Bank Seeks Receiver; Zayat Files Counterclaim

As attorneys for Fifth Third Bank seek a receiver to manage the more than 200 horses owned by Zayat Stable, attorneys for Ahmed Zayat are claiming that the request is not justified and that the bank’s equine lenders reneged on a pledge to restructure the horse owner’s loan with the lender.

A hearing on the request for a receiver is scheduled in Lexington on Feb. 8 before U.S. District Court Judge Karen Caldwell.

Fifth Third’s request for a receiver and Zayat’s counterclaim are the latest developments in a suit filed last month in which the bank is seeking repayment of more than $34 million in loans to one of U.S. racing’s most prominent and successful racing stables.

According to the suit filed Dec. 15 in U.S. District Court by attorneys for Fifth Third Bank against Zayat Stables and its owner, Zayat obtained loans totaling $38.6 million between Aug. 1, 2007, and Jan. 14, 2009. Collateral for the loans was a security interest in all of Zayat's bloodstock interests, including racehorses, stallion shares, purses earned by the stable, and any breeders' awards and stallion income, according to documents filed with the suit.

Zayat's loan was amended to provide that in the event the owner defaulted on any of the notes, then all notes held by the bank would be considered in default and the lender could accelerate the principal balance and all accrued interest due and owing under all of the notes. The suit states that Zayat defaulted by failing to make payments due March 1 and July 31 last year.

Zayat paid one note in full and made a $1.3 million payment on another note, court documents show. The suit concludes that after those payments by Zayat, the bank continues to suffer damages that as of Dec. 14, 2009, are in the amount of $34,265,970, plus $190,505 in interest and any interest that continues to accrue, as well as attorneys fees and late charges.

In an attempt to settle the legal dispute, the parties recently took part in a one-day mediation in Lexington but failed to resolve their differences.

In its court filing seeking appointment of a receiver, Fifth Third also requests that Zayat allow the bank to inspect the stable’s horses and/or examine the business operations of Zayat Stables during an interim period "until the receiver is able to undertake the duties of the office."

In supporting its request for the receiver, the bank’s filing states "Due to the dire financial condition of Zayat Stables, there will not be sufficient cash to properly train, care for, and feed the equine collateral, materially decreasing its value and possibly threatening the lives and health of some of the animals."

Zayat Stables disclosed to Fifth Third that it expects to experience a cash-flow shortfall of nearly $4 million as of Dec. 31, 2009, and nearly $3 million as of Dec. 31, 2010, in addition to net operating losses of $51.8 million for Zayat Stables between 2006 and 2008 and a projected net operating loss of $13.6 million in 2009, according to the receiver request. Also, the bank’s filing states that Ahmed Zayat has lost over $42 million of personal funds he invested in the operation of Zayat Stables "over this same period and is unwilling to fund the projected cash flow shortfall."

Fifth Third recommended that either Doug Dean of Dean, Dorton & Ford or Charley Stivers of Crowe Howarth, both equine accountants, for the position of federal equity receiver, if approved by the court.

Zayat has countered that appointment of a receiver is not necessary because the bank has failed to show that the horses’ care is being neglected or that he is not paying for the horse’s care. Zayat Stables provided statements from its trainers and farms where its horses are maintained, attesting that the bills were current and that the horses’ care had not been compromised.

In its response, Zayat also said it had obtained $5.2 million in additional financing to run the stable. The defendant’s filing also questioned whether "a CPA – even a highly qualified CPA such as Doug Dean or Charley Stivers – has the qualifications and experience necessary to manage the liquidation of 203 Thoroughbred horses."

In addition to its response to the motion for a receiver, Zayat has filed a counterclaim against Fifth Third in which he alleges the bank’s officers engaged in "misleading, deceptive, and predatory practices" that have "positioned Zayat Stables for financial ruin."

Specifically, Zayat’s attorneys contend that the equine lenders at Fifth Third in Lexington led the horse owner to believe that his loan would be restructured similarly to the way in which it had been restructured previously. However, according to the counterclaim, officers at Fifth Third in Cincinnati nixed the restructuring plan.

According to Zayat, had it known that the restructuring was not going to proceed, the stable would have offered 67 horses at the Keeneland September yearling sale and 57 horses at the Keeneland November sale.

"While, given the depressed market conditions, Zayat Stables would have preferred not to sell the horses until market conditions improved, it was nonetheless resigned, if necessary, to participate in these auctions to raise the funds needed to restructure, extend, and re-amortize the loans," Zayat said."

As the parties continued to negotiate, Zayat received written and verbal assurances from the bank that it would approve a $7 million pay down of the loan by Zayat in 2009 and a five-year amortization of the remaining balance, the Zayat filing states. Based on that assurance, Zayat ceased its preparations for the yearlings and other horses to be sold at Keeneland, the counterclaim says.

"Despite its promises and representations, once again, however, on or about Aug. 10, 2009, the bank indicated that it was reconsidering its agreement to extend the loans," Zayat said, but that negotiations for a restructuring continued through August. Late in the month, Zayat received notice that the handling of the loan had been transferred from Lexington to Fifth Third in Cincinnati and that the "workout" division would be requesting certain documentation from Zayat in connection with the loan, the court filing states.

However, eventually the bank did not approve the restructuring of the loan, according to Zayat, which said the action came too late for the horses to be re-entered in the sales.

Zayat was chairman of Egyptian-based Al Ahran Beverages from 1995 to 2007 before selling the company to Heineken International. Zayat acquired his first horses in 2005 and was leading owner of 2008 with more than $6.8 in stable earnings. Zayat was represented by 116 winners from 740 starters that year.

In 2009. Zayat purchased 77 horses at North American auctions for a total of $24.5 million. They included 35 yearlings purchased for $14.8 million, 39 juveniles for which he paid $8.7 million, and three broodmares that cost $985,000.

Among the top horses campaigned by Zayat in 2009 was Pioneerof the Nile , the Santa Anita Derby (gr. I) winner and Kentucky Derby Presented by Yum! Brands (gr. I) runner-up who will enter stud at Vinery near Lexington next year, and three-time grade I winner Zensational , who entered stud at Hill 'n' Dale Farms near Lexington this year. His other top runners in 2009 included grade II winners Eaton's Gift and Soul Warrior, and grade III winner Heart Ashley.