verbally engaged judges. Keller, reflecting on MGG’s arguments, commented, “Maybe we shouldn’t have debunked this.” Early in the hearing, Thompson focused on the banks’ rights, asking if a lender’s lien could be secured in these circumstances.
Adding spice to the lawsuit’s recipe is amicus curiae, or “friend of the court,” filed by the Kentucky Bankers Association. The summary argues that the lien system in place works well and would not be the ruin of the Thoroughbred lending industry if the Supreme Court upheld the Court of Appeal’s ruling.
