In re Zayat Stables, LLC
| Decision Date | 24 August 2021 |
| Docket Number | 20-20524 (VFP) |
| Parties | In Re: ZAYAT STABLES, LLC, Debtor. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
Chapter 7
ORDER AND OPINION CONCERNING PRODUCTION, USE AND TREATMENT OF DEBTOR'S ESI
The relief set forth on the following pages, numbered two (2) through eleven (11) is hereby ORDERED.
This Order and Opinion is entered in furtherance of the June 3 2021 Consent Order Concerning the Chapter 7 Trustee's ("Stables Trustee") Motion to Compel Turnover (the "Turnover Motion") of the Debtor's Cloud Storage System to the Stables Trustee and Directing Cooperation with the Stables Trustee's Professionals (the "Turnover Consent Order").[1] The Turnover Consent Order granted initial interim relief with respect to the Turnover Motion and generally provided for the respective information technology consultants for the Stables Trustee and the Zayat family to obtain and create mirror images of the Debtor's emails, documents and other information contained on the Debtor's Cloud and other electronic devices in the possession of the Stables Trustee, which he obtained from the Debtor's former business premises (defined as the "Other Electronic Devices" in the Turnover Consent Order).
The stated purpose of such mirror imaging was to ensure the preservation of such emails, documents, data and other information as interim relief, with the review, production and use of the mirror images of the Debtor's Cloud and Other Electronic Devices initially limited to extent provided in the Turnover Consent Order. The Turnover Consent Order contemplated that the parties would attempt to negotiate a further consent order governing the review, production and use of such information. The parties advised the Court that they were unable to agree upon the procedures for the further access, review, examination, analysis and use of such mirror images and have requested and agreed that the Court should make that determination on the basis of the submissions of the parties to date.
The Court has reviewed the submissions made on behalf of the Stables Trustee, the individual Debtor, Ahmed A. Zayat (the "Individual Debtor" or "Mr. Zayat"), the Zayat Family Members, Donald V. Biase, the Individual Debtor's Chapter 7 Trustee (the "Individual Trustee"), and MGG Investment Group LP ("MGG"), as well as the multiple and divergent forms of Order submitted by certain parties, and the statements of the parties at various hearings and conferences during which the remaining issues underlying the Turnover Motion were discussed. The Court has considered the relevant case law and other authorities included with the parties' submissions. No party disputed the applicable law as set forth by the Stables Trustee, which no party has disputed. Accordingly, the Court finds and determines as is set forth below.
Property of the estate is broadly defined and construed to consist of "all legal and equitable interests of the debtor as of the commencement of the case." 11 U.S.C. § 541(a)(1). See generally United States v. Whiting Pools, Inc., 462 U.S. 198, 204-06 (1983). Consistent with this broad definition, the Supreme Court has held that: "Upon commencement of a case in bankruptcy, all corporate property passes to an estate represented by the trustee." Commodity Futures Trading Comm. v. Weintraub, 471 U.S. 343, 352 (1985). To allow the trustee to perform his or her duties, section 521(a)(4) of the Bankruptcy Code requires the debtor in a Chapter 7 case to:
surrender to the trustee all property of the estate and any recorded information, including books, documents, records and papers, relating to property of estate, whether or not immunity is granted under section 344 of the title.
11 U.S.C. § 521(a)(4) (emphasis supplied).
Additionally, section 542(a) similarly provides that "an entity ... in possession, custody or control during the case, of property that the trustee may use, sell or lease . .. shall deliver to the trustee, and account for, such property or the value of such property." 11 U.S.C. § 542(a) (emphasis supplied). Moreover, under 11 U.S.C. § 542(e) and subject to any applicable privilege, "the court may order an attorney, accountant or other person that holds recorded information, including books, documents, records, and papers, relating to the debtor's property or financial affairs, to turn over or disclose such recorded information to the trustee." Finally, the trustee in a chapter 7 corporate case also owns and controls any privileges held by the corporate debtor. Weintraub, 471 U.S. at 358. Accordingly, the Stables Trustee may waive any privilege held the Stables Debtor.
Thus, the Debtor's electronically stored information on the Cloud and Other Electronic Devices (collectively, the "ESI"), including any information arguably subject to any privilage held by the Stables Debtor, is plainly and necessarily property of the Debtor's estate which is controlled by and must be "delivered" or "surrendered" to the Stables Trustee. The disputed issues that arise here are whether and to what extent purely personal information that is unrelated to the Debtor's case that is contained in the ESI may be reviewed by the Stables Trustee, his professionals and others. Mr. Zayat and the Zayat Family Members seek to limit the Stables Trustee's access to and use of the ESI by excluding many individual parties (at least 38 in total), a list which includes various Zayat Family Members, and limiting the time periods for which the ESI may be produced to and utilized by the Stables Trustee and others. Mr. Zayat and the Zayat Family Members proposed to do so either unilaterally or, in some cases, by agreement of the parties or Court Order. Additionally, Mr. Zayat and the Zayat Family Members propose a com- plicated and cumbersome review process to address items that are the subject of any dispute. See Proposed Consent Order Concerning Agreed ESI Protocol (Dkt. 115-2, ¶¶ 4-6).
The Stables Trustee and MGG, joined in by the Individual Trustee, counter that the restrictions proposed by Mr. Zayat and the Zayat Family Members are arbitrary, unnecessary, unduly complicated, contradicted by the relevant facts and contrary to law. By way of example (and not limitation), the list of excluded individuals proposed by Mr. Zayat and his Family includes Mr. Zayat's spouse, Joanne Zayat, his brother, Sherif El Zayat, and various other family members and individuals who purportedly "had no involvement in Zayat Stables." But Mrs. Zayat: (a) was party to millions of dollars in transfers to and from Stables Debtor; (b) asserted that she was senior executive at Zayat Stables for 13 years, but now claims that this is not true even though it appeared on her Linked In profile; (c) was involved in obtaining substantial loans for Zayat Stables; and (d) was involved in the sale of American Pharoah Breeding Rights ("AP Breeding Rights") (Dkt. No. 116, p.2).
Also sought to be excluded is Sherif El Zayat, who is the Individual Debtor's brother and lives in Egypt. Sherif El Zayat is also party to numerous transactions with the Debtor, received at least $450, 000 from the Stables Debtor from 2017 to 2020, and was involved in at least two business enterprises in Egypt with the Individual Debtor (Dkt. Nos. 116 at 3; 117 at 27). Further evidencing the potential relevance of communications between Mr, Zayat and his brother is Mr. Zayat's statement in late 2019 (December 23, 2019) that he was relying "on our income and ownership (in) companies in Egypt" to support the Stables Debtor. (Dkt. No. 117-2). Additionally, Mr. Sherif El Zayat has loaned the Individual Debtor substantial sums, including $500, 000 loaned immediately prior to the Individual Debtor's bankruptcy filing that was secured by a mortgage on the Individual Debtor's residence that he owns with his wife. Additional proposed exclusions included: (i) other Zayat Family Members who were involved in the Stables Debtor's business and/or selling the AP Breeding Rights that were pledged as security for MGG's $25 million loan; (ii) one of the three creditors of Stables Debtor that filed an involuntary petition against it; and (iii) another individual who had extensive dealings with the Individual Debtor and Sherif El Zayat in Egypt. (Dkt. No. 116 at 1-3). Obviously, these individuals have ties to the Stables Debtor and should not be excluded from the ESI review and production.
The Court finds no valid grounds to exclude these individuals (or the others identified by the Individual Debtor) based on either the Individual Debtor or Zayat Family Members' say so, or by allowing those parties to dispute the use of information and then require court proceedings to resolve the dispute. This case has already been marked by repeated delays in producing information and discovery, with many vigorously contested discovery motions filed, decided and/or pending. In this instance, with the Stables Debtor's case approaching its one-year anniversary, the Stables Debtor's ESI is...
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