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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.
5 SANTORO, DRIGGS, WALCH,
KEARNEY, HOLLEY & THOMPSON
6 400 South Fourth Street, Third Floor
Las Vegas, Nevada 89101
Counsel for the Liquidating Trustee
IN THE UNITED STATES BANKRUPTCY COURT
10 DISTRICT OF NEVADA
IN RE: Chapter 11
XYIENCE INCORPORATED, )
13 a Nevada corporation, ) No. BK-S-08-10474-MKN
14 Debtor. )
15 DAVID HERZOG, )
as Liquidating Trustee, )
Plaintiff, ) Adversary Case No. 09-1402-MKN
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
SUMMARY JUDGMENT ON COUNTS X AND XIII
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
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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.
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MEMORANDUM OF POINTS AND AUTHORITIES
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)):
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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.
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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
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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
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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
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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
/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:
7 OGONNA M. ATAMOH, ESQ.
on behalf of the Liquidating Trustee
9 MATTHEW C. ZIRZOW, ESQ.
on behalf of all Defendants
10 email@example.com, firstname.lastname@example.org
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