04/21/2010 11:00PM

More liens as breeders struggle to pay

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LEXINGTON, Ky. - The slump in bloodstock prices has contributed to a jump in liens and payment-default lawsuits as banks, service providers, and sales companies try to collect on bills that breeders and buyers are finding harder to pay.

Keeneland vice president Harvie Wilkinson estimated that the Lexington auction house in the last two years has seen a 35 to 40 percent increase in lien notifications on horses entered in its auctions.

"It's the most I've seen in my 10 years [with Keeneland]," Wilkinson said. "When I was outside attorney for Keeneland in the late 80s, I saw this many."

Liens generally are filed by banks, farms owed stud fees, or vendors such as veterinarians or boarding farms seeking to be paid from sale proceeds. A multitude of liens, particularly if they're on a single horse, can be an accounting headache for a sale company, which must then distribute payments to several entities rather than just one.

But buyers should not worry about lien activity on horses they purchase, Fasig-Tipton chief executive officer Boyd Browning said, because generally liens are on sale proceeds, not the horse itself. Under Kentucky auction companies' conditions of sale, the title to the horse passes to the buyer at the fall of the hammer, free and clear of all liens.

"I don't know why a potential buyer would be concerned if there was a lien on a particular horse, because we guarantee them the title to that horse if it is sold at public auction," Browning said. "They don't buy it subject to those liens. It's our responsibility to get that lien situation satisfied. A third party buyer is never adversely impacted by a lien being in existence on a horse before it was sold, to the best of my knowledge."

Wilkinson said Keeneland also has filed more lawsuits seeking payments for horses.

"There has been a trend where we've had to start legal proceedings to collect," he said. "We've done more forbearance agreements, or workout agreements, and we've done more lawsuits in the past two or three years than normal. It's just a sign of the times. The overwhelming majority of people want to pay you, but they just can't. If they want to work with us and show that they want to cooperate and communicate, we will enter into forbearance or workout agreements. It's only when they stop communicating that we then file legal action."

That has resulted in more work for attorneys such as Craig Robertson, who said he is handling two to three times the work he normally would. Robertson's clients include Fifth Third Bank, which has sued well-known Thoroughbred owner Ahmed Zayat for an alleged default on $34 million in loans. Zayat has countersued, alleging deceptive and predatory lending practices.

The global economic recession, a crash in Thoroughbred prices, and a slowdown in equine lending have contributed to the flood of liens and suits, Robertson said.

"They're having sort of a perfect storm," he said of horsemen. "They're having more difficulty making their payments, and the collateral on which banks have loaned money to them - the horses - is now worth less."

As for the banks, Robertson said: "They're hurt with people who are defaulting and have suffered losses from loans that have gone bad. As a result, they're less willing to work with people than they have been in the past."

Robertson estimates the tide of such legal activity could remain higher than normal for another year until Thoroughbred prices rebound and the credit squeeze loosens. PNC Bank, which bought National City Bank, has effectively gotten out of equine lending, leaving what Wilkinson at Keeneland estimated as several hundred million dollars in the credit market for other banks to pick up. But mainstays such as Fifth Third and JP Morgan Chase are still lending, if on stricter terms.

"Some banks have just gotten out of equine lending altogether," Robertson said. "The ones that are still involved are much tighter with their money. They're going to require additional collateral, perhaps, so they won't just be loaning on horses alone. They may require a mortgage on the farm. Or they might want a different loan-to-collateral ratio, where the borrower puts up more collateral."

Wilkinson said he at least sees some thawing in the credit freeze, which most people believe is crucial to improving the bloodstock business's stability.

"These are agricultural loans," Wilkinson said. "Everybody needs a line of credit to pay off bills until their crop goes to market. But we're seeing signs that some banks are getting into equine lending, and we've made a big effort to try to get word out to some banks that traditionally have not done equine lending, and they are doing it now. That helps tremendously."