FRANKFORT, Ky. (CN) — The sale of race horses and their breeding rights are not governed by the Food Security Act because the animals are not agricultural commodities, an investment firm argued Wednesday before the Kentucky Supreme Court.
MGG Investment Group LP is seeking to enforce its security interests in several race horses and their breeding rights – including 2015 Triple Crown winner American Pharaoh – after the animals were sold by Zayat Stables under market value and without MGG's approval.
The horses had been put up as collateral in 2016 for $30 million in loans to Zayat, which began surreptitiously selling off its assets in the following years.
Zayat defaulted on the loans in 2019 and owed MGG over $23 million by January 2020, and when MGG discovered the breeder's covert sales, it filed suit against the buyers in Kentucky state court to enforce its security interests.
Both a circuit court and the Kentucky Court of Appeals determined MGG's state law claims were preempted by the Food Security Act, or FSA, which allows for the sale of "farm products" and the "free and clear" transfer of their titles.
MGG appealed to the commonwealth's high court and argued the lower court's decisions "would have the catastrophic effect of causing lenders to abandon the thoroughbred industry because equine collateral could be sold nearly with impunity."
In its brief to the state supreme court, the lender claimed the circuit court's decision lacked "any precedential support" and said "the unique thoroughbreds at issue in this case lack the interchangeability that characterizes commodities."
Even if the horses themselves could be considered "farm products" under the FSA, the investment firm argued, there is no interpretation of the statutory text that would allow breeding rights to be sold free of any lender's security interest.
"It is implausible to call the right to breed a particular mare to a particular stallion a 'product' of any kind, let alone an agricultural commodity," it said.
The breeders who purchased the horses and their breeding rights claimed in their brief the horseracing industry has operated for decades in a similar fashion, and that MGG's prediction of a catastrophe is hyperbole.
"MGG's failure to follow standard lending practices and to avail itself of prescribed protective measures are not legitimate bases to disregard unambiguous statutory language so that MGG can recover its losses from innocent third party purchasers," the buyers said.
They emphasized language in the loan agreement between MGG and Zayat explicitly allowed the sale of the horses "pursuant to the provisions of Section 1324 of the Food Security Act," and claimed MGG never sent written notice of its liens on the animals, as required by the FSA.
Attorney Kannon Shanmugam of Paul Weiss argued Wednesday on behalf of MGG and told the justices the appeals court plainly misinterpreted the FSA in its decision.
"The purpose of the statute was to protect consumers from higher food prices," Shanmugam said. "It is perfectly reasonable to view a species of livestock as an agricultural commodity ... but thoroughbred horses are unique. They are not interchangeable, and that is particularly true with breeding rights."
The lender's attorney emphasized the breeding rights of American Pharaoh "are some of the most valuable in the history of horseracing," and that if the Kentucky Supreme Court upholds the decision of the appeals court, it would "cripple the horseracing industry."
Chief Justice Laurance VanMeter asked Shanmugam about an amicus brief filed by the Kentucky Bankers Association that sided with the buyers, and said he found it "curious" the bankers would not side with his client.
The attorney claimed the bankers association is worried a decision in the lender's favor would "upset the current understanding" of the law, and pointed out this is an issue of first impression for the Kentucky Supreme Court.
"A breeding right is not a product," Shanmugam continued, "it is an intangible right that pretty clearly falls outside the statutory language."
Attorney David Royse of Ransdell, Roach, and Royse in Lexington, Kentucky, argued on behalf of the buyers and took issue with his counterpart's point of view.
"This is a case of first impression only because nobody had the chutzpah to make the argument that when Congress said 'horse,' it didn't mean 'horse,'" Royse told the court.
The attorney reiterated throughout his argument that Kentucky law explicitly includes "equine rights" in its definition of farm products, and pointed out the horseracing industry has operated without issue for nearly four decades under the current interpretation of the FSA.
"There have been millions of dollars in sales of horses without anybody saying, 'we don't know how to protect the security interest,'" Royse said. "Thoroughbred lenders in this industry figured this out a long time ago."
Shanmugam pushed back during his rebuttal and dug in against his opposing counsel's claim regarding Congress's intent in passing the FSA.
"It's clear that none of the 535 people in Washington were thinking about the breeding rights of a Triple Crown winner when they passed this legislation," he told the court.
Justice Michelle Keller disagreed, at least in part, and said she hoped legislators from Kentucky would have thought about equine breeding rights.
"I'd be disappointed if they weren't," she said, "but it wouldn't be the first time."
No timetable has been set for the court's decision.
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