Ahmed Zayat, the top Thoroughbred racehorse owner in North America just two years ago, filed for bankruptcy in Newark, N.J., on Wednesday to block a possible bank takeover of his racing stable.
The bankruptcy comes less than a week before a hearing in U.S. District Court in Lexington on a motion by Fifth Third Bank to appoint a receiver for Zayat's 200-plus horse racing stable. Fifth Third alleges Zayat owes the bank more than $34 million after defaulting on a loan.
Because a bankruptcy filing stays all other pending litigation, a hearing Monday on the bank's motion probably will be canceled.
Zayat said he "intends to quickly file a plan of reorganization that will pay claims of creditors over a reasonable period of time as it continues to execute on its sound business plans that have thus far produced stellar racing results and, based on prior performance, will continue to do so."
Last year, Zayat's homebred Pioneerof the Nile finished second in the Kentucky Derby. Zayat finished 2009 as the third leading owner, with earnings of more than $6.3 million. He has two hopefuls for this year's Derby, Esken dereya and Macias.
Zayat filed for Chapter 11 bankruptcy protection from creditors. Court documents state that he has $10 million to $50 million in estimated liabilities. He said he has assets in the same range.
He filed for bankruptcy because the stable "is far too valuable to its creditors and the industry as a whole to permit a single creditor, who has acted improperly in reneging on its promises, to cause a forfeiture of the debtor's assets to the detriment of all creditors and myself as a $40 million investor."
Among those investors: Keeneland, the world's largest Thoroughbred auction house.
Zayat owes Keeneland Association $2.4 million from a loan made to buy yearlings in September. He said he has about $1.2 million in other debts, largely to trainers, boarding farms and vets.
In the bankruptcy filing, Zayat lists some of the top names in Thoroughbred racing and breeding among his creditors. Some of them had submitted letters in support of Zayat, affirming that his horses are being fed and properly cared for.
His top unsecured creditors include Sheikh Mohammed bin Rashid al-Maktoum's Darley Stud (Jonabell Farm), owed $174,900 for stud fees; White & Case, his New York lawyers, owed $150,000; Adena Springs, owed $143,100 for stud fees; Steve Asmussen, owed $73,544.60 in training fees; Eaton Sales, owed $54,682.62 for consignment fees; H.E. Sutton (horse transportation), owed $47,004.21; Gainesway, owed $37,100 in boarding fees for a sire (Zayat's J Be K stands there); Equine Medical and Surgical Group of Arcadia, Calif., owed $34,195.49 in vet fees; Dr. Tom VanMeter's Stockplace Farm in Lexington, owed $28,807 in boarding fees; Mike Mitchell Racing Stable, owed $27,060 in training fees; Nicholas Zito Racing Stables, owed $26,877 in training fees; Bob Baffert Racing Stables, owed $21,308.80 in training fees; and others.
In the affidavit filed with the bankruptcy, Zayat said he took the step so the stable "can continue to operate its business and build on its successes for the benefit of all its creditors in the face of predatory practices by its primary secured lender, Fifth Third Bank."
Zayat blames the bank for reneging on plans to restructure loans last year, and said the bank has pursued a "scorched earth" policy that is intended to put him out of business.
Craig Robertson, attorney for Fifth Third, said the bank does not comment on pending litigation.
Zayat claims he has "the support of the key players in its industry, including, without limitation, Keeneland Association Inc., an approximately $2.4 million secured creditor."
Zayat said Keeneland Association loaned him more than $3.13 million for the purchase of 24 horses at the September sale. That loan, written up in October, was secured with the proceeds and products from those horses.
The loan was reduced by a $750,000 payment on Tuesday from Zayat's brother, Sherif El Zayat.
"As consideration for that payment, Keeneland has agreed to the debtor's (Ahmed Zayat's) use of its cash collateral and to provide support to the debtor relating to the Keeneland Horses," according to the filing.
Keeneland spokesman Jay Blanton said, "We have yet to see the filings and as the case is just starting its process in the courts, it's premature to comment at this time."
Zayat said he borrowed the money from Keeneland after Fifth Third promised once again to restructure his loans. Following that promise, he said, he withdrew most of the horses he planned to sell in the Keeneland November Breeding Stock Sale.
He also paid $4.3 million to the bank from the sale of breeding rights to sprinter Zensational, who now stands at Hill 'n' Dale Farm in Lexington for $25,000.
Those two moves left him severely strapped for cash when the bank later called in the loans, he said.
Filing for bankruptcy will allow him to use the cash collateral and a debtor-in-possession loan of $2.45 million from an unidentified source, according to Zayat.
He has previously said he has outside financing that would provide $5.2 million to keep the stable running.
A hearing has been scheduled for 10 a.m. Friday in Newark on Zayat's motions to maintain his bank accounts and continue to operate in the ordinary course of business.