An agreement between Zayat Stable and Fifth Third Bank on use of cash collateral funds to continue operations was approved March 8 during a hearing before Judge Donald H. Steckroth in U.S. Bankruptcy Court in Newark, New Jersey.
Fifth Third has sued Zayat, claiming he is in default on loans totaling more than $34.4 million. In response to the Fifth Third suit, Zayat filed for Chapter 11 bankruptcy protection.
During the March 8 hearing, an order was issued setting out guidelines under which Zayat will be permitted to use the cash collateral through and including May 1, 2010. That is the date of the Kentucky Derby Presented by Yum! Brands (gr. I), for which Zayat’s Fasig-Tipton Fountain of Youth Stakes (gr. II) winner Eskendereya is now the favorite or co-favorite.
The cash collateral funds will be used by Zayat in accordance with a budget submitted to the court and approved by Fifth Third, which initially had opposed Zayat’s use of the cash collateral.
Not included in the use of the cash collateral are funds that Zayat will be permitted to use to make three premium payments totaling $214,553 for mortality insurance on the stable’s inventory of horses.
A filing on behalf of Zayat Stable said use of the cash collateral was necessary for the racing entity to maintain and preserve its assets and continue operation of its business, including payroll and payroll taxes, payments to trainers and boarders of Zayat’s horses, and insurance expenses.
As part of the agreement under which Zayat will use the cash collateral, the owner agrees to submit to the bank within 24 hours of the order being entered a list of 2-year-olds and racehorses "to be sold in the ordinary course at a commercially reasonable time during the spring 2010 and the manner and timing for the sale of the listed horses." Proceeds from the sale of the horses will be placed in an escrow account that will be established by Zayat Stables "at a bank of its choosing." Funds in the escrow account will be released only upon order of the bankruptcy court, according to the order.
In addition to the cash collateral funds, Zayat will be permitted to use up to $150,000 accrued from any horses in the stable that are claimed from the stable. Any claiming money above that amount will also be placed in the escrow account.
Michael Sirota, an attorney representing Zayat, said the horses that will be sold and lost through claiming races are those that would be sold or lost to claims through the ordinary course of Zayat’s stable operations. He said the terms of the agreement signed by the court for use of the cash collateral were submitted on behalf of Zayat and that no additional stipulations were added by Fifth Third or the court as to the sale of horses.
Additional terms of the cash collateral agreement include submission by Zayat before 5 p.m. (EST) March 9 of a "term sheet" proposing a global settlement of all issues" among Zayat and Fifth Third Bank. Upon receipt, the bank will have until noon on March 12 to submit a response. Also, Zayat will submit to Fifth Third a budget covering the 13-week period commencing the week ending May 8.
Sirota said the ultimate goal for both parties is to reach an agreement that would resolve all issues between his client and the bank.
Keeneland Association, which has a claim against Zayat in the amount of $2,381,500 on horses bought from the sales company, is also a party to the cash collateral agreement and also gets a secured interest in those horses under the order.