Xyience Trustee Settlement With Fertitta Enterprises

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					     Case 08-10474-mkn      Doc 687     Entered 04/18/12 06:54:51      Page 1 of 18



 1   Jonathan A. Backman                                       E-filed: April 18, 2012
     Law Office of Jonathan A. Backman
 2   117 N. Center Street
     Bloomington, Illinois 61701-5001
 3   (309) 820-7420

 4   Ogonna M. Atamoh, Esq.
     SANTORO, DRIGGS, WALCH,
 5   KEARNEY, HOLLEY & THOMPSON
     400 South Fourth Street, Third Floor
 6   Las Vegas, Nevada 89101
     702/791-0308
 7
     Counsel for the Liquidating Trustee
 8
                        IN THE UNITED STATES BANKRUPTCY COURT
 9                                DISTRICT OF NEVADA

10
      IN RE:                                        )     Chapter 11
11                                                  )
      XYIENCE INCORPORATED,                         )     No. BK-S-08-10474-MKN
12    a Nevada corporation,                         )
                                                    )     Hearing: May 16, 2012
13    Debtor.                                       )     9:30 a.m.
      ________________________________              )
14
                      LIQUIDATING TRUSTEE’S MOTION FOR APPROVAL
15                         OF A SETTLEMENT AND COMPROMISE

16                 Plaintiff David Herzog, as Liquidating Trustee (the “Trustee”) for the post-

17   confirmation liquidating trust estate (the “Trust Estate”) of Xyience Incorporated (the

18   “Debtor”), the former debtor and debtor in possession the above-captioned Chapter 11 case

19   (the “Bankruptcy Case” or the "Case"), hereby moves this Court, pursuant to Section 8

20   § 13(i) of the Liquidating Trust Agreement (as further described below), for the entry of an

21   Order approving: (i) the Trustee’s settlement and dismissal of his claims against the

22   remaining defendants in the adversary proceeding styled Herzog v. Zyen, LLC, Adversary

23   Case No. 09-1402-MKN (the “Adversary Proceeding”) — i.e., Zyen, LLC (“Zyen”), Fertitta

24   Enterprises, Inc. (“Fertitta Enterprises”), and William Bullard (“Bullard,” and collectively

25   with Fertitta Enterprises and Zyen, the “Defendants”); (ii) a series of compromises of the

26   administrative claims of KL Gates, LLP (“KL Gates”), Fennemore Craig, P.C.

27   (“Fennemore Craig”), and Sierra Consulting Group, LLC (“Sierra”); (iii) the subordination

28   of the $6.0 million unsecured claim of Zuffa Marketing, LLC (“Zuffa Marketing”) to the

     claims of the former Debtor’s unsecured creditors; and (iv) a compromise of the fees of the
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 1   Trustee’s undersigned counsel, Jonathan A. Backman, all as documented substantially in

 2   the form of Exhibit A hereto (collectively, the “Proposed Settlement”). This motion is

 3   made and based on the points and authorities herein, and all pleadings and papers filed in

 4   both the Bankruptcy Case and the Adversary Proceeding, judicial notice of which are

 5   respectfully requested.

 6                 In support of his motion, the Trustee states as follows:

 7
                                   PROCEDURAL BACKGROUND
 8
                   1.     On January 18, 2008 (the “Petition Date”), the Debtor filed in this
 9
     Court its voluntary petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C.
10
     § 101 et. seq. (the “Bankruptcy Code” or the “Code”).
11
                   2.     Pursuant to an Order entered January 31, 2008 (the “Avoidance
12
     Date Order”), the Court dismissed, with prejudice, an involuntary petition for relief under
13
     Chapter 11 of the Bankruptcy Code that had been filed against the Debtor on January 3,
14
     2008, as Case No. BK-S-08-10049-MKN.
15
                   3.     The Avoidance Date Order provided that, in this Case, the period for
16
     avoidance actions under the applicable provisions of the Bankruptcy Code would be
17
     measured as if the petition date in this Case were January 3, 2008.1
18
                   4.     From January 18, 2008, through the October 23, 2008 confirmation
19
     of the Debtor’s plan of reorganization (the “Plan”), the Debtor operated and managed its
20
     business affairs as a debtor in possession pursuant to Sections 1107 and 1108 of the
21
     Bankruptcy Code.
22

23

24

25
            1
26                 On April 7, 2010, the Court ruled that the Avoidance Date Order was not
     authorized by the Bankruptcy Code. As a result, the preference claim at issue here
27   against Fertitta Enterprises, as discussed further below, involves a transfer that falls
     outside the ordinary 90-day preference reach-back period and requires that the Trustee
28   prove that Fertitta Enterprises was an insider at the time of the transfer.

                                                  2
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 1                   5.    By order entered on April 7, 2008 [Doc 1782], the Court approved the

 2   Debtor’s sale its business and substantially all of its operating assets to Manchester

 3   Capital, Inc.

 4                   6.    On May 19, 2008, the Debtor filed its Plan [Doc 191], which provided,

 5   among other things, that the Debtor’s remaining assets, including all of its pre-petition

 6   claims, rights and causes of action, and all of its right and powers to pursue avoidance

 7   actions under Chapter 5 of the Bankruptcy Code, would be transferred to and would vest

 8   in a Liquidating Trust for the benefit of various creditors groups.

 9                   7.    The Plan further provided that, upon its Effective Date, a

10   Liquidating Trustee would represent the Trust Estate.

11                   8.    On October 23, 2008, the Court entered an Order approving the

12   Debtor’s Disclosure Statement in connection with the Plan, and confirming the Plan [Doc

13   321].

14                   9.    On November 12, 2009, the Court entered an Order authorizing the

15   Trustee to accept his appointment as Liquidating Trustee under the Liquidating Trust

16   Agreement (as described further below), and the Trustee accepted the appointment on

17   that day [Doc 356]. The Trustee’s extensive qualifications and experience in bankruptcy

18   matters were set forth in an attachment to a declaration he filed in support of his

19   appointment [Doc 346]. Among other matters, the Trustee has served as a standing

20   Chapter 7 trustee in the Northern District of Illinois for approximately twenty five (25)

21   years and also an adjunct professor of law at the John Marshal Law School where he has

22   taught courses in bankruptcy, sales and commercial paper.

23                   10.   On November 20, 2009, the Trustee caused notice of his appointment

24   to be filed and served, and as a result, on November 23, 2009, the Plan became effective

25   [Docs 359 and 360].

26

27
             2
                    All reference to “Doc” are to the docket in the Debtor’s Bankruptcy Case,
28   and all references to “Adv. Doc.” are to the docket in the Adversary Proceeding.

                                                   3
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 1                 11.     At or about the same time as the Trustee’s appointment, he retained

 2   as his primary litigation counsel the Law Office of Jonathan A. Backman. After

 3   graduating from Harvard Law School in 1987, Mr. Backman began his legal career as a

 4   judicial clerk to Judge Brian Barnett Duff of the U.S. District Court for the Northern

 5   District of Illinois. Thereafter, Mr. Backman entered private practice and for the first

 6   eleven (11) years of his career worked for large law firms in Chicago handling numerous

 7   corporate bankruptcy and related litigation matters. In 2001, Mr. Backman opened his

 8   own law practice where he has continued representing both debtors and creditors in a

 9   wide variety of corporate restructuring, bankruptcy and commercial litigation matters.

10   Mr. Backman has more than twenty (20) years of experience in complex bankruptcy and

11   related litigation matters.

12
                         PERTINENT TRUST AGREEMENT PROVISIONS
13
                   12.     The Liquidating Trust Agreement authorizes the Trustee, among
14
     other things, to pursue — and where appropriate, to compromise and settle — claims,
15
     rights and causes of action on behalf of the Trust Estate. Liquidating Trust Agreement
16
     (“LTA”) at 7-8 §§ 13(f) and 13(i) [Doc 308; Exhibit 4].
17
                   13.     The Trust Agreement further provides that, where a settlement
18
     involves a claim of $25,000 or more, the Trustee must obtain this Court’s approval of the
19
     settlement. LTA at 8 § 13(i). Still, inasmuch as there no longer exist any creditors of the
20
     Debtor, but instead beneficiaries of the Trust Estate, neither the Trust Agreement nor any
21
     provision of the Plan provides for the parties who will receive notice of motions for such
22
     approval; thus, service of such motions and the notices of the hearings thereon historically
23
     have been served upon to the general case service list (including the Office of the United
24
     States Trustee) as well as counsel to the Creditors’ Advisory Committee as appointed and
25
     designated by the Trust Agreement.
26
                   14.     Under the Trustee’s engagement agreement with undersigned
27
     counsel (the “Engagement Agreement”), a third of any settlement, as well as counsel’s
28

                                                   4
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 1   expenses (including the fees and expenses of local counsel), incurred in connection with all

 2   avoidance actions (under section 547, 548, etc.) — including those at issue in this

 3   proceeding — are payable to counsel before the settlement proceeds vest in the Trust

 4   Estate. See Engagement Letter (Exhibit B to the Notice of (1) Liquidating Trustee’s

 5   Acceptance of Liquidating Trust Agreement, and (2) Effectiveness of Engagement Letter,

 6   filed November 20, 2009) at 4 § 7.B [Doc 359].

 7                 15.    On the other hand, counsel’s fees and expenses incurred in

 8   connection with claims against Zyen for lender liability and related alleged wrongdoing

 9   (the “Zyen Claims”) would be paid only if the Trustee and counsel have prevailed on and

10   received proceeds in excess of $475,000 in connection with such claims.3 Id. at 3-4 § 7.

11
                                         THE PLEADINGS
12
                   16.    The Trustee commenced the Adversary Proceeding on December 29,
13
     2010, by filing his original Complaint (the “Original Complaint”).
14
                   17.    By Order dated April 8, 2010 [Adv. Doc. 48], and after extensive
15
     briefing of the issues by the parties, the Court dismissed all of the claims against Zyen
16
     and Fertitta Enterprises (including breach of fiduciary duty, equitable subordination and
17
     substantive consolidation), except that the Court (i) allowed the Trustee to continue to
18

19          3
                     As the Court and the parties may recall, the Trustee’s counsel’s fee
20   arrangement in the adversary proceeding styled Herzog v. ARC Investment Partners,
     LLC, Adversary Case No. 10-01009 (the “ARC Proceeding“), was identical to the fee
21   arrangement for avoidance actions as set forth in the immediately preceding paragraph
     regarding avoidance actions. The Trustee settled, with Court approval, a portion of the
22
     claims in the ARC Proceeding for $325,000, which would have entitled the Trustee’s
23   counsel to a fee of $108,333. Nevertheless, given the early stages at the time of the
     current Adversary Proceeding, and the possibility that the Zyen Claims might turn out to
24   have merit, the Trustee’s counsel contributed $25,000 of his $108,333 fee towards the
     expenses that he might need to incur in pursuing the Zyen Claims, and thus accepted a
25   fee for the settlement in the ARC Proceeding of only $83,333. Even though, as discussed
26   below, questions exist as to whether any portion of the expenses that the Trustee’s counsel
     has incurred in the instant Adversary Proceeding are properly attributable to the Zyen
27   Claims, the Trustee’s counsel is not seeking any reimbursement of the $25,000 that he
     contributed to the expenses relating to the pursuit of those claims, so such $25,000 will
28   inure to the benefit of the Trust Estate.

                                                   5
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 1   pursue a section 547 preference claim against Fertitta Enterprises, and (ii) allowed the

 2   Trustee to amend his section 548 and related state law fraudulent transfer claim against

 3   Zyen (which pertained to the alleged wrongful intent of the Debtor, not any of the

 4   Defendants).

 5                  18.    On May 3, 2010, in accordance with the Court’s April 8, 2010 Order,

 6   the Trustee filed an Amended Complaint [Adv. Doc. 54] that amended the section 548

 7   fraudulent transfer claims against Zyen.

 8                  19.    On June 27, 2010, the Trustee sought leave to file a proposed Second

 9   Amended Complaint [Adv. Doc. 75] adding four claims — two each against Zyen and

10   Fertitta Enterprises — alleging that each had aided and abetted, and conspired with,

11   certain of the Debtor’s officers and directors in their alleged breaches of fiduciary duty,

12   which the Court granted by order entered on August 18, 2010 [Adv. Doc. 85].

13                  20.    On August 22, 2010, the Trustee filed the Second Amended

14   Complaint [Adv. Doc. 87], and the parties were at issue on all pending claims in this case

15   involving the Trustee and the Defendants here.

16
                                   DISCOVERY AND EVIDENCE
17
                    21.    Over the next nearly two years, the parties exchanged tens of
18
     thousands of documents and engaged in 15 depositions regarding the claims at issue here.
19
     Based on this discovery, the Trustee developed the firm belief that the preference claim
20
     against Fertitta Enterprises — albeit by no means a certainty given the need to prove that
21
     Fertitta Enterprises was either a statutory or non-statutory insider at the time of that it
22
     received a roughly $1.03 million payment from the Debtor (outside the 90-day standard
23
     preference period) — had at least a material chance of prevailing.4
24

25
            4
26                 Although the Trustee argued during his initial summary judgment
     pleadings that Fertitta Enterprises qualified as an insider both (i) as person in control of
27   the Debtor shortly before the October 4, 2007, $12.0 million Zyen loan, and (ii) as non-
     statutory insider based on the pari passu provisions of certain promissory notes that had
28                                                                                   (continued...)

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 1                 22.     On the other hand, Fertitta Enterprises argued that, even if it were

 2   liable for a preference, which it firmly denied, it was entitled to more than a $400,000

 3   “offset” against its preference liability because at the time of the alleged preferential

 4   transfer, it possessed a perfected security interest in the bank accounts from which the

 5   alleged preferential payments were made. Accordingly, Fertitta Enterprises has

 6   steadfastly argued that its maximum exposure — even if the Trustee could prove that it

 7   qualified as an insider — is approximately $600,000.

 8                 23.     Additionally, the Defendants assigned virtually no value — for

 9   settlement purposes or otherwise — to the allegations that it had aided and abetted, or

10   conspired in, a breach of fiduciary duty by the Debtor’s officers or directors.

11                 24.     The Trustee has reached the essentially the same conclusion. That

12   is, whereas certain of the Debtor’s officers and directors made some questionable business

13   judgments after they effectively took over operational control of the Debtor in June 2007,

14   they were acting in what they thought were the best interests of the company. And the

15   fact that the Board of Directors unanimously approved and ratified all of their conduct —

16   even the independent Board member William Underhill — rendered a breach of fiduciary

17   duty claim against them virtually impossible to prove (with a claim that the Defendants

18   here aided and abetted or conspired with such a breach therefore equally or even more

19   difficult).

20                 25.     What’s more, although as indicated above, the Trustee brought

21   various claims against the Defendants, the basis of bringing such claims was based upon

22   information provided to the Trustee by various third parties. After completing discovery,

23

24
             4
             (...continued)
25   been executed by Fertitta Enterprises and two of the Debtor’s insiders in July 2007 (which
26   prevented them from being repaid without Fertitta Enterprises being paid as well), it
     appeared by the conclusion of the summary judgment briefing that the case law would not
27   support a finding of Fertitta Enterprises as a statutory insider, and that the Debtor’s best
     opportunity for prevailing on the preference claim lay in the somewhat unique provisions
28   of the July 2007 notes.

                                                    7
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 1   the Trustee has determined that the evidence does not support claims of misconduct,

 2   breaches of fiduciary duties and conspiracy by the Defendants and as such, those claims

 3   are being dismissed as part of the Settlement Agreement.

 4                 26.     Indeed, based on the evidence, the Trustee for some time has

 5   believed that the only remaining claim besides the preference claim on which he might

 6   have a significant chance of prevailing upon at trial is the fraudulent transfer claim

 7   grounded upon section 548 of the Bankruptcy Code. This claim is based on the old

 8   Supreme Court decision in Dean v. Davis, 242 U.S. 438, 37 S.Ct. 130 (1917), and involves

 9   the fraudulent intent of the Debtor in connection with the transfer of assets prior to a

10   bankruptcy case. The Trustee, however, has determined, after extensive discovery, that

11   differences exist between this case and the facts in Dean that would make it substantially

12   difficult to prevail on this claim. Thus, the Trustee has substantial doubts about his

13   ability to prevail on his section 548 claim under the Dean v. Davis theory.

14                 27.     Finally, and perhaps most significantly in terms of the Trustee’s

15   decision to settle for the amounts at issue here, and described in the next Section, lies in

16   the Trustee’s difficulty to prove damages even were he to prevail on the Dean v. Davis

17   theory.

18                 28.     This is so because the Trustee’s own expert report, which assigned a

19   potential $41 million value to the Debtor as of September 2007, required for this valuation

20   that the Debtor had raised $10 million in working capital before entering into the Zyen

21   loan. Yet, despite the efforts not only of the Debtor’s officers, but also of their Board

22   members and observers, no one could locate an entity willing to make such an investment

23   in the company during this time period. And the Trustee’s own damages expert also

24   reported that, as of October 5, 2007, the Debtor was substantially insolvent — based in

25   part on the fact that, that as of September 30, 2007, the Debtor’s cash balance was

26   approximately $68,000 and its liabilities were approximately $39.3 million, and after the

27   Zyen Loan, on October 5, 2007, the Debtor’s cash balance was approximately $76,000 and

28   its liabilities were approximately $38.8 million.

                                                    8
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 1                 29.     So even if the Court found liability on the Dean v. Davis claim (which

 2   for the reasons stated above, the Trustee believes could have been difficult to sustain

 3   under his burden of proof), the Trustee’s proof of damages could have required a level of

 4   speculation by the Court as to the Debtor’s value prior to the Zyen loan. As a result, the

 5   Trustee recognizes that the evidence may not be sufficient to find the level of damages

 6   suggested by the Trustee’s damages expert.

 7                 30.     In short, the only two claims that the Trustee believes that he might

 8   have prevailed on at trial were the preference and, to a lesser extent, the section 548 Dean

 9   v. Davis claim. And even if the Trustee prevailed on these claims, the evidence suggests
10   that the net recovery to the Estate would have been only slightly more than the amount

11   the Defendants are paying to settle this case (and, as described below, substantially less

12   than the net value of this settlement to the estate).

13                 31.     In November and December 2011, the parties extensively briefed

14   cross motions for summary judgment on various claims in the Second Amended Complaint

15   [Adv. Docs. 133, 134, 136, 137, 146, 147, 151, 152, 157, and 159]. By order and

16   memorandum dated December 13, 2011 [Adv. Docs. 167 and 168], the Court denied all

17   parties’ requests for summary judgment on all claims. This extensive briefing gave the

18   Trustee further insight into the validity and likelihood of the claims and legal theories

19   involved, and also meant that any recovery would require a lengthy and expensive trial.

20   Finally, in preparing for trial, which was originally set to commence on April 9, 2012, the

21   Trustee reviewed and considered the relevant evidence and legal theories in even greater

22   detail.

23

24

25

26

27

28

                                                   9
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 1                                 THE PROPOSED SETTLEMENT

 2                    32.   Over the course of the last few months, the parties engaged in

 3    extensive settlement discussions in good faith and at arms’ length in order to determine

 4    whether a mutually agreeable compromise of some or all of the claims was possible, which

 5    culminated in the Proposed Settlement at issue here.

 6                    33.   In order to ensure some value for the unsecured creditors of the

 7    former Debtor, the Proposed Settlement involves a number of parties and compromises.

 8                    34.   Fertitta Enterprises will pay a total of $525,000, which in

 9    Defendants’ view, represents payment for the only claim on which they believe they have

10    some exposure — i.e., the preference claim.

11                    35.   Fennemore Craig will reduce its $142,239.10 administrative claim to

12    $25,000 (for a savings to the Estate of $117,239.10).

13                    36.   KL Gates will reduce its $347,181.10 administrative claim to

14    $100,000 (for a savings to the Estate of $247,181.10).

15                    37.   Sierra will reduce its $18,951.41 administrative claim to $5,000

16    ($18,951.41) (for a savings to the Estate of $13,951.41).

17                    38.   Mr. Backman will contribute to the Trust Estate $50,000 of the

18    $175,000 fee to which he would be entitled under the Engagement Agreement, with the

19    understanding that Mr. Backman will be allowed to reduce this $50,000 (i) by the amount,

20    if any, that any party interest successfully asserts, against him or the Trustee, that the

21    Trust’s expenses were excessive or should have been paid by the Trustee or Mr. Backman

22    personally, and (ii) to the extent that a party appeals the approval of the Proposed

23    Settlement, in which case Mr. Backman may charge $200 per hour and expenses against

24    this $50,000.

25                    39.   Zuffa Marketing will subordinate its $6.0 million claim against the

26    Trust Estate to the claims of all of unsecured creditors of the former Debtor (i.e., now

27    beneficiaries of the Trust Estate).

28

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 1                   40.     The foregoing reductions in administrative claims (even without

 2    taking into account Mr. Backman’s $50,000 contribution of his fee to the Estate) come to

 3    $378,371.61.

 4                   41.     In addition, beyond the financial components of the settlement, the

 5    Defendants have agreed that Mr. Michael Levy, the former Chief Financial Officer of the

 6    Debtor who now works for one of the Defendants’ affiliates, will be authorized to expend

 7    up 12 hours per month, not to exceed 60 hours total (but exclusive of time Mr. Levy

 8    spends traveling to or testifying in any court proceeding relating to the Liquidating

 9    Trust), assisting the Trustee in the claims objection process that the Proposed Settlement,

10    if approved, will necessitate.

11
                                       ARGUMENT FOR APPROVAL
12
                     42.     As described above, the Liquidating Trust Agreement authorizes the
13
      Trustee to settle and compromise disputes, subject to bankruptcy court approval, where
14
      the claim amount at issue exceeds $25,000. See Plan at 15 § 7.2(i); LTA at 8 § 13(i);
15
      compare In re Holywell Corp., 913 F.2d 873, 881 (11th Cir. 1990) (where a liquidating trust
16
      agreement does not require bankruptcy court approval for settlements by the liquidating
17
      trustee, the trustee need not seek approval for any such settlements).
18
                     43.     In ruling on an approval motion, courts allow trustees broad
19
      discretion in negotiating and reaching such settlements, and grant the motions so long as
20
      they are fair and equitable and in the best interests of the debtor’s creditors and its estate.
21
      Protective Committee for Independent Stockholders of TMT Trailer Ferry v. Anderson,
22
      390 U.S. 414 (1968); Arden v. Motel Partners (In re Arden), 156 F.3d 729 (9th Cir. 1999);
23
      see generally 9 Collier on Bankruptcy, ¶9019[1] (15th Edition 1990) (noting that
24
      compromises are favored in bankruptcy cases).
25
                     44.     The Ninth Circuit has directed that, “[i]n determining the fairness,
26
      reasonableness and adequacy of a proposed settlement agreement, the court must
27
      consider: (a) the probability of success in the litigation; (b) the difficulties, if any to be
28

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 1    encountered in the matter of collection; (c) the complexity of the litigation involved, and

 2    the expense, inconvenience and delay necessarily attending it; and (d) the paramount

 3    interest of the creditors and a proper deference to their reasonable views in the premises.”

 4    Martin v. Kane (In re A&C Properties), 784 F.2d 1377, 1381 (9th Cir. 1986).
 5                  45.     Furthermore, “[a] precise determination of likely outcomes is not

 6    required,” since “an exact judicial determination of the values at issue would defeat the

 7    purpose of compromising the claim.” In re Telesphere Comm’s, Inc., 179 B.R. 544, 553

 8    (Bankr. N.D. Ill. 1994). The Court’s role is not “finally to determine the numerous

 9    questions of law and fact raised . . . but rather to canvass the issue and see whether the

10    settlement ‘fall[s] below the lowest point in the range of reasonableness.” In re Lion

11    Capital Group, 49 B.R. 163, 175 (Bankr. S.D.N.Y. 1985).
12                  46.     Here, the Trustee has considered each of the four A&C Properties

13    factors in reaching the foregoing settlement with the Defendants, and submits that they

14    strongly support the Proposed Settlement.

15                  47.     As set forth above, the Trustee has concluded that the only claim on

16    which he has a significant chance of prevailing would be the preference claim, and even if

17    he did so — which remains uncertain given his need to prove that one of more of the

18    Defendants were insiders of the Debtor at the time of the payment — his likely recovery

19    from such claim would be in the range of $600,000 to $650,000 due to Fertitta Enterprises’

20    right to offset the amount of the payment that was secured.

21                  48.     By contrast, the value to the Estate of the Proposed Settlement —

22    i.e., the $525,000 payment plus the savings of $378,371.61 in administrative claims — will

23    provide the Estate with a benefit of approximately $903,370 (again, without taking into

24    account Mr. Backman’s contribution of $50,000 of the fee to which he would be entitled

25    from the preference recovery5).

26
             5
27                 The $903,370 figure also does not take into account the $125,000 fee to
      which Mr. Backman will be entitled from the Proposed Settlement, for the obvious reason
28                                                                                (continued...)

                                                   12
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 1                  49.     Regarding the second factor — the difficulty of collection — the

 2    Trustee did not consider this factor a significant one in his determination as to an

 3    appropriate settlement amount, because he assumes that, within limits, the Defendants

 4    would have been able to pay more than the $525,000 in cash that they are paying under

 5    the Proposed Settlement. Still, it bears noting that the only the claim aside from the

 6    preference claim as to which the Trustee, at one point, saw a reasonable chance of

 7    prevailing is the section 548 claim against Zyen, and significant doubt exists as to Zyen’s

 8    ability to pay a substantial judgment in view of what the Trustee understands about its

 9    current financial condition and the fact that, were the Court to avoid the transfer and

10    order the Zyen assets returned to the Trust Estate, the Trustee could face substantial

11    difficulty in monetizing those assets.

12                  50.     As for the third A&C Properties factor — the complexity of the

13    litigation and the delay in pursuing it — the Trustee submits that, as with the first factor,

14    it weighs strongly in favor of the Proposed Settlement here. The Adversary Proceeding

15    here involves multiple highly complex claims and defenses — indeed, the Court has

16    bifurcated that case not only between liability and damages on the non-preference claims,

17    but also on the liability issues along regarding the preference and the non-preference

18    claims. And even were the Trustee to prevail, on the preference claim or any other, little

19    question exists that the Defendants would appeal the Court’s ruling, probably at several

20    levels, meaning potentially years more of litigation before the Trust Estate would recover

21    any funds from this litigation.

22                  51.     Finally, regarding the final A&C Properties factor, the Trustee does

23    not currently know what position the Creditors’ Advisory Committee under the Trust

24

25           5
              (...continued)
26    that, whether settled or tried, Mr. Backman would be entitled to a fee — indeed, absent
      his $50,000 contribution to the Estate, a potentially significantly larger fee — for his
27    services. At the same time, the figure does not include the significant costs in terms of
      expert testimony and other expenses that would be incurred were the case to proceed to
28    trial and appeal.

                                                   13
     Case 08-10474-mkn       Doc 687     Entered 04/18/12 06:54:51        Page 14 of 18



 1    Agreement will take with respect to the Proposed Settlement. The Trustee has no doubt,

 2    however, that certain creditors could be disappointed in what they may view as the

 3    relatively low amount that the Proposed Settlement will net for unsecured creditors.

 4                  52.    That being said, the Trustee has litigated the Adversary Proceeding

 5    for more than two years with the interests of the unsecured creditors (as well as the other

 6    Trust beneficiaries, including the administrative claimants) as his paramount concern.

 7    The Trustee not only strongly believes that the Proposed Settlement is the absolute best

 8    he could do for all of the beneficiaries, but also that much of the potential disappointment

 9    certain creditors may have stems from events and rulings that occurred during the

10    Bankruptcy Case itself, not this Adversary Proceeding, which were beyond the Trustee’s

11    ability to alter or challenge by the time of his appointment. The Trustee’s belief is

12    informed by the documents and evidence adduced in the case, the foregoing legal

13    authorities, and his and his counsel’s extensive experience in bankruptcy and bankruptcy-

14    related litigation. Accordingly, the Trustee believes and submits that the Proposed

15    Settlement satisfies the fourth A&C Properties factor in that it takes into account the

16    paramount interests of all of the Trust’s beneficiaries and obtains for them the best

17    possible results under the difficult circumstances at issue here.

18                  53.    Accordingly, the Trustee believes and submits that the Proposed

19    Settlement satisfies the fourth A&C Properties factor in that it takes into account the

20    paramount interests of all of the Trust’s beneficiaries and obtains for them the best

21    possible results under the difficult circumstances at issue here.

22

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     Case 08-10474-mkn        Doc 687    Entered 04/18/12 06:54:51       Page 15 of 18



 1
                                             CONCLUSION
 2
                    WHEREFORE, for all of the reasons set forth above, the Trustee submits
 3
      that the Proposed Settlement is reasonable, fair and equitable, and in the best interests of
 4
      the Trust Estate and its beneficiaries, and prays that this Court enter an Order
 5
      (i) approving the Trustee’s Proposed Settlement, as described above and documented in
 6
      Exhibit A hereto, (ii) finding that notice of this motion and of the opportunity to object
 7
      thereto were appropriate and sufficient, and (iii) granting the Trustee such other and
 8
      further relief as the Court deems just and proper.
 9
      Dated: April 18, 2012
10
                                                  Respectfully submitted,
11

12
                                                         /s/ Jonathan A. Backman
13

14
      Jonathan A. Backman
15    Law Office of Jonathan A. Backman
      117 N. Center Street
16    Bloomington, Illinois 61701-5001
      (309) 820-7420
17    FAX: (309) 820-7430
      jbackman@backlawoffice.com
18
      Counsel to David Herzog, as Liquidating Trustee for the
19     Estate of Xyience, Incorporated
20

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                                                    15
     Case 08-10474-mkn           Doc 687   Entered 04/18/12 06:54:51   Page 16 of 18



 1                                     CERTIFICATE OF SERVICE

 2                   I, Jonathan A. Backman, hereby certify that on April 18, 2012, I

 3    electronically filed the foregoing Liquidating Trustee’s Motion for Approval of a

 4    Settlement and Compromise, using the ECF system which will send notification of such

 5    filing to the following:

 6    SHEENA R. AEBIG
      on behalf of Interested Party DARLIS INVEST & TRADE CORP.
 7    saebig@williamskastner.com

 8    JEFFREY R. ALBREGTS
      on behalf of Defendant ARLINGTON MID-CITIES WAREHOUSES, INC.
 9    jalbregts@nevadafirm.com, kmorrow@nevadafirm.com

10    OGONNA M. ATAMOH
      on behalf of Creditor SANTORO, DRIGGS, WALCH, KEARNEY, HOLLEY &
11    THOMPSON
      oatamoh@nevadafirm.com,
12    bkecf@nevadafirm.com;sliberio@nevadafirm.com;manthony@nevadafirm.com;rholley@nev
      adafirm.com;vnelson@nevadafirm.com;sdwkhtecf@gmail.com;oswibies@nevadafirm.com;c
13    mecf40@gmail.com

14    KEITH MILES AURZADA
      on behalf of Creditor RACKSPACE US, INC.
15    keith.aurzada@bryancave.com, lupe.rojas@bryancave.com

16    TODD L. BICE
      on behalf of Defendant ADAM FRANK
17    lit@pisanellibice.com, mar@pisanellibice.com

18    JAMIE S. COGBURN on behalf of Plaintiff XYIENCE INCORPORATED
      jsc@cogburnlaw.com
19
      LAUREL E. DAVIS
20    on behalf of Debtor XYIENCE INCORPORATED
      ldavis@fclaw.com, mhurtado@fclaw.com
21
      MICHAEL N. FEDER
22    on behalf of Creditor ZUFFA MARKETING,LLC
      mfeder@lrlaw.com, cwrangham@lrlaw.com;nfortenberry@lrlaw.com
23
      GREGORY E. GARMAN
24    on behalf of Counter-Defendant FERTITTA ENTERPRISES
      bankruptcynotices@gordonsilver.com, bknotices@gordonsilver.com
25
      DOUGLAS D. GERRARD
26    on behalf of Creditor MJE INVESTMENTS, LLC
      DGERRARD@GERRARD-COX.COM, ekaymedellin@gerrard-
27    cox.com;dwaddoups@gerrard-cox.com;jberghammer@gerrard-cox.com

28
     Case 08-10474-mkn     Doc 687   Entered 04/18/12 06:54:51    Page 17 of 18



 1    JAMES D. GREENE
      on behalf of Defendant ARC INVESTMENT PARTNERS
 2    jgreene@greeneinfusolaw.com,
      cjorvig@greeneinfusolaw.com;fritchie@greeneinfusolaw.com;kfarney@greeneinfusolaw.com
 3    ;bschmidt@greeneinfusolaw.com

 4    JEFFREY R. HALL
      on behalf of Interested Party DAVID HERZOG
 5    jhall@hutchlegal.com, kthompson@hutchlegal.com

 6    KEVIN R. HANSEN
      on behalf of Defendant BARDO EQUITIES, LLC
 7    kevin@shumwayvan.com

 8    BRIGID M. HIGGINS
      on behalf of Defendant ZINKIN ENTERTAINMENT LLC,
 9    bankruptcynotices@gordonsilver.com, bknotices@gordonsilver.com

10    CARRIE E. HURTIK on behalf of Creditor A. J. ROBBINS, PC
      churtik@hurtiklaw.com
11
      MATTHEW L. JOHNSON
12    on behalf of Creditor THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS
      bankruptcy@mjohnsonlaw.com, mjohnson@mjohnsonlaw.com;candice@mjohnsonlaw.com
13
      PAMELA R. LAWSON
14    on behalf of Creditor HUNTERTON & ASSOCIATES, A PROFESSIONAL
      CORPORATION
15    plawson@huntertonlaw.com

16    JON T. PEARSON
      on behalf of Debtor XYIENCE, INCORPORATED
17    pearsonj@ballardspahr.com, gradyc@ballardspahr.com;koronac@ballardspahr.com

18    LUKE KRISTOPHER RATH
      on behalf of Interested Party DAVID HERZOG
19    krath@hutchlegal.com, k7lkr@aol.com

20    SAMUEL A. SCHWARTZ
      on behalf of Defendant NATHAN JUDD
21    sam@schwartzlawyers.com, ecf@schwartzlawyers.com

22    LAWRENCE J SEMENZA
      on behalf of Defendant ARC INVESTMENT PARTNERS, LLC
23    lsemenza@bhfs.com, orodriguez@bhfs.com

24    AMBRISH S. SIDHU
      on behalf of Stockholder ALISON NEWMAN
25    ecfnotices@sidhulawfirm.com

26    ROBERT SPEAR
      on behalf of Petitioning Creditor LAWRENCE ABERLE
27    rspear@remmelspear.com, karlee@remmelspear.com;swaugh@remmelspear.com

28

                                               -ii-
     Case 08-10474-mkn      Doc 687     Entered 04/18/12 06:54:51       Page 18 of 18



 1    U.S. TRUSTEE - LV - 11
      USTPRegion17.lv.ecf@usdoj.gov
 2
      S. GARY WERLEY
 3    on behalf of Defendant ARLINGTON MID-CITIES WAREHOUSES, INC.
      sgwerley@werleylaw.com
 4
      JAY YOUNG
 5    on behalf of Defendant PATRICK BRAUCKMANN
      jay@maclaw.com, dcolvin@maclaw.com;tszostek@maclaw.com
 6
      STEVEN L ZIMMERMAN
 7    on behalf of Creditor A. J. ROBBINS, PC
      steve@rzpc.com
 8
      MATTHEW C. ZIRZOW
 9    on behalf of Counter-Defendant FERTITTA ENTERPRISES
      bankruptcynotices@gordonsilver.com, bknotices@gordonsilver.com
10

11    and I hereby certify that I have delivered the document to the following parties by

12    electronic transmission and United States Priority Mail to:

13    HARLEY J. GOLDSTEIN
      MATTHEW E. MCCLINTOCK
14    Goldstein & McClintock LLLP
      208 South LaSalle Street
15    Suite 1750
      Chicago, IL 60604
16    Phone: (312) 337-7700
      harleyg@restructuringshop.com
17    mattm@restructuringshop.com
      on behalf of the Creditors’ Advisory Committee
18

19

20                                                        /s/ Jonthan A. Backman

21

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                                                  -iii-

				
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Description: Xyience Trustee Jonathan Backman recently announced a pending settlement deal with Fertitta Enterprises in a case that was supposed to go to trial earlier this month. The deal calls for the Fertittas to pay out less than a million and give up a claim due to Zuffa Marketing. For hundreds of burned shareholders, this motion kills their hopes of any significant recovery.