A lending group whose collateral was allegedly sold by Zayat Stables to third parties without being notified has lost an appeal in the Kentucky Supreme Court in a case where it tried to recoup money from the collateral purchasers.
The case arose when Ahmed Zayat's Zayat Stables sold several horses and breeding seasons upon which MGG Investment Group held a lien to equine businesses both within and outside Kentucky and, according to court pleadings, didn't turn over proceeds to the lender.
MGG loaned Zayat Stables $30 million in 2016, within a year after Zayat's homebred American Pharoah won the first Triple Crown in 37 years and went to stud. The loan was secured by an agreement that required Zayat Stables to report to MGG any sale of equine collateral and not to sell the collateral unless permitted by the agreement.
Several collateral sales described in legal pleadings occurred several years before 2020, when both Zayat and Zayat Stables filed for bankruptcy protection in New Jersey. The filing was prompted when MGG obtained an uncontested judgment for more than $24 million against Zayat Stables in Fayette Circuit Court located in Lexington, Ky.
MGG filed claims in bankruptcy court against Zayat and Zayat family members for the sale proceeds. After reaching a settlement for a fraction of the debt, the lender pursued its value in the sold collateral from the purchasers in Fayette Circuit Court. MGG's claims were denied, and the Court of Appeals affirmed. The Supreme Court's ruling, rendered on March 23, also affirmed and spells an end to MGG's pursuit.
MGG may ask the high court to reconsider its ruling, but such motions are rarely granted. The decision was unanimous.
The Supreme Court found that Thoroughbreds, even those with valuable breeding rights, and their breeding seasons are "farm products" as defined by the federal Food Security Act of 1985. Under that statutory scheme a security interest, or lien, on farm products is dissolved when sold. The FSA, which overrides state law contained in Kentucky's Uniform Commercial Code, treats such property the same as commodities like eggs or crops, the court ruled.
"We hold that Thoroughbreds and the right to breed them are farm products within the meaning of the FSA and as a result any security interest in those products was extinguished when they were sold to their respective buyers," Chief Justice Laurance VanMeter wrote.
Bemak, a business designation for Ashford Stud, Coolmore Stud's North American operation, is one of several defendants in the suit. American Pharoah stands at Ashford.
Yeomanstown Stud bought the stallion El Kabeir in 2017 from Zayat Stables; Hill 'n' Dale Equine bought American Cleopatra, a mare, the same year. LNJ Foxwoods purchased two breeding rights to American Pharoah from Zayat Stables and Justin Zayat, Ahmed Zayat's son, in 2018.
According to the opinion, Orpendale purchased 100% of what the court called "the breeding qualities of American Pharoah, including all ownership rights following the horse's retirement from racing," in 2015. Members of the Zayat family retained transferable lifetime breeding rights to the stallion. In 2019, Orpendale purchased seven of the breeding rights from Zayat Stables and the Zayat family.
McMahon of Saratoga Thoroughbreds purchased a 50% share of Solomini from Zayat Stables in 2019, and then McMahon purchased the other half of Solomini from Orpendale after it acquired the interest from Zayat Stables. MGG released its lien only on the latter half-interest.
Flintshire Farm, managed by Brad Sears with the farm entity, bought interests in Lemoona, then bought him outright from Zayat Stables.
