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1 Jonathan A. Backman E-filed on: November 4, 2011
LAW OFFICE OF JONATHAN A. BACKMAN
2 117 N. Center Street
Bloomington, Illinois 61701-5001
3 (309) 820-7420
jbackman@backlawoffice.com
4
Ogonna M. Atamoh, Esq. (NV Bar No. 7589)
5 Email: oatamoh@nevadafirm.com
SANTORO, DRIGGS, WALCH,
6 KEARNEY, HOLLEY & THOMPSON
400 South Fourth Street, Third Floor
7 Las Vegas, Nevada 89101
Telephone: 702/791-0308
8
Counsel for the Liquidating Trustee
9
IN THE UNITED STATES BANKRUPTCY COURT
10 DISTRICT OF NEVADA
11
IN RE: ) Chapter 11
12 )
XYIENCE INCORPORATED, )
13 a Nevada corporation, ) No. BK-S-08-10474-MKN
)
14 Debtor. )
______________________________________ )
15 DAVID HERZOG, as Liquidating Trustee, )
Plaintiff, )
16 )
v. ) Adversary Case No. 09-1402-MKN
17 )
ZYEN, LLC, a Nevada limited liability )
18 company, FERTITTA ENTERPRISES, )
INC., a Nevada corporation, WILLIAM )
19 BULLARD, ADAM FRANK, KIRK )
SANFORD, and OMER SATTAR, )
20 Defendants.
21 TRUSTEE’S STATEMENT OF UNDISPUTED FACTS
22 Plaintiff David Herzog, as Liquidating Trustee (the “Trustee”) for the estate
23 of Xyience Incorporated (the “Xyience” or the “Debtor”), the former debtor and debtor in
24 possession in the above-captioned Chapter 11 case (the "Case"), respectfully submits this
25 statement of undisputed facts in support of his motion for summary judgment on two
26 counts of his Second Amended Complaint (i.e., Counts X and XIII), against Fertitta
27 Enterprises, Inc., and Zyen, LLC, respectively.
28
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1 BANKRUPTCY CASE
2 1. On January 18, 2008 (the “Petition Date”), the Debtor filed in this
3 Court (the “Court”) its voluntary petition for relief under Chapter 11 of the Bankruptcy
4 Code, 11 U.S.C. § 101 et. seq. (the “Bankruptcy Code” or the “Code”). Defendants’ Answer
5 to Second Amended Complaint filed on September 7, 2010, as Adversary Case Docket No.
6 88 at 2 ¶ 1 (hereafter “Answer SAC at ___ ¶ ____”).
7 2. From January 18, 2008, through the October 23, 2008, entry of the
8 Plan Confirmation Order (as hereinafter defined), the Debtor operated and managed its
9 business affairs as a debtor in possession pursuant to Sections 1107 and 1108 of the
10 Bankruptcy Code (although after the April 2008 asset sale discussed below, there
11 effectively were no business affairs or assets to operate). Bankruptcy Case Docket No.
12 321.
13 3. On May 19, 2008, the Debtor filed its Plan of Reorganization
14 (“Plan”), which provided, among other things, that substantially all of the Debtor’s
15 remaining assets, including all of its pre-petition claims, rights and causes of action, and
16 all of its right and powers to pursue avoidance actions under Chapter 5 of the Bankruptcy
17 Code, would be transferred to and would vest in a Liquidating Trust for the benefit of
18 various creditor classes. Answer SAC at 2 ¶ 5; see also Bankruptcy Case Docket No. 191.
19 4. The Plan further provided that, upon the Effective Date of the Plan,
20 a Liquidating Trustee would represent the Trust Estate. Answer SAC at 2 ¶ 6;
21 Bankruptcy Case Docket No. 191.
22 5. The Liquidating Trust received no funds, and possessed no funds for
23 unsecured creditors, under the Plan; on the contrary, after the Chapter 11 professionals’
24 fees were resolved, the Trust owed approximately $1.0 million in Chapter 11
25 administrative expenses and superpriority claims as of its Effective Date. See Bankruptcy
26 Case Docket No. 191.
27
28
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1 6. On October 23, 2008, the Court entered an Order (the “Plan
2 Confirmation Order”) approving the Debtor’s Disclosure Statement in connection with the
3 Plan and confirming the Plan of Reorganization. Answer SAC at 2 ¶ 7; Bankruptcy Case
4 Docket No. 321.
5 7. On November 12, 2009, the Court entered an Order authorizing the
6 Trustee to accept the appointment as Liquidating Trustee, and the Trustee accepted his
7 appointment on that day. Answer SAC at 2 ¶ 8; Bankruptcy Case Docket No. 356.
8 8. On November 20, 2009, the Trustee caused a notice of appointment
9 to be filed and served, and on November 23, 2009, the Plan became effective. Bankruptcy
10 Case Docket No. 359.
11
JURISDICTION
12
9. The Court possesses subject matter jurisdiction over this Adversary
13
Proceeding pursuant to 28 U.S.C. § 1334(b). The Adversary Proceeding is a core
14
proceeding under 28 U.S.C. § 157.
15
10. Venue of this Adversary Proceeding lies in this judicial district under
16
28 U.S.C. 1409(a) because the Bankruptcy Case is pending here.
17
18 PARTIES
19 11. Plaintiff is the Liquidating Trustee. Answer SAC at 3 ¶ 13.
20 12. Fertitta Enterprises, Inc. (“Fertitta Enterprises” or “Fertitta”) is a
21 Nevada corporation with its principal place of business in Las Vegas, Nevada. Answer
22 SAC at 3 ¶ 15. Since its incorporation in 1993, Fertitta has served as an investing vehicle
23 for Fertitta family members and trusts. Ex. B (Deposition of William Bullard held May
24 24, 2011 (“Bullard Dep”)) at 65-66.1 Mr. Lorenzo is (and in 2007 was) the President of
25
1
26 All of the exhibits cited in this Statement of Undisputed Facts, besides
those taken from the official court records, were either (a) produced as business records by
27 the defendants kept in the ordinary course of the producing parties’ business (including
the records of Kirk Sanford and Adam Frank when they still were represented by
28 defendants’ counsel), or (b) authenticated at the various depositions in this case. For the
3
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1 Fertitta Enterprises, with Mr. Bullard acting in various capacities, including (among
2 others) chief financial officer, and frequently serving as the most involved person in
3 running the corporation’s day-to-day affairs with respect to various corporate functions.
4 Id. at 66; see also Ex. 26.
5 13. Zyen is a Nevada limited liability company with its principal place of
6 business in Las Vegas, Nevada. Answer SAC at 3 ¶ 14. Zyen was organized on
7 September 12, 2007, for the sole purpose of making the $12.0 million loan to the Debtor at
8 issue in this case. Ex. 29; Ex. A (Articles of Organization (ZYEN01915)); Ex. B (Bullard
9 Dep.) at 22. Fertitta Enterprises is, and always has been, reflected in the Nevada
10 corporate records as the sole manager of Zyen, but it delegated that function to Mr.
11 Bullard, who frequently signed the Zyen loan and other documents as Zyen’s manager.
12 Ex. C (Annual Lists of Managers (ZYEN01916-ZYEN01921); Ex. 26; see, e.g., Ex. 171B (at
13 ZYEN00417); Ex. 253.
14 14. Mr. Bullard is a resident of Las Vegas, Nevada. Answer SAC at 3
15 ¶ 16. As indicated above, he is an officer of Fertitta Enterprises, and the Registered Agent
16 of Zyen. Ex. 26; Ex. 29. He also frequently holds himself out as the direct manager of
17 Zyen even though technically, as indicated above, Fertitta Enterprises is Zyen’s sole
18 manager with Mr. Bullard responsible for operating Zyen’s affairs for Fertitta. Ex. B
19 (Bullard Dep.) at 108; see also Ex. 171 B (at ZYEN00417); Ex. 253. Ex. 338.
20
21
22
23
24
25
26 sake of limiting the number of exhibits that the Trustee is filing, which already will
number around 130, the Trustee is not filing with each and every exhibit — especially the
27 business records — the document that authenticates it, but to the extent that defendants
challenge the authenticity of any of the filed exhibits, the Trustee will provide the
28 authenticating document with his reply brief.
4
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1 BACKGROUND FACTS
2 15. The Debtor is a Nevada corporation with its principal place of
3 business in Las Vegas, Nevada. Answer SAC at 4 ¶ 23.
4 16. Subsequent to its founding in May 2004, the Debtor was engaged in
5 the production, sale, marketing, and distribution of, among other things, energy drinks,
6 fitness supplements, nutritional products, and apparel that are distributed around the
7 United States and Canada. Answer SAC at 4 ¶ 24.
8 17. The Debtor’s principal line of business involved the sale and
9 marketing of its energy drink (XenergyTM), which the Debtor advertised largely through
10 its sponsorship of the Ultimate Fighting Championship (the “UFC”), a mixed martial arts
11 production and network. Answer SAC at 4 ¶ 25.
12 18. In June 2007, and continuing through today, Lorenzo Fertitta and
13 Frank Fertitta have been co-owners and senior officers of Zuffa, LLC (“Zuffa”), which owns
14 the UFC. Exhibit 35 at TRUSTEE-IDIIA-001638 (CONFIDENTIAL).2
15 19. Zuffa Marketing, LLC (“Zuffa Marketing”) is a subsidiary of and the
16 marketing arm for Zuffa. Ex. D (Deposition of John Mulkey taken August 10, 2010
17 (“Mulkey Dep.”)) at 15 (CONFIDENTIAL).
18 20. The Debtor began sponsoring UFC events in or around 2005, when
19 the UFC was in its early stages. Ex. 377 (CONFIDENTIAL).
20 21. The UFC’s popularity thereafter grew dramatically, and in or about
21 January 2007, the Debtor entered into a long-term sponsorship agreement with Zuffa
22 Marketing. Ex. 39 (CONFIDENTIAL); Answer SAC at 4 ¶ 26.
23
24
25
2
26 On August 9, 2010, this Court entered an Order Granting a Stipulation for
a Protective Order (Docket No. 81), pursuant to which the parties (in particular, the
27 defendants and certain third parties) have designated certain discovery documents as
“CONFIDENTIAL”. The Trustee will be filing a stipulation or motion requesting leave to
28 file these designated exhibits under seal with the Court.
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1 22. Through this marketing agreement, the Debtor became a major
2 sponsor of, and a substantial source of revenue for, Zuffa Marketing. Ex. 35 at TRUSTEE-
3 IDIIA-001654 (CONFIDENTIAL).
4 23. On or about March 1, 2007, after a dispute among the Debtor’s
5 directors and officers was resolved through a settlement agreement, Mr. William
6 Underhill became the Debtor’s Chairman of the Board and its Chief Executive Officer,
7 with Jan Hall as the Debtor’s President and Board Member. Ex. 42; Ex. E (Deposition of
8 William Underhill held May 26, 2011 (“Underhill Dep.”)) at 25-26; 29-30.
9 24. Mr. Underhill was an extraordinarily well-qualified chief executive
10 for the company — with both an MBA from Harvard and a law degree pursuant to which
11 he previously had served, before entering the business world, as a prosecutor in Los
12 Angeles. Ex. F (Deposition of Kirk Sanford held August 6, 2010 (“Sanford Dep”)) at 38.
13 25. On March 15, 2007, the Debtor and Zuffa Marketing entered into a
14 first amendment to the January Sponsorship Agreement (the “March 2007 Sponsorship
15 Amendment”). Ex. 45 (CONFIDENTIAL). The March 2007 Sponsorship Amendment
16 caused certain of the amounts owing from the Debtor under the January 2007
17 Sponsorship Amendment to be converted to equity in the Debtor, and further provided
18 that the Debtor would make cash payments of $1 million on July 31, 2007, and August 31,
19 2007, and then $2.0 million on September 30, 2007, and $2.0 million per month thereafter.
20 Ex. 45 (CONFIDENTIAL).
21 26. From March 1, 2007, through the end of May 2007, when Mr.
22 Underhill was forced to resign as Chief Executive Officer, the Debtor’s sales grew from
23 $1.4 million in February 2007 to $3.2 million in May 2007, and were poised to increase to
24 $5.6 million per month by the fourth quarter of 2007. Ex. 509; Ex. 82 at TRUSTEE-IDIIA-
25 002126.
26 27. By the end of May 2007, Mr. Underhill had arranged for a financing
27 facility that would have enabled the Debtor to obtain at least $8 million in equity and debt
28 capitalization, and thereby enabled the company to reach the top tier of the energy drink
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1 market, which was the fastest growing beverage market at the time (Ex. 519; Ex. E
2 (Underhill Dep.) at 101-111); indeed, by the summer of 2007, the Debtor had become the
3 seventh (7th) best selling energy drink in the United States, among a total of several
4 hundred trying to enter the market. Ex. 425A (TRUSTEE000445).
5 28. One of the proposed investors, Burrill Life Sciences, was prepared to
6 close the transaction within weeks based on the strength of the management team, and
7 valued the Debtor’s enterprise value at $200 million at the time. Ex. 519; Ex. E
8 (Underhill Dep.) at 104-105.
9 29. Meanwhile, two other members of the Debtor’s board of directors
10 were Adam Frank and Kirk Sanford. Ex. 49.
11 30. Starting in or around the middle of May 2007, if not earlier, Mr.
12 Sanford, determined that he did not believe that the Debtor’s former shareholders should
13 benefit from the value that Mr. Underhill and his team had built in the company; rather,
14 Mr. Sanford proposed that Mr. Underhill develop a strategy for reducing or eliminating
15 the equity shares of the current shareholders, and for giving the majority of such value to
16 the management team and the board. Ex. E (Underhill Dep.) at 51-52.
17 31. Messrs. Frank and Sanford also determined at the time that the best
18 strategy for effecting the foregoing was for the Debtor to ally itself with Zuffa or its
19 affiliates, obtain substantially all of its financing from these Fertitta-related entities and
20 grant substantial control of the company to them. Exs. 62, 63. In exchange, Mr. Sanford
21 and Mr. Frank would receive substantial personal benefits, including stock and stock
22 options, and align themselves with Zuffa in the control of the Debtor that Zuffa was
23 seeking through investments in the company. Id.
24 32. Shortly after Mr. Underhill apprized Mr. Sanford that Mr. Underhill
25 represented all of the company’s shareholders, and was unwilling to participate in Messrs
26 Sanford’s plans for diluting or eliminating the other shareholder’s interests in the
27 company, Mr. Sanford advised Mr. Underhill and Ms. Hall (through an email circulated to
28
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1 the entire Board) that they needed to resign from the company, or else he would seek to
2 have them dismissed for cause. Ex. 508A.
3 33. In response to these threats, and without wishing to risk their
4 personal and professional reputations in a fight with Messrs. Sanford and Frank (and
5 with the Fertitta family members who owned Zuffa), Mr. Underhill and Ms. Hall resigned
6 their management positions with the Debtor, with Mr. Underhill retaining a position on
7 the board of directors. Ex. 509.
8 34. As of May 30, 2007, Mr. Frank became the Chairman of the Board as
9 well as the Debtor’s President. Ex. 509.
10 35. Mr. Sanford, for his part, was a contractual advisor to the Board, but
11 thereafter served, with Mr. Frank, as the company’s de factor co-Chief Executive Officer
12 through January 2008. Ex. 62; Ex. 230 (ADAMFRANK11827-8); see also Ex. G (Deposition
13 of Michael Levy held December 3, 2010 (“Levy 2010 Dep.”) at 81.
14 36. On or about June 13-14, 2007, Messrs Sanford and Frank
15 approached Mr. Bullard personally and by email and proposed that Zuffa and its affiliated
16 entities invest a total of $50 million for a combination of equity and debt in the Debtor
17 (the “Proposed Zuffa Investment”). Ex. 63.
18 37. In exchange for the Proposed Zuffa Investment, Zuffa would have
19 received a fully diluted percentage ownership of 35% of the outstanding stock of the
20 Debtor, with an additional 5% if the Debtor defaulted under any of its material obligations
21 under the Proposed Zuffa Investment. Ex. 63.
22 38. The Proposed Zuffa Investment was predicated on a valuation of the
23 Debtor of $180 million. Ex. 63.
24 39. At Mr. Bullard’s request, Mr. Sanford then prepared and provided
25 Mr. Bullard with an analysis showing that the Debtor was worth somewhere in the range
26 of $180 to $250 million based on the sales and equity of other energy drink sellers. Ex. 64;
27 Ex. 65.
28
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1 40. Mr. Bullard thereafter replied that he and his colleagues at Zuffa
2 and its related entities would study carefully the request and would consider taking a
3 substantial financial role in the Debtor’s business, include Messrs. Frank and Sanford in
4 the business, and make a substantial investment in its operations. Ex. 363; see also Ex.
5 H (June 15, 2007 Email Exchange (GB00105-106)).
6 41. On June 18, 2007, in an e-mail to the Board of Directors, Messrs.
7 Frank and Sanford reported on their discussions with the Fertittas; in doing so, they
8 assured the Board, some of whom (such as Mr. Underhill) were wary of the Fertittas, “that
9 any deal that is put forth will be one that necessarily needs to have ALL
10 of the shareholders best interest at heart, and that they [i.e., all of the shareholders] will
11 have the opportunity to review.” Ex. 66 at 3 (TRUSTEE-IDIIA-001982).
12 42. On or about June 28, 2007, Mr. Bullard’s counsel sent a detailed
13 term sheet to Mr. Sanford in which counsel provided an outline of terms and conditions of
14 a substantial senior lending facility, combined with convertible stock features and stock
15 warrants, pursuant to which Zuffa or an affiliated entity would finance the Debtor’s future
16 operations; the term sheet, however, omitted the amount of the funding that the Fertitta-
17 related entity would provide to the Debtor under the new facility. Ex. 80.
18 43. On or about July 26, 2007, while the parties were still discussing the
19 precise amount of the Zuffa or related entity investment in the Debtor, Fertitta
20 Enterprises lent the Debtor $1 million pursuant to promissory note that was to serve as a
21 bridge loan to finance the Debtor’s immediate cash needs. Ex. 92.
22 44. At precisely the same time, at the insistence of Mr. Bullard, Messrs.
23 Frank and Sanford lent $250,000 each to the Debtor pursuant to virtually identical
24 promissory notes. Exs. 93 and 94; Ex. F (Sanford Dep.) at 145-146.
25 45. The three promissory (the “July 2007 Notes”) all contained
26 provisions that they would be secured and repaid pari passu — i.e., on equal terms and in
27 equal amounts at whatever such time as they were refinanced or repaid. See Exs. 92, 93
28 and 94 at 6 § 14(f).
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1 46. The sole security for the July 2007 Notes were liens on certain bank
2 accounts of the Debtor at Wells Fargo (the “Fertitta Secured Accounts”), which were
3 perfected through a Control Agreement dated and executed among the Debtor, Fertitta
4 Enterprises, Messrs. Sanford and Frank and Wells Fargo in or about 2007 (the “July 2007
5 Control Agreement”). Ex. I (Restricted Account Agreement (Doc. No. 28-2)).
6 47. Each of the promissory notes had maturity dates of August 25, 2007,
7 by which time Messrs. Frank and Sanford believed that the long-term facility would be in
8 place. Exs. 92-94; Ex. 81; Ex. F (Sanford Dep.) at 145-146.
9 48. Although Mr. Underhill expressed reservations about the conflict of
10 interest inherent in this arrangement, and requested that a disinterested third party be
11 involved in future negotiations with the Fertittas, Messrs. Frank and Sanford responded
12 that they, and they alone, would conduct the Fertitta negotiations. Ex. E (Underhill Dep.)
13 at 114-116.
14 49. In August 2007, the Debtor defaulted under its Sponsorship
15 Agreement with the Zuffa Marketing; but the parties continued to operate as if the
16 Agreement remained in place. Ex. 103 (CONFIDENTIAL); Ex. D (Mulkey Dep.) at 85-86
17 (CONFIDENTIAL).
18 50. During the period between the time that Messrs. Sanford and Frank
19 began negotiating with Mr. Bullard for a substantial investment from Zuffa, Fertitta
20 Enterprises or a related entity, and the ultimate closing of the Zyen $12 million loan
21 facility in October 2007, the Debtor had numerous offers and opportunities to raise equity
22 financing from other sources. Exs. 95, 111, 112, 135, 386, 387 and 399.
23 51. Yet, Messrs. Frank and Sanford, who stood to gain substantial
24 financial benefit from the closing of a loan facility with the Fertitta-related entities,
25 declined to accept any financing from any other source. Ex. 136A; Ex. 386; see also Ex. J
26 (Deposition of Adam Frank held May 25, 2011 (“Frank Deposition”)) at 20-22.
27 52. Indeed, at one point in August 2007, Mr. Frank Maher from the
28 established brokerage firm Morgan Joseph in New York, visited the Debtor’s facilities and
10
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1 informed Mr. Frank that he could raise several million dollars for the company; but Mr.
2 Frank turned down his offer, leaving the Debtor with no cash investments beyond the
3 July loan funds, which already had been expended for other purposes. Ex. 136A; Ex. 365;
4 386; Ex. J (Frank Dep.) at 28-29.
5 53. Whatever may have been Messrs Frank’s and Sanford’s initial
6 ignorance about how much they would receive in the final Fertitta loan facility, or how
7 much they would have to pay Zuffa Marketing in order to continue or renew their
8 Sponsorship Agreement with the UFC, such ignorance was dispelled in a series of
9 documents and emails that they received in early late August and early September 2007.
10 Ex. 120; Ex. 380; see also Ex. J (Frank Dep.) at 18-19.
11 54. In those documents, the co-CEO’s learned that they would receive at
12 most $12 million under the Zyen loan facility, while having to pay at least $6.5 million of
13 this $12 million loan to Zuffa alone (the first $4.5 million of it on the day the loan closed)
14 as well as repaying in full the $1.5 million due under the July promissory notes, for a total
15 of $8.0 million (in principal alone) of the $12 million facility. Ex. 120; Ex. 380; Ex. J
16 (Frank Dep.) at 18-20.
17 55. As it turns out, a principal reason the Debtor was going to have to
18 pay such a large portion of the Zyen loan to Zuffa was that Zuffa needed the Xyience
19 sponsorship fees in order to avoid a downgrade in its $350 million loan facility with a bank
20 syndicate; indeed in an email from Kirk Sanford to Adam Frank on September 11, 2007,
21 Mr. Sanford described a conversation with Mr. Mulkey, Zuffa’s Chief Financial Officer, in
22 which Mr. Mulkey explained that he was going to have to become involved in the
23 negotiations regarding the Fertitta/Zyen loan facility because Zuffa Marketing needed to
24 get paid the Xyience sponsorship fees. Ex. 484 at 1-2.
25 56. At around the same time, the two Xyience co-CEO’s (Messrs. Frank
26 and Sanford) also learned that the initial proceeds from the Zyen loan facility would be
27 only $9.5 million (of which a full $6.3 million, plus the Debtor’s and Zyen’s more than
28 quarter million dollars in attorneys’ fees, would need to be paid to Zuffa, Fertitta, Mr.
11
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1 Frank and Mr. Sanford before any of the loaned funds could be used for the Debtor’s
2 operations). Ex. 380; Ex. J (Frank Dep.) at 18-20.
3 57. Nevertheless, and despite the fact that Xyience’s sales continued to
4 fall substantially as the company raised no new funds throughout August and September
5 2007 with which to finance their operations, Messrs. Frank and Sanford advised the
6 Board throughout September that they would seek no new financing from any other
7 source until the Fertitta Enterprises/Zyen $12.0 million loan facility closed. Ex 1A; Ex. G
8 (Levy 2010 Dep.) at 40-41; Ex. 123; Ex. 134.
9 58. Messrs. Frank and Sanford informed Mr. Bullard of their decision in
10 this regard, and also informed him of the dramatically negative impact in closing the
11 Fertitta loan facility was having on the Debtor’s operations. Ex. 139; Ex. 380.
12 59. Nevertheless, Mr. Bullard continued to delay the closing of the loan
13 facility. Ex. 139.
14 60. A principal reason that Mr. Bullard proffered to the Debtor during
15 September for his ongoing delay with the financing was that the Fertittas would not
16 proceed with the loan unless and until Mr. Russell Pike, his brother William Pike,
17 Russell’s wife Mrs. Jennifer Pike and Mr. Michael Clark — who together owned
18 approximately 25% of the Debtor’s stock as of the end of September 2007 — entered into
19 an agreement pursuant to which they would forfeit the voting rights of their Xyience stock
20 for so long as the Fertitta loan was outstanding (except that the Voting Agreement
21 expressly required the four stockholders to vote in favor of the Zyen loan facility). Ex. 139;
22 Ex. 151; Ex. 168 (Voting Agreement).
23 61. Mr. Bullard offered as a primary reason for this demand that Mr.
24 Pike had a prior criminal record, and he therefore was concerned about the relationship
25 between the Debtor and the Fertitta-related enterprise that was going to be funding the
26 financing facility. Ex. B (Bullard Dep.) at 18-20.
27 62. This explanation, however, was inconsistent with the following
28 undisputed facts: (a) Mr. Pike, at the time, was neither an officer nor a director of the
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1 Debtor; (b) Zuffa, which is directly owned by the Fertittas, had been doing extensive
2 business with the Debtor for many years, even back in 2005 through early 2007 when Mr.
3 Pike was both an officer and a director of Xyience; and (c) even assuming arguendo that
4 something in Mr. Pike’s past could have caused concern for Mr. Bullard in terms of the
5 new loan that he was to be providing through Fertitta Enterprises (or Zyen) to the Debtor,
6 William Pike, Mrs. Pike and Mr. Clark had no such tainted background of any kind; yet
7 Mr. Bullard insisted that they too forfeit their ability to vote their Xyience shares in order
8 for Mr. Bullard to proceed with the lending facility.
9 63. Meanwhile, on or about September 18, 2007, Messrs Frank and
10 Sanford — reneging on their commitment to seek approval from all shareholders before
11 engaging in a major transaction with the Fertittas — sent to a small and select group of
12 Xyience shareholders and loan holders a letter requesting their consent to the new
13 Fertitta $12.0 million loan facility (the “Funding Consent Letter”). Ex. 130. Mr. Bullard
14 participated directly in the editing and revising of this letter. Id.; Ex. K (September 14,
15 2007 Nadeau Email and attachment, Bates No. ADAMFRANK07229-7230).
16 64. The Funding Consent Letter indicated that the Fertitta loan would
17 only be consummated if (a) 70% of the voting shares of the Company approved a
18 transaction (but also made clear that Fertitta could waive this requirement), and (b) all of
19 the other Debtor’s other secured lenders subordinated their loans and security interests to
20 those of Fertitta Enterprises (or its affiliate that would be making the loan). Ex. 130.
21 65. The Funding Consent Letter was false and misleading in that (a) it
22 failed to advise the recipients that other prospective investors (including Morgan Joseph)
23 had been offering to obtain equity financing for the Debtor; (b) it represented that the new
24 Fertitta facility would provide “attractive” additional financing for its near terms
25 operations; and (c) it failed to disclose that, of the first $9.5 million that Fertitta (or
26 ultimately Zyen) would lend to the Debtor under the new loan facility, (i) $4.5 million
27 would be paid immediately to Zuffa, (ii) an additional $1.5 million would be paid back to
28
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1 Fertitta and to Messrs. Sanford and Frank, and (iii) a substantial portion of the remainder
2 of in initial loan would be used for non-working capital purposes. Ex. 130.
3 66. At the time that Messrs. Frank and Sanford caused the Funding
4 Consent Letter to be circulated to the select group of the Debtor’s shareholders and
5 lenders, the Debtor’s general outside counsel cautioned them of the risk of doing so, but
6 Messrs. Frank and Sanford, who were to receive substantial benefits if the transaction
7 closed, ignored these warnings. Ex. 354.
8 67. The Debtor never received 70%, or even close to 70%, shareholder
9 approval for the Fertitta loan facility, but Mr. Bullard waived this requirement. Ex. B
10 (Bullard 2011 Dep.) at 17-18; Ex. 171 E (Action By Written Consent of Shareholders).3
11 68. Indeed, after the majority of the Debtor’s shareholders got wind of
12 the Funding Consent Letter and its terms, numerous shareholders representing well over
13 25% of the outstanding Xyience stock granted their proxies to a single shareholder (the
14 “Proxy Holder”) to call for a special meeting of stockholders. Ex. 158; Ex. 175.
15 69. Under the Xyience bylaws, shareholders holding proxies for 25% or
16 more of the company’s voting could require a shareholder meeting. Ex. 36 at 1.
17 70. Even though the Proxy Holder possessed substantially in excess of
18 the 25% requirement when he presented his demand for the meeting on October 2, 2007,
19 the Debtor’s board (which included Mr. Bullard as of October 4), declined to call the
20 meeting. Ex. 175; Ex. O (Levy 2011 Dep.) at 23-24.
21 71. The reason the Board did so was that it determined that the shares
22 of Russell Pike, William Pike, Mrs. Pike and Mr. Clark did not count towards the 25%
23
24
3
As reflected in the actual consent forms attached to the Action of Written
25 Consent, only 13 stockholders signed consents. Of these 13, two were signed by the
26 alleged co-conspirators here, Messrs. Frank and Sanford, three were signed pursuant to
the Pike Voting Agreement (because Jennifer and Russell Pike executed a single consent),
27 and two were signed by Brent Hucks (on behalf of his two different LLC’s) — leaving just
7 other shareholder consents (of the over 320 shareholders of Xyience at the time). Ex.
28 171E; see infra for discussion of Brent Hucks’s reasons for consenting.
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1 requirement because, under the Voting Agreement that Mr. Bullard demanded as a
2 condition to the Zyen loan, the four shareholders had forfeited their voting rights (except,
3 of course, for the purpose of voting for the loan).4 Ex. 175.
4 72. As discussed below, however, and reflected in Exhibit 168, the Voting
5 Agreement was not executed until the day after the Proxy Holder had made the valid
6 request for the meeting. Compare Ex. 158 and Ex. 168. Still, it was Mr. Bullard’s
7 demand for the Voting Agreement that enabled the Debtor’s board to provide a rationale
8 for refusing to conduct a shareholder’s meeting at which the Debtor’s owners could have
9 voted for a board of directors that would have prevented the events that subsequently
10 unfolded. Ex. 139; Ex. 175.
11 73. As for the Debtor’s other lenders, the lender with the most senior
12 security interest in portions of the Debtor’s assets at the time of the Fertitta/Zyen loan
13 was Mr. Brent Hucks.5
14 74. After several conversations and emails with management, Mr. Hucks
15 agreed to sign the Funding Consent Letter and subordinate his security interest to the
16 new loan facility based on his belief (a) that the substantial portion of the facility was
17 going to be used to fund future working capital for the Debtor, and (b) that the company’s
18
19 4
So insistent was Mr. Bullard that Mr. Pike and the other three large
20 shareholders sign the Voting Agreement — i.e., vote in favor of the Zyen loan facility, but
then forfeit their voting rights in the future — that on September 27, 2007, he sent an
21 email to Messrs. Frank and Sanford threatening to begin the foreclosure process on the
Debtor’s bank accounts (which at the time held scarcely enough to pay back 10% of the
22
July 2007 Loans) because the four shareholders had not yet signed the Voting Agreement.
23 Ex. 145. As set forth in the text below, in the face of these threats to kill the company, the
four shareholders ultimately relented and signed the Voting Agreement on October 3,
24 2007, effectively conceding full control over the Debtor to Mr. Bullard and the two entities
he operated for the Fertittas (Fertitta Enterprises and Zyen).
25
5
26 Although the Debtor’s schedules listed Mr. Hucks in a third lien position
(behind an entity known as Darlis Invest & Trade), this listing was inaccurate. Mr.
27 Hucks’s security interests predated Darlis’s, and no one ever has produced (because none
exists) a document in which Mr. Hucks subordinated his security interest to Darlis, or to
28 anyone other than Fertitta and Zyen. Bankruptcy Case Docket No. 1.
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1 best hope for surviving and growing lay in proceeding with the facility. Ex. 471; Ex. 477;
2 Ex. L (Deposition of Brent Hucks held December 17, 2010 (“Hucks Dep.”)) at 37-42.
3 During these conversations, Mr. Hucks was not told and did not know, that a substantial
4 portion of the facility was going to pay Zuffa Marketing and Fertitta Enterprises. Id.
5 75. Mr. Hucks would not have subordinated his interests had he known
6 that the Debtor was going to intentionally and unnecessarily default on its first loan
7 payment under the facility, and that Zyen would be foreclosing on its loan — leaving Mr.
8 Hucks with zero recovery on his loan — within less than two months. Ex. L (Hucks Dep.)
9 at 41-42.
10 76. Even after receiving subordinations from all of the Debtor’s secured
11 lenders, Mr. Bullard continued to insist, even to the point that the Debtor had to shut
12 down its operations on October 2, 2007, that Fertitta/Zyen would not proceed with $12.0
13 million facility unless Russell Pike, William Pike, Mrs. Pike and Mr. Clark signed the
14 Voting Agreement. Exs. 160, 161, 164, 168.
15 77. Ultimately, on October 3, 2007, after Mr. Bullard’s actions caused
16 the Debtor to close its operations entirely on October 2, the four required signatories —
17 Russell Pike, William Pike, Mrs. Pike and Mr. Clark — signed the Voting Agreement.
18 Exs. 160, 161, 164, 168; see Ex. G (Levy 2010 Dep.) at 75-77 (disclosing the shutdown of
19 operations on October 2, 2007).
20 78. Meanwhile, on October 1, 2007, the Board conducted its final board
21 meeting prior to the loan facility closing. Ex. 154.
22 79. As required by section 6(viii) (on page 12) of the Zyen $12.0
23 promissory note — which made it a condition precedent of the closing of the loan that the
24 Debtor appoint a person selected by the lender to serve as a director of the Debtor — the
25 Board at the October 1, 2007, board meeting appointed Mr. Bullard as Zyen’s
26 representative on the Board. Ex. 154; Ex. 171B at 12 (ZYEN00396).
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1 80. On October 3, 2007, Mr. Bullard (who, technically, at least, was not
2 yet even a Board member because the loan facility had not yet closed) received an offer
3 from Cott Beverage Company to acquire the Debtor for $150,000,000. Ex. 506.
4 81. Mr. Bullard promptly reported this offer to Lorenzo Fertitta; and in
5 the same email, he advised Mr. Fertitta that he had “locked up Pike with the voting
6 agreement.” Id. (emphasis added). Mr. Bullard also informed Mr. Fertitta that he had
7 informed Mr. Frank (who, at least in name, remained the Debtor’s President and chief
8 executive), that he (Mr. Bullard) had instructed Mr. Frank to keep the Cott $150 million
9 offer “low key.” Id.
10 82. Mr. Bullard had a very good (albeit improper) reason for wanting to
11 keep the Cott offer quiet: if the Board learned of the offer, then it might delay the Zyen
12 financing; yet Mr. Mulkey (the Zuffa CFO) had expressed to Mr. Bullard the very same
13 day that he was becoming nervous about the transaction closing because (as discussed
14 earlier) he needed the Xyience $4.5 million in sponsorship fees that Zuffa Marketing was
15 receiving from the financing. Ex. 371 (Sanford email to Frank re discussion with Bullard
16 re Mulkey’s nervousness about finalizing the deal).
17 83. Indeed, on the same day, October 3, 2007, the Debtor and Zuffa
18 Marketing had entered into a new Sponsorship Agreement (the “October 2007
19 Sponsorship Agreement”). Ex. 171A (CONFIDENTIAL).
20 84. As Messrs Frank and Sanford already had been told, the October
21 2007 Sponsorship Agreement required an immediate payment of $4.5 million (on October
22 4, 2007), and an additional payment of $2.0 million on December 1, 2007. Ex. 171A
23 (CONFIDENTIAL).
24 85. At least $4.0 million of the $4.5 million that was to be paid to Zuffa
25 Marketing on October 4, 2007 (and was actually paid on October 5, 2007) represented past
26 due amounts under the January 2007 Sponsorship Agreement as amended by the March
27 2007 Sponsorship Amendment. Ex. 45 (CONFIDENTIAL).
28
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1 86. The amount due from the Debtor to Zuffa Marketing under the
2 various sponsorship agreements all constituted unsecured debts — i.e., there was no
3 security for the sponsorship payments due under these agreements. See Exs. 39, 45, 171A
4 (All CONFIDENTIAL).
5 87. On October 4, 2007, the Zyen $12.0 loan facility closed, and Zyen
6 wired to the Debtor $9.5 million as the first portion of the loan.6 Ex. 13B at 1.
7 88. In accordance with the October 1 Board Minutes and the condition
8 precedents to the Zyen loan facility, Mr. Bullard, as of October 4, 2007, became a member
9 of the Debtor’s Board of directors. Ex. 154; Ex. 171B at 12.
10 89. The $9.5 million did not go into any of the Fertitta Secured Accounts.
11 Ex. I (Restricted Control Agreement at 12).
12 90. As of the close of business on October 4, 2007, the Fertitta Secured
13 Accounts contained a total amount of $125,397.85. Ex. M (Demonstrative: Preference
14 Analysis Table); Exs. 7B, 8B, 9B, 15B and 16B.
15 91. On October 5, 2007, and October 9, 2007 the Debtor paid the
16 following amounts to Fertitta Enterprise, Mr. Frank and Mr. Sanford:
17 (a) Fertitta Enterprises (10/5): $1,029,166.67
18 (b) Mr. Sanford (10/5): $ 257,187.50.
19 (c) Mr. Frank (10/9): $ 257,187.50
20 Ex. 13B at 2, 3.
21
22
23
24
25
26
6
27 As indicated above, Fertitta Enterprises formed Zyen on or about
September 12, 2007, to act as a subsidiary entity that would enter into the $12.0 million
28 loan facility with the Debtor.
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1 92. Also on October 5, 2007, the Debtor moved certain of the $9.5 million
2 of the funds that it had received on October 4, 2007, into accounts that constituted
3 Fertitta Secured Accounts (i.e., the collateral securing the promissory notes), so that as of
4 the close of business on October 5, 2007, the Fertitta Secured Accounts contained a total of
5 $434,216.12. Ex. M (Preference Analysis Table); Exs. 7B, 8B, 9B, 15B and 16B.
6 93. In addition, still on October 5, 2007, the Debtor paid $4.5 million to
7 Zuffa Marketing, thereby repaying in full the $4.0 million unsecured debt that was due
8 under the January Sponsorship Agreement (as incorporated into the October 2007
9 Sponsorship Agreement) with funds that were secured on a first priority basis by all of the
10 Debtor’s assets. Ex. 13B at 2.
11 94. Zuffa Marketing subsequently acknowledged to Judge Nakagawa
12 that the $4.5 million portion of the $9.5 million that Zyen made to Zuffa Marketing on
13 October 4-5, 2007, was specifically “earmarked” for Zuffa Marketing, and for no other
14 purpose. Ex. 333A at 77.
15 95. As of October 5, 2007, the Debtor was insolvent in that its liabilities,
16 fairly valued, exceeded the fair value of its assets at the time. Ex. G (Levy 2010 Dep.) at
17 37.
18 96. In the weeks that followed the closing of the Zyen loan facility,
19 Messrs. Frank and Sanford failed to invest or raise any equity or debt capital from any
20 source for the Debtor’s operations; nor, given the stringent terms of the Zyen loan
21 documents (especially the provisions relating to a default occurring in the event of a
22 change of the Board of Directors that Zyen did not approve, and the consequences of such
23 a default), would any reputable lender or investor have made any such investment. Ex.
24 212 at TRUSTEE-IDIIA-003955.
25 97. During this same time period, Messrs. Frank and Sanford
26 consistently referred to and corresponded with Mr. Bullard as a member of the Debtor’s
27 board of directors; and on October 8, 2007, Mr. Michael Levy, the Debtor’s Chief Financial
28 Officer, reported to the Debtor’s auditing firm that Mr. Bullard was currently a board
19
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1 member. Ex. 174; Ex. N (October 19, 2007 Email Chain listing Board, Bates No.
2 ADAMFRANK18061); Ex. 547.
3 98. Also during this period, Mr. Bullard advised Mr. Underhill that
4 unless Mr. Underhill resigned from the Board, Mr. Bullard would not allow another board
5 meeting to take place. Ex. E (Underhill Dep.) at 143-145.
6 99. As a result of this discussion, Mr. Underhill, on or about October 31,
7 2007, resigned from the Debtor’s Board. Ex. 203.
8 100. On or about October 25, 2007, Zyen funded the final $2.5 million of
9 its $12 million loan facility. Ex. 13B.
10 101. Under the Zyen loan facility, the first interest payment was due on
11 November 1, 2007 — in the amount of approximately $109,000. Ex. 3B; Ex. 171B at 9
12 ¶ 3(a).
13 102. Mr. Levy, the Debtor’s CFO, reflected in the company’s general
14 ledger that in interest payment had to be made on November 1, 2007. Ex. O (Deposition
15 of Michael Levy held September 29, 2011 (“Levy 2011 Dep.”.) at 12-13; Ex. 3B.
16 103. As of November 1, 2007, the Debtor possessed in excess of $1.0
17 million with which to make its required loan payment. Ex. 3A at 20; Ex. O (Levy 2011
18 Deposition) at 9-10.
19 104. Nevertheless, when November 1, 2007, arrived, Mr. Levy decided not
20 to make the first interest payment due under the Zyen facility as a result of a “board
21 decision” that the company should not make it, thereby placing the Debtor in default
22 under the senior secured facility. Ex. 337A at 93.
23 105. At the Board meeting two days later, on November 3, 2007, Mr.
24 Bullard resigned from the Board, citing as his reason “lender liability” concerns. Ex. 212.
25 106. On November 20, 2007, Mr. Bullard sent a notice of default to the
26 Debtor arising from the company’s failure — while he was on the Board of Directors — to
27 make the November 1 loan payment. Ex. 242.
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1 107. By letter dated November 27, 2007, Mr. Bullard accelerated the
2 entire amount due under the Zyen loan facility arising from its failure to make the
3 November 1 loan payment. Ex. 248.
4 108. On or about November 30, 2007, Mr. Bullard caused his secretary,
5 Pegi Nadeau, to send a notice to the Debtor, asking the Debtor to execute a letter
6 accepting a partial strict the foreclosure of the Debtor’s assets by Zyen. Ex. 253.
7 109. When the Debtor did not respond, Ms. Nadeau, on or about
8 December 3, 2007, sent a notices of complete strict foreclosure to the Debtor under section
9 621 of the New York Uniform Commercial Code pursuant to which, with the Debtor’s
10 agreement, all of the Debtor’s indebtedness under the Zyen loan facility would be deemed
11 satisfied if the Debtor agreed to convey all of its assets to Zyen. Ex. 256.
12 110. At the Debtor’s Board meeting on December 3, 2007, Mr. Levy was
13 appointed to the Debtor’s Board. Ex. 258.
14 111. At the same meeting, Mr. Sattar was appointed as the Debtor’s
15 President and Chief Operating Officer, with Messrs. Frank and Sanford remaining as the
16 Debtor’s co-CEO’s. Ex. 258.
17 112. On or about December 20, 2007, Mr. Sattar, executed the notice of
18 strict foreclosure in partial satisfaction of the Debtor’s indebtedness to Zyen, which
19 purported to voluntarily convey all of the Debtor’s assets to Zyen.7 Ex. 381.
20 113. Meanwhile, on December 14, 2007, unbeknownst to Messrs. Frank
21 and Sanford, Mr. Bullard had entered into a secret agreement with Manchester
22 Consolidated Corporation, pursuant to which Manchester would serve as Zyen’s
23 consultant in formulating a plan by which a group aligned with Zyen would purchase the
24 Debtor’s assets through a Chapter 11 sale. Ex. 494; Ex. J (Frank Dep.) at 62-63.
25
26
7
27 The strict foreclosure was not consummated because a number of creditors
objected to it, and per the terms of the statute and the notice, such objections defeated the
28 voluntary foreclosure. E.g., 474 (Brent Hucks objection).
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1 114. Under the Manchester Consulting Agreement, Mr. Bullard granted
2 Manchester unfettered access to Mr. Levy — i.e., the Debtor’s Chief Financial Officer and
3 as one of its directors. Ex. 494.
4 115. From the period commencing with the signing of the Zyen-
5 Manchester Consulting Agreement, through the Debtor’s January 2008 bankruptcy filing,
6 Mr. Levy began sending cash plans and forecasts in emails directly to Mr. Bullard alone
7 without copying Messrs. Frank, Sanford or Sattar. Exs. 537, 538, 539 and 540; compare
8 Ex. 503 (11/13/07 Email to Bullard with attached cash plan, copied to Frank and Sanford).
9 116. With these figures and others obtained from Mr. Bullard, the
10 Manchester group developed a proposal, which it presented to Mr. Bullard on or about
11 December 26, 2007 (and then another one that it presented to Zuffa in January 2008)
12 pursuant to which Zyen and the Manchester group together would acquire Xyience’s
13 assets through a bankruptcy sale, with Mr. Levy serving as CFO or in a similar capacity.
14 Ex. 534; Ex. 535; Ex. P (January 30, 2008 Proposal, Bates No. GB00129-140).
15 117. In the meantime, on or about December 13, 2007, the Debtor had
16 retained Laurel Davis, Esq., of Fennemore Craig, as its prospective bankruptcy counsel.
17 Ex. 279.
18 118. During December 2007, while Ms. Davis prepared for a bankruptcy
19 filing, Messrs. Frank and Sanford (who had remained as co-CEO’s and board members)
20 sought to structure a deal pursuant to which they would join with Mr. Bullard and Zyen to
21 acquire the Debtor’s assets through a section 363 bankruptcy sale once the Debtor filed for
22 Chapter 11. Ex. 335; Ex. 436.
23 119. In several emails from Ms. Davis to the Debtor’s management during
24 December 2007, Ms. Davis advised management that Mr. Bullard, Fertitta Enterprises,
25 Zyen and Zuffa (all represented at the time by Milbank Tweed) would not permit the
26 Debtor to file for bankruptcy until after January 5, 2008 (i.e., the 92nd day following the
27 more than $6.0 million in otherwise potentially preferential payments that the Debtor had
28
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1 made to Zuffa, Fertitta Enterprises, Mr. Frank and Mr. Sanford on October 5, 2007). Ex.
2 274, Ex. 404; Ex. 405.
3 120. In December 17, 2007, Zuffa purported to terminate all of the
4 Debtor’s rights under the October 2007 Sponsorship Agreement. Ex. 373.
5 121. Section 6.3 of the Agreement, however, expressly provided that
6 Xyience could continue selling cans bearing the UFC logo for an additional six months
7 following this termination of the Agreement. Ex. 171A at 4. (CONFIDENTIAL).
8 122. On December 18, 2007, Thomas Paschall (one of the Zuffa/Zyen
9 attorneys from Milbank Tweed) wrote an email to several Zuffa principals, which was
10 then forwarded from one of them (Lawrence Epstein) to Zuffa’s local counsel, Brett
11 Axelrod, and finally to the Debtor’s attorney, Ms. Davis. Ex. 295.
12 123. On page 2 of the December 18 email, Mr. Paschall explains, among
13 other things, that Mr. Bullard was discussing with Frank and Lorenzo Fertitta granting
14 the Debtor an additional $1.0 million subordinated loan — exclusively for the purpose of
15 allowing the Debtor to continue operating, and to avoid filing for bankruptcy, until the
16 expiration of the preference period for the more than $5.53 million in payments that the
17 Debtor had made to Zuffa and Fertitta Enterprise on October 5, 2007. Ex. 295.
18 124. Inasmuch as the Debtor was willing, at the time, to file for Chapter
19 11 and enter into a senior secured superiority loan with Zyen for post-petition financing,
20 the sole reason for the discussion regarding Zyen lending the Debtor $1.0 on a pre-
21 bankruptcy subordinated basis was to delay the Debtor’s bankruptcy filing date so that
22 Zuffa and Zyen could escape preference liability for what would have been more than $5
23 millions that could have been available for the Debtor’s unsecured creditors as potentially
24 preferential transfers. Ex. 295 at 2 (“The overarching strategy is twofold: (1) preserve
25 Xyience's UFC relationship, even if in a subordinated sense, which all prospective Xyience
26 investors seem to value; and (2) arrange a short-term subordinated financing that will
27 help Xyience survive without bankruptcy protection for the remainder of the preference
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1 period. This should maximize the upside and downside protection for the Fertittas both
2 on the Zuffa and Fertitta Enterprises fronts.”) (Emphasis added).
3 125. At no time during any board meeting or any other conversation in
4 which any officer or attorney for the Debtor participated did anyone discuss the potential
5 leverage that the Debtor could have exacted in negotiations regarding bankruptcy
6 financing and other agreements on account of Zuffa Marketing’s and Zyen’s more than $5
7 million in preference exposure. Ex. Q (Deposition of Laurel Davis held September 28,
8 2011 (“Davis Dep.”)) at 22.
9 126. Instead, because Mr. Bullard — and Mr. Bullard alone — was
10 making the decisions at the time as to when the Debtor would file for Chapter 11, the
11 Debtor merely deferred to Mr. Bullard’s wishes and did not file its bankruptcy case until
12 January 18, 2008 — well after the preference period had expired. Ex. 302; Ex. 307; Ex.
13 308.
14 127. Meanwhile, throughout December 2007, Messrs. Frank and Sanford,
15 unaware of the secret Manchester-Zyen agreement, were planning to become part of the
16 group that would align with Zyen and Mr Bullard to acquire the Debtor’s assets through a
17 Chapter 11 sale. Ex. 335; Ex. 436.
18 128. Ms. Davis, as the Debtor’s attorney, expressed severe reservations
19 that their doing so would constitute a conflict of interest, but the two declined to resign
20 from the Board at the time. Ex. 436.
21 129. As required by Zuffa Marketing and Zyen, the Debtor, after the
22 preference period had passed, filed for Chapter 11 on January 18, 2011. Ex. 302; Ex. 307;
23 Ex. 308.
24 130. On February 12, 2008, at a final hearing on the motion to obtain
25 post-petition financing and to enter into a limited license agreement with the UFC, the
26 Debtor and counsel for Zuffa represented to the Court that approval of a Non-Exclusive
27 License Agreement between Zuffa and the UFC was critical because otherwise the Debtor
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1 would have to destroy some $8 million in inventory that bore the UFC label. Ex. 333A at
2 60-63.
3 131. Regardless of whether the persons who made these statements
4 understood at the time that they false, they were in fact untrue; that is, as referenced
5 above, under section 6.3 of the October Sponsorship Agreement, the Debtor had six
6 months from the date that the Agreement was terminated — i.e. six months from
7 December 17, 2007 — to continue selling cans bearing the UFC label. Ex. 171A at 4
8 (CONFIDENTIAL).
9 132. Nevertheless, Judge Nakagawa approved the License Agreement
10 because, among other reasons, he (erroneously) considered it vital to keep the Debtor in
11 business. Ex. 333A at 91-94; Bankruptcy Docket No. 128.
12 133. Under the License Agreement, the Debtor released and waived its
13 preference or other avoidance claims against Zuffa. But the Debtor did not release or
14 waive such claims against Zuffa affiliates, including Zyen. Ex. 372 at 4 ¶ 8.
15 (CONFIDENTIAL).
16 134. On or about February 21, 2008, Messrs. Levy and Sattar selected
17 Manchester as the stalking horse bidder for the Debtor’s assets in a section 363 asset sale.
18 Ex. G (Levy 2010 Dep.) at 67; Ex. R (Deposition of Omar Sattar) at 21, 22.
19 135. Because Messrs. Frank and Sanford were unaware of the deal that
20 Zyen had struck with Manchester, they were shocked to learn that Mr. Bullard had
21 determined that in no way would he consider allowing them (as opposed to Manchester) to
22 become the stalking horse for Debtor’s assets; and they so wrote in an email to Mr.
23 Bullard directly on February 21, 2008. Ex. 501.
24 136. On April 1, 2008, after the Court approved a sale of the Xyience
25 assets to Manchester, and Manchester assigned its rights under the sale contract to an
26 entity known as Manzen LLC (which was a combined term for Manchester and Zyen),
27 d/b/a Xyience, the Debtor consummated a sale of substantially all of its assets to Manzen
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1 pursuant to which Zyen became partial equal holder and partial lender in the new
2 “Xyience” entity. Ex. 408; Answer to SAC at 8 ¶ 71.
3 137. Within a year, Zyen foreclosed its interests in the former Xyience
4 assets and today is both the manager of and the principal owner of Manzen. Ex. G (Levy
5 2010 Deposition) at 62; Ex. B (Bullard Deposition) at 121-122.
6 Dated: November 4, 2011
7 Respectfully submitted,
8
9 /s/ Jonathan A. Backman
10
Jonathan A. Backman
11 Law Office of Jonathan A. Backman
117 N. Center Street
12 Bloomington, Illinois 61701-5001
(309) 820-7420
13 FAX: (309) 820-7430
jbackman@backlawoffice.com
14
Counsel for David Herzog, as Liquidating Trustee for the
15 Estate of Xyience, Incorporated
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1 CERTIFICATE OF SERVICE
2 I, Jonathan A. Backman, an Illinois attorney, hereby certify that on
3 November 4, 2011, I electronically filed the foregoing Trustee’s Statement of Undisputed
4 Facts with the Clerk of the Court using the CM/ECF system which will send notification
5 of such filing to the following:
6 OGONNA M. ATAMOH, ESQ.
on behalf of the Liquidating Trustee
7 oatamoh@nevadafirm.com
8 MATTHEW C. ZIRZOW, ESQ.
on behalf of all Defendants
9 bankruptcynotices@gordonsilver.com, bknotices@gordonsilver.com
10 and I hereby certify that I have delivered the document to the following non-CM/ECF
11 participants by United States Priority Mail postage prepaid: NONE.
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/s/ Jonathan A. Backman
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