A federal bankruptcy judge in New Jersey has refused to certify a motion filed on behalf of Fifth Third Bank alleging that Zayat Stables had defaulted on terms of a cash collateral agreement.
Fifth Third, which has sued Zayat Stables claiming it defaulted on a loan package of more than $34 million, had filed a motion claiming Zayat had violated terms of the cash collateral by withdrawing four of nine horse entered in the Keeneland April sale of 2-year-olds in training.
The action by Judge Donald Steckroth allows Zayat, one of North America’s largest stables with more than 200 horses, to continue operations by using the cash collateral. Zayat, owned by Ahmed Zayat, is using the cash collateral under an agreement reached between the racing entity and Fifth Third and approved by the bankruptcy court. Among the horses campaigned by Zayat is Eskendereya, likely favorite for the Kentucky Derby Presented by Yum! Brands (gr. I).
Zayat filed for Chapter 11 bankruptcy protection after Fifth Third filed suit claiming that the stable had defaulted on its loan agreement. Zayat has countered that he could have met the payments called for in the loan agreement by selling horses last fall, but was led to believe by Fifth Third loan officers that the loan package would be renewed without that action.
As part of the bank’s agreement to let the stable use the cash collateral, Zayat provided Fifth Third with a list of horses it intended to sell, with proceeds to be placed in an escrow account. The bank contends the withdrawal of the four horses meant that Zayat violated terms of its agreement with the bank regarding use of the cash collateral.
"The debtor’s unilateral decision not to sell four of the nine listed horses at the Keeneland sale as agreed and as required by the cash collateral order without the consent of Fifth Third is a breach of the cash collateral order warranting the termination of the debtor’s further use of cash collateral," Fifth Third stated in its motion.
In response, Zayat claimed, and included e-mail correspondence between the two parties as documentation, that it "committed to entering nine horses in the April 5, 2010 Keeneland sale (and to explore the sales of seven additional 2-year-old horses), but would not commit to selling them...The debtor asserts that holding the withdrawn horses was a reasonable and prudent business decision that ultimately will inure to the benefit of the estate’s creditors, including Fifth Third."