Xyience Trustee Motion For Summary

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					     Case 09-01402-mkn       Doc 133    Entered 11/04/11 08:18:33      Page 1 of 15

 1   Jonathan A. Backman, Esq.                                 E-filed: November 4, 2011
     Law Office of Jonathan A. Backman
 2   117 N. Center Street
     Bloomington, Illinois 61701-5001
 3   (309) 820-7420
     Ogonna M. Atamoh, Esq.
 6   400 South Fourth Street, Third Floor
     Las Vegas, Nevada 89101
 7   702/791-0308
     Counsel for the Liquidating Trustee
10                                DISTRICT OF NEVADA

      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,                       )
16                                                  )
      Plaintiff,                                    )     Adversary Case No. 09-1402-MKN
17                                                  )
      v.                                            )
18                                                  )
      ZYEN, LLC, a Nevada limited liability         )
19    company, FERTITTA ENTERPRISES,                )     Hearing: December 9, 2011
      INC., a Nevada corporation, and               )              9:30 a.m.
20    WILLIAM BULLARD,                              )
21    Defendants.                                   )

22                        LIQUIDATING TRUSTEE’S MOTION FOR
23                        OF HIS SECOND AMENDED COMPLAINT

24                  Plaintiff David R. Herzog, as Liquidating Trustee (the “Trustee”) for the

25   estate of Xyience, Incorporated (the “Debtor”), the former debtor and debtor in possession

26   the above-captioned Chapter 11 case (the "Case"), hereby moves this Court pursuant to

27   Rule 56(a) of the Federal Rules of Civil Procedure (as made applicable here by the Rule

28   7056 of the Federal Rules of Bankruptcy Procedure) and Local Rule 7056 for summary

     judgment on Count X (against Fertitta Enterprises, Inc.) and Count XIII (against Zyen
     Case 09-01402-mkn        Doc 133    Entered 11/04/11 08:18:33        Page 2 of 15

 1   LLC) of his Second Amended Complaint against remaining defendants Zyen, LLC (Zyen”),

 2   Fertitta Enterprises, Inc. (“Fertitta Enterprises,” and sometimes “Fertitta,”), and Mr.

 3   William Bullard, as follows:

                    For the most part, the claims at issue in this case against the three
     remaining defendants involve a combination of disputed facts, and determinations as to
     the parties’ intent, that render the claims unsuitable for summary judgment. As our
     Statement of Undisputed Facts makes clear, however, two of the Trustee’s claims fall
     outside this category.
                    First, as demonstrated in Section II below, the indisputable control that
     Fertitta and then Zyen — both through Mr. Bullard — exercised over the Debtor from no
     later than late September 2007 through the Debtor’s January 18, 2008, bankruptcy filing,
     combined with the intertwined, pari passu, nature of the three July 2007 Notes (from
     Fertitta and the Debtor’s co-CEO’s Adam Frank and Kirk Sanford) leaves no genuine
     issue of material fact that Fertitta qualifies as either a statutory or non-statutory insider
     of the Debtor for the purposes of section 547's insider provisions. Accordingly, and
     irrespective of the parties’ intent, the Trustee is entitled to summary judgment on Count
     X’s preference claim against Fertitta.
                    As for Count XIII — the fraudulent transfer claim against Zyen arising from
     the Debtor’s transfer to it of a lien on all of its assets — the Trustee recognizes that,
     ordinarily, such a claim would require a trial. But the unique (and undisputed) facts at
     issue here — including the admitted earmarking of $4.5 million of the Zyen secured loan
     proceeds to pay the otherwise unpayable unsecured claim of a Zyen affiliate (Zuffa
     Marketing) — render this claim appropriate for summary under the Supreme Court’s
     opinion in Dean v. Davis, 242 U.S. 438, 37 S.Ct. 130 (1917), and its progeny. Accordingly,
     as we set forth further in Section III below, the Trustee is entitled to summary judgment
     on this claim as well.

     Case 09-01402-mkn       Doc 133     Entered 11/04/11 08:18:33       Page 3 of 15

 3   I.     Applicable Legal Standard.

 4                 As the Court knows well, Rule 56(a) — as amended in late 2010 — provides

 5   that summary judgment for a plaintiff or a defendant should be entered when the moving

 6   party “shows that there is no genuine dispute as to any material fact and the movant is

 7   entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); Mann v. New York Life

 8   Ins. & Annuity Corp., 222 F. Supp. 2d 1151, 1153 (D. Ariz. 2002). The court, in evaluating
 9   the motion, must view all facts and draw all inferences in the light most favorable to the

10   nonmoving party. Zoslaw v. MCA Distrib. Corp., 693 F.2d 870, 883 (9th Cir. 1982). But

11   an issue precluding summary is “genuine” only “if there is a sufficient evidentiary basis on

12   which a reasonable fact-finder could find for the nonmoving party.” Ctr. Capital Corp. v.

13   Eagle Jet Aviation, Inc., 2010 U.S. Dist. LEXIS 38683, at 5 (D. Nev. Apr. 20, 2010). And a
14   dispute is "material" only if it “could affect the outcome of the suit under the governing

15   law.” Id. at 5-6. Indeed, “[o]nce the movant satisfies the requirements of Rule 56, the

16   burden shifts to the party resisting the motion to `set forth specific facts showing that

17   there is a genuine issue for trial.’” Id. at 6 (quoting Anderson v. Liberty Lobby, Inc., 477

18   U.S. 242, 256, 106 S. Ct. 2505 (1986)).

     II.    Fertitta Enterprises Is Liable for the Preferential Transfer That
20          It Received On October 5, 2007, from the Debtor.

21          A.     The Trustee Has Met His Prima Facie Case.

22                 As reflected in the Trustee’s undisputed factual statement filed concurrently

23   herewith (the “Trustee’s Statement” or “Tr. Stat.”), if Fertitta Enterprises was an “insider”

24   of the Debtor (which it clearly was, as demonstrated in subsection II.B below), then the

25   roughly $1,029,000 transfer that Fertitta received on October 5, 2007, easily satisfies all of

26   the elements of the Trustee’s prima face case under section 547(b), and is avoidable as a

27   preference (since Fertitta possesses no affirmative defenses under subsections (c) or (i)):


     Case 09-01402-mkn        Doc 133      Entered 11/04/11 08:18:33     Page 4 of 15

 1                  1.     Fertitta was a creditor of the Debtor. 11 U.S.C. § 547(b)(1);

 2                  2.     Fertitta received full payment on account of this debt. 11 U.S.C.

 3   § 547(b)(2); see Tr. Stat. 18 ¶ 91;

 4                  3.     The Debtor was insolvent at the time of the payment. 11 U.S.C.

 5   § 547(b)(3);

 6                  4.     Fertitta received the payment within one year of the January 18,

 7   2008, Petition Date. 11 U.S.C. § 547(b)(4)(B); see Tr. Stat. 19 ¶ 95; and

 8                  5.     The payment enabled Fertitta to receive more than it would have

 9   received if this case were a case was under Chapter 7 of the Bankruptcy Code, the

10   payment had not been made, and instead, Fertitta had received payment on its claim

11   under the applicable provisions of the Bankruptcy Code.1 11 U.S.C. § 547(b)(5).

12                  Accordingly, the Trustee is entitled to summary judgment here if, as was

13   clearly the case, and as we demonstrate below, Fertitta Enterprises qualified as a

14   statutory or a non-statutory insider of the Debtor under section 101(31).

            B.      Fertitta Enterprises Was An Insider of the Debtor from Prior
16                  To the Preference Period through the Petition Date.

17                  As this Court previously has explained, the recipient of an allegedly

18   preferential transfer can qualify as in insider under section 101(31) — and thus be subject

19   to the one-year reachback period of section 547(b)(4)(B) — by virtue of being either a

20   statutory or a non-statutory insider. In re Lull, 2009 WL 3853210, 4-5 (Bankr. D. Haw.

21   November 17, 2009); accord In re Winstar Communications, Inc., 554 F.3d 382, 396-397

22   (3rd Cir. 2009). A statutory insider is one that falls within the examples of insiders listed

24                  As indicated in the Trustee’s Statement, the security securing the July 2007
     Notes was limited to certain bank accounts, which had a balance of $125,397.85 as of the
25   close of business on October 4, 2007, and a balance of $434,216.52 as of the close of
26   business on October 5, 2007, the day the payments were made. In subsection C below, we
     explain why, if this were a case under Chapter 7, Fertitta would have received only
27   $83,609.85 (i.e., 2/3rds of the amounts in the accounts on October 4, 2007). As a result,
     and as discussed further in subsection C, the amount that the Trustee is entitled to avoid
28   and recover from Fertitta as a preferential transfer is $945,556.82.

     Case 09-01402-mkn       Doc 133     Entered 11/04/11 08:18:33        Page 5 of 15

 1   in section 101(31) — e.g., for corporations: officers; directors; and persons in control of the

 2   debtor. Non-statutory insiders, on the other hand, are persons and entities who — albeit

 3   not specifically delineated in the statute — have such a close or special relationship with

 4   the debtor that their transactions with the debtor fall outside ordinary business dealings

 5   and therefore are not an arms-length. In re Winstar Communications, Inc., 554 F.3d at

 6   396-397 (“the question `is whether there is a close relationship [between debtor and

 7   creditor] and ... anything other than closeness to suggest that any transactions were not

 8   conducted at arm's length’”) (quoting In re U.S. Medical, Inc., 531 F.3d 1272, 1277 (10th

 9   Cir. 2008) (citing S. Rep. No. 95–989, at 25 (1978), as reprinted in 1978 U.S.C.C.A.N.

10   5787, 5810 (“An insider is one who has a sufficiently close relationship with the debtor

11   that his conduct is made subject to closer scrutiny than those dealing at [arm's] length

12   with the debtor.”)).

13                  Here, we submit, and discuss in subsections 1 and 2 below, that the

14   undisputed facts render Fertitta Enterprises both a statutory insider (as a person in

15   control of the Debtor) and a non-statutory insider (by virtue both of its unique control over

16   aspects of the debtor’s business and its special relationship with Messrs. Frank and

17   Sanford, which ensured that Fertitta would receive its payment when these two corporate

18   officers received theirs). Accordingly, we submit that no genuine of issue of material fact

19   exists as to Fertitta’s insider status, and that the Trustee is entitled to judgment on Count

20   X’s preference claim as a matter of law.

                    1.      Fertitta Was a Statutory Insider Because It Effectively
22                          Controlled the Debtor and the Preferential Payment
                            And the Date on Which the Debtor Filed For Bankruptcy.
                    Even though Fertitta, though its representative Mr. Bullard, was not in full
     control of the Debtor’s business during the July through September 2007 period — at least
     not the sort of control that Winstar case seems to require to satisfy the statutory control

     Case 09-01402-mkn        Doc 133    Entered 11/04/11 08:18:33       Page 6 of 15

 1   provision — Mr. Bullard (on behalf of Fertitta, and then Zyen2) had assumed precisely

 2   such control by the end of September 2007, and he retained it through the Debtor’s

 3   bankruptcy filing. Thus, by the end of September 2007, Mr. Bullard, acting for Fertitta

 4   Enterprises, was empowered: (i) to force the Debtor’s largest shareholders to relinquish

 5   their voting rights; (ii) to require the repayment of the Fertitta, Sanford and Frank loans

 6   before Zyen would extend financing to the Debtor; (iii) to require the Debtor to repay Zuffa

 7   Marketing in full and enter into a new contract with it on terms highly favorable to Zuffa;

 8   (iv) to obtain loan documents that would prohibit any change in the Debtor’s board of

 9   directors without Fertitta’s express approval; (v) obtain a seat for Mr. Bullard on the

10   Debtor’s board; and (vi) to require Mr. Underhill to resign his seat on the Board. See, e.g.,

11   Tr. Stat. at 12-20 ¶¶ 60-99

12                 Indeed, so complete was Fertitta’s control over the Debtor during the late

13   September into October 2007 period that when Cott made a verbal offer to purchase the

14   Debtor on October 3, 2007, it made the proposal to Mr. Bullard (of Fertitta) as opposed to

15   Adam Frank (the Debtor’s purported Chairman of the Board and Chief Executive Officer).

16   And Mr. Bullard, for his part, was perfectly comfortable directing Mr. Frank — the

17   Debtor’s supposed chief executive — to keep the matter “low profile.” Tr. Stat. at 17 ¶ 80-

18   81; Tr. Stat. Ex. 506.

19                 Mr. Bullard’s (i.e., Fertitta’s and Zyen’s) control over the Debtor escalated

20   further in the months that followed the closing of the Zyen loan facility on October 4,

21   2007. Even beyond Mr. Bullard’s service as a Xyience director for a month (until he

22   resigned due to “lender liability” concerns in early November), he obtained full access to


                    As set out in the Trustee’s Statement, Mr. Bullard was the senior officer of
25   Fertitta Enterprises dealing with Debtor; Fertitta, in turn, was the sole manager of the
26   Debtor (according to the Secretary of State’s records), with Mr. Bullard in such complete
     control of Fertitta and Zyen that he frequently referred to himself as, and signed
27   documents, including the Zyen $12.0 million loan facility, as Zyen’s manager, foregoing
     any reference to Fertitta Enterprises entirely. See, e.g., Tr. Stat. at 4 ¶ 14; Tr. Stat. Ex.
28   338 at 1 ¶ 2 (Mr. Bullard stating in his declaration that he is the manager of Zyen).

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 1   and direction over the Debtor’s financial records (going so far as to secretly contract with

 2   Manchester to make Mr. Levy, the Debtor’s CFO, available to Manchester for whatever

 3   information the latter required). Tr. Stat. at 21-22 ¶¶ 113-116. And Mr. Bullard

 4   specifically determined (with the input of Mr. Lorenzo Fertitta and his counsel) the

 5   Debtor’s filing bankruptcy filing date — instructing the Debtor (through counsel) that it

 6   could not file for Chapter 11 until the preference period for the Zuffa $4.5 million payment

 7   and the Fertitta Enterprises $1.029 million payment had expired. Tr. Stat. at 22-23

 8   ¶ 119; Tr. Stat. at 23-24 ¶¶ 122-124; see In re National Century Financial Enterprises,

 9   Inc., Inv. Litigation, 604 F. Supp. 2d 1128, 1160-1161 (S.D. Ohio 2009) (noting that the
10   “one-year reachback period for insiders exists because of the danger that `insiders who

11   lent money to the firm could use their knowledge to advantage by paying their own loans

12   preferentially, then putting off filing the petition in bankruptcy until the preference

13   period had passed’”) (quoting Levit v. Ingersoll Rand Fin. Corp., 874 F.2d 1186, 1195 (7th

14   Cir. 1989) (emphasis added).

15                  Indeed, so accepted (by everyone) was Mr. Bullard’s control over the Debtor

16   by December 2007 that he left it to his secretary to send to the Debtor two notices of strict

17   foreclosure (one in partial satisfaction of Zyen’s debt and the other in full satisfaction of

18   such debt) pursuant which to the Debtor would voluntarily turn over all of its assets to

19   Zyen. Tr. Stat. at 21 ¶¶ 108-109. And Mr. Sattar, who by mid-December 2007 had

20   become the Debtor’s nominal president, agreed to the strict foreclosure, which (were it not

21   for the objections of creditors) would have voluntarily transferred all of the Debtor’s assets

22   to Zyen in partial satisfaction of the Zyen October 2007 loan facility by the end of

23   December 2007. Tr. Stat. at 21 ¶ 112.

24                  Of course, the reason that Mr. Bullard was able to exercise such total

25   control over the Debtor is clear — i.e., the virtually complete control he possessed over the

26   Debtor’s President and co-Chief Executive Officers (Messrs. Frank and Sanford). This

27   control began with his statements that he would want them involved in Xyience for so

28   long as the Fertitta was a lender to the company. Tr. Stat. at 9 ¶ 40. It continued with

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 1   the significant financial benefits, as set out in the Funding Consent Letter, that Messrs.

 2   Frank and Sanford were to receive if (and only if) the Zyen loan facility closed. Tr. Stat. at

 3   13 ¶¶ 63-65. And it culminated with Messrs. Frank’s and Sanford’s efforts in December

 4   2007, as discussed at length by the Debtor’s own counsel, to develop a plan for Mr. Bullard

 5   that would allow them to align with Zyen in a Chapter 11 section 363 (or other

 6   acquisition) of the Debtor’s assets. Tr. Stat. at 22-23 ¶¶ 118-119. In short, by assuring

 7   Messrs. Frank and Sanford that they would maintain an ongoing role in the Xyience

 8   business so long as they did Mr. Bullard’s bidding, Fertitta Enterprises, through Mr.

 9   Bullard, was able to ensure (to the point of directing Mr. Frank how to handle an offer for

10   the company; and determining the Debtor’s bankruptcy filing date) that Fertitta and Mr.

11   Bullard, not the Debtor and its senior management, controlled the Debtor’s major

12   decisions from the end of September 2007 through its Chapter 11 bankruptcy filing on

13   January 18, 2008.

                   2.      Fertitta Was a Non-Statutory Insider in that the Negotiations
15                         And the Repayment Were Not Arms-Length Transactions.

16                 Even if Fertitta Enterprises’ control of the Debtor at the time of the alleged

17   preferential transfer was not so all-encompassing as to qualify Fertitta as a statutory

18   person in control of the Debtor, absolutely no question exists that the combination of the

19   control Fertitta exercised over the Debtor, combined with the unique and interconnected

20   relationship among Fertitta Enterprises and Messrs. Frank and Sanford, rendered the

21   “negotiation” (i.e., payment) of the $1,029,000 payment to Fertitta anything but arms-

22   length, and thus places Fertitta firmly in the category of non-statutory insiders for the

23   purposes of section 547(b)(4)(B) of the Bankruptcy Code. See Bruno Mach. Corp. v. Troy

24   Die Cutting Co. (In re Bruno Mach. Corp.), 435 B.R. 819, 832-836 (Bankr. N.D.N.Y. 2010)
25   (control not necessary to render a party an insider); see also In re Winstar

26   Communications, Inc., supra, 554 F.3d at 396-397 (person qualifies as non-statutory
27   insider where his dealings with the debtor are such that they are not at arms-length).


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 1                 As set out in the Trustee’s Statement, the July 2007 Notes — comprised of

 2   $1.0 million from Fertitta Enterprises and $250,000 each from Messrs. Frank and Sanford

 3   — all contained pari passu provisions such that each lender would receive identical

 4   treatment (on a pro rata basis) upon repayment of any of the three on one or more of the

 5   notes. Tr. Stat. at 9 ¶¶ 43-45. As insiders (and indeed, as Chief Executive Officers) of the

 6   Debtor, Messrs. Frank and Sanford were certain to, and did in fact, ensure that they

 7   would receive repayment in full — with interest — on their July 2007 Notes. Tr. Stat. 18

 8   ¶ 91. But for them to retain these repayments, they had to ensure that Fertitta

 9   Enterprises too would receive payment in full on its $1.0 million claim (also with interest);

10   otherwise, Messrs. Frank and Sanford would have had to turn over portions of their

11   repayments to Fertitta. Tr. Stat. Exs. 92-94 at 6 ¶ 14(f). Through this pari passu

12   mechanism, Fertitta obtained for itself all of the benefits of insider status — whether or

13   not it acquired the full control that it sought, and ultimately achieved, over the Debtor’s

14   business and assets. Cf. Hirsch v Va. Tarricone (In re A. Tarricone, Inc.), 286 Bankr. 256,

15   267 (Bankr. S.D.N.Y.) (“the existence of personal guarantees issued by insiders for the

16   benefit of the recipient of repayment of an antecedent debt within one year prior to a

17   bankruptcy filing is a factor which should be considered by the bankruptcy court in

18   determining whether the recipient should be deemed a non-statutory insider for

19   preference purposes under Section 547").

20                 Accordingly, even if Fertitta’s control over the Debtor was not so all-

21   encompassing as to qualify it as a statutory insider for section 547(b)(4)(B), the

22   undisputed facts leave no question that its substantial control over the company from

23   September 2007 forward, combined with its virtual control (through the July 2007 Notes’

24   pari passu provisions) that its $1.0 million loan would be repaid, rendered it a non-

25   statutory insider under section 101(31), and subjects it to preference liability here.


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 1           C.      The Trustee Is Entitled to Recover the Amount of the
                     Preferential Transfer Less Two-Thirds of the Amounts in the
 2                   Fertitta Secured Accounts as of October 4, 2007.

 3                   Fertitta argued in its motion to dismiss, and the Trustee does not disagree,

 4    that to the extent that Fertitta would have recovered funds based on its non-avoidable

 5    collateral for the July 2007 Notes, the amount of such funds should be deducted from the

 6    amount of the preferential transfer it received in determining its net liability. This is so,

 7    of course, because section 547(b)(5) limits the amount avoidable to the extent that the

 8    preference recipient received more than he would have received under a Chapter 7

 9    liquidation. So to the extent that Fertitta possessed a non-avoidable security interest in

10    certain of the Debtor’s assets prior to its receipt of the October 5, 2007, transfer, the value

11    of those assets should be deducted from the $1,029,000 it received in determining the net

12    amount avoidable (and recoverable) under sections 547(b) and 550(a).

13                   As reflected in Demonstrative Exhibit M (which summarizes the numbers

14    from the bank accounts that also are filed as exhibits to the Trustee’s Statement), the

15    Fertitta Secured Accounts possessed $125,397.85 as of October 4, 2007. Tr. Stat. at 18

16    ¶ 90 and Ex. M. Had the Zyen loan facility not closed, and had the Fertitta preference

17    payment not been made, then the pari passu provisions of the July 2007 Notes would have

18    authorized Fertitta to receive 2/3rds of this collateral as payment on its secured claims —

19    i.e., $83,609.86. Accordingly, the amount to which the Trustee is entitled to avoid, and

20    recover, as a preferential payment to Fertitta is the amount of the transfer ($1,029,166.67)

21    less the $84,609.86 that Fertitta would have recovered on its claim if this were a case

22    under Chapter 7 of the Bankruptcy Code — for a net preferential recovery from Fertitta of

23    $945,556.82.


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 1    III.   The Debtor’s Grant of a Security Interest to Zyen in All of
             The Debtor’s Asset Constituted a Fraudulent Transfer
 2           Under the Supreme Court’s Dean v. Davis Ruling and Its Progeny.

 3                  Section 548(a)(1)(A) provides that a debtor’s transfer of an interest in

 4    property — here, its grants of a security interest in all of its assets to Zyen — is voidable

 5    where the debtor made the transfer with the intent of “to hinder, delay or defraud” an

 6    existing (or even a future) creditor. As indicated in the Introduction above, questions of

 7    intent generally are not the grist of summary judgment motions. Here, however, the facts

 8    of this case fall sufficiently squarely within the Supreme Court’s ruling in Dean v. Davis,

 9    242 U.S. 438, 443-445, 37 S.Ct. 130, 131-132 (1917), and its progeny that summary

10    judgment on this claim is warranted at this time.

11                  In Dean, the debtor owed an unsecured debt that it needed to, but was

12    unable to pay. So the debtor obtained the funds by borrowing them from one of his

13    relatives, and then granting a security interest in all of his assets to the relative. Shortly

14    thereafter, the debtor filed for bankruptcy, with the relative receiving substantially all of

15    the debtor’s assets and the debtor’s other unsecured creditors receiving virtually nothing.

16    The Supreme Court held that the transfer of the security interest to the relative in order

17    to secure the funds to pay the unsecured creditor — when the debtor knew or had to have

18    known that the loan was destined to deprive his other creditors of any meaningful

19    recovery — constituted a fraudulent transfer.

20                  Although the facts here differ somewhat in that the related entities are not

21    the debtor and its secured lender, but instead, the secured and the secured creditors, the

22    Dean principle and holding apply equally to the Debtor’s and the Fertitta-related entities’
23    conduct here. With pressure building both from Zuffa and Mr. Bullard to accept the

24    secured Zyen loan, so that the Debtor could repay the unsecured Zuffa Marketing debt,

25    the Debtor entered into a loan transaction that ensured that Zuffa Marketing (and

26    Fertitta Enterprises) would be paid in full, while Zyen would receive a first priority

27    security interest on all of the Debtor’s assets and the Debtor’s other creditors would

28    receive, at most, pennies on the dollar, Indeed, of the first $9.5 million that Zyen loaned,

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 1    more than $6.0 million went to repay Zuffa Marketing, Fertitta Enterprises and Messrs.

 2    Sanford and Frank (who had to be repaid in order for Fertitta to retain its repayment).

 3    And the Zuffa Marketing attorneys themselves admitted that $4.5 million of the secured

 4    loans were earmarked for the payment to Zuffa Marketing of its unsecured claim. See Tr.

 5    Stat. at 19 ¶ 94.

 6                   The case law since the Dean case confirms the impropriety of the Debtor’s

 7    conduct here. As the court in In re American Properties, Inc., 14 B.R. 637 (Bankr. Kan.

 8    1981) explained: ”Dean v. Davis is a warning to creditors who loan money to a debtor and

 9    take a security in the debtor's property, knowing the loan will be used by the debtor to pay

10    off an unsecured creditor. Dean ... holds such a loan is a fraudulent transfer and will not

11    be honored if a debtor declares bankruptcy.” Id. at 642-643. And although this statement

12    may go too far, in that circumstances can exist where accepting a secured loan to repay an

13    unsecured one may not constitute a fraudulent transfer, the instant case plainly does not

14    fall into this limited innocent category. For not only did the secured lender (Zyen) know

15    for a fact (and indeed insist) that $5.3 million of its loan go to pay the unsecured claims of

16    its affiliated entities, but it also knew that, in view of the Draconian terms of the Zyen

17    loan facility, the Debtor’s demise once it entered into the facility was inevitable; indeed, so

18    clear was this fact that the Debtor did not even bother to make its very first payment due

19    under Zyen facility, was in default of the facility within less than a month of entering into

20    it, and was headed for a strict foreclosure and then bankruptcy within just two months.

21    See, e.g.., Tr. Stat. at 20 ¶¶ 101-104.
22                   Of course, the fact that the Debtor, with Mr. Bullard’s substantial input,

23    misrepresented the primary purpose of Zyen facility in the Funding Consent letter (and

24    then later in the discussions with Mr. Hucks) serves only to add to the fraudulent nature

25    of this facility. See Tr. Stat. at 13-14 ¶¶ 63-66; id.. at 15-16 ¶¶ 73-75. Not just one

26    creditor (although one is enough under section § 548(a)(1)(A)) was defrauded by the Zyen

27    loan, but rather an entire class of creditors who would have received far more in the

28    Debtor’s liquidation were it not for the Zyen loan and the Debtor’s use of the substantial

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 1    portion of the proceeds to repay the undersecured and unsecured claims of Fertitta and a

 2    Fertitta-related entity (i.e., Zuffa). See In re IFS Financial Corp., 417 Bankr. 419, 440

 3    (Bankr. S.D. Tex. 2009) (explaining that, in Dean, the “Supreme Court noted that the

 4    circumstances surrounding the transfer itself establishes the required fraudulent intent

 5    [and that w]here the `obviously necessary effect’ of a transfer `is to deprive creditors of the

 6    benefits sought to be secured by the Bankruptcy Act,’ the transfer is made with the

 7    required intent to hinder, delay, or defraud creditors”) (quoting Dean, 242 U.S. at 444, 37

 8    S.Ct. 130); In re Health Gourmet, Inc., 29 Bank 673, 677 (Bankr. Mass. 1983) (“if it is

 9    demonstrated that the bank had knowledge that the transaction by which it substituted

10    its secured claim against the corporation for Rubin's unsecured claim against the

11    corporation would be detrimental to Health Gourmet's other creditors, then the trustee's

12    claim of a fraudulent conveyance under Section 548(a)(2)(A) will succeed”).

13                  As we acknowledged earlier, questions of knowledge and intent, such as

14    those that frequently arise under section 548(a)(1)(A), ordinarily require a trial. Where,

15    however, the undisputed facts leave no genuine issue as to any material fact — i.e., a fact

16    that could prevent the moving party from prevailing — summary judgment is appropriate.

17    And here, given the undisputed facts as to what occurred, with two Fertitta-controlled

18    entities knowingly and intentionally transforming their unsecured claims into the secured

19    claim of another Fertitta entity on the eve of an inevitable bankruptcy filing, to the

20    detriment of all of the Debtor’s other creditors, there remains no material factual dispute

21    remaining under Dean and its progeny for this Court to resolve.

22                  Accordingly, the Trustee is entitled to avoid the security interest granted to

23    Zyen under section 548(a)(1)(A), with the only potential question remaining for resolution,

24    at a hearing or trial — under section 550(a) and the Ninth Circuit’s recent holding in In re


     Case 09-01402-mkn      Doc 133     Entered 11/04/11 08:18:33      Page 14 of 15

 1    Taylor, 599 F.3d 880 (9th Cir. 2010) — the value of the property in which the Debtor
 2    granted Zyen security interests in October 2007.3 Id. at 890.

                    WHEREFORE, the Trustee prays that this Court (i) enter summary
      judgment for him and against Fertitta Enterprises on Count X, and against Zyen on
      Count XIII, of the Second Amended Complaint, and (ii) that the Court grant the Trustee
      such other and further relief as may be just and proper.
      Dated: November 4, 2011
                                                Respectfully submitted,

                                                 /s/ Jonathan A. Backman
13    Jonathan A. Backman
      Law Office of Jonathan A. Backman
14    117 N. Center Street
      Bloomington, Illinois 61701-5001
15    (309) 820-7420
      Counsel for David Herzog, as Liquidating Trustee for the
17     Estate of Xyience, Incorporated

                      The Trustee would argue that an appropriate measure of the amount
25    recoverable under section 550(a) here would be the amount of the Zyen loan less the
26    amounts that were not transferred to Zyen’s affiliated entities (i.e., Fertitta Enterprises
      and Zuffa Marketing). Taylor appears to hold, however, that the Trustee is entitled to the
27    full value of the property in which the Debtor was granted a security interest, which
      obviously exceeds, by a substantial sum, the amount that the Trustee otherwise would be
28    seeking to recover under his fraudulent transfer claim.

     Case 09-01402-mkn         Doc 133    Entered 11/04/11 08:18:33      Page 15 of 15

 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 Liquidating Trustee’s Motion for

 4    Summary Judgment on Counts X and XIII of His Second Amended Complaint with the

 5    Clerk of the Court using the CM/ECF system which will send notification of such filing to

 6    the following:

      on behalf of the Liquidating Trustee

      on behalf of all Defendants

11    and I hereby certify that I have delivered the document to the following non-CM/ECF

12    participants by United States Priority Mail postage prepaid: NONE.

                                                               /s/ Jonathan A. Backman


Description: This is the Xyience Trustee's Motion For Summary Judgment Against Fertitta Enterprises and others allegedly engaged in a "loan to own" scheme to bankrupt Xyience and benefit Fertitta Enterprises and other insiders. Check out for more information.