Update on Xyience Chapter 11 Bankruptcy case

Some interesting movement in the Chapter 11 Bankruptcy case of sport drink manufacturer Xyience. Last week, Forbes reported that Fertitta Enterprises was sanctioned by the Bankruptcy Court in Nevada for failing to provide certain information previously requested by the Bankruptcy trustee.

The sanctions stem from Fertitta Enterprises’ failure to provide e-mails from its chief financial officer which claim that it orchestrated the funding for Xyience during its bankruptcy proceedings. In addition to the sanctions, a motion for summary judgment has been filed by the trustee seeking an order that the Fertittas pay back over $945,000 and that Zyen, LLC does not have a security interest in Xyience assets.

Zyen, LLC loaned $12 million to Xyience in December 2007. The loan was secured by all assets of Xyience. Zyen, LLC was controlled by the Fertittas. The trustee alleges that this is a “loan to own” scheme. It occurs when a distressed entity must borrow money which it cannot repay and default is assured. The loan is secured by the assets of the entity so the lender will be able to foreclose and end up owning it.

Via The Las Vegas Review Journal:

…Chicago-based trustee David Herzog contends that the $12 million that Fertitta entities loaned Xyience in 2007 as it faltered financially came with such heavy-handed terms that it scared off potential buyers. As such, he (the trustee) will try to recoup damages that could lead to “potentially significant recoveries,” as described in court papers, at a trial now scheduled to start next spring.

Via Forbes.com:

In an Oct. 28 order, U.S. Bankruptcy Judge Lloyd King held that William Bullard, the chief financial officer of Fertitta Enterprises and a manager of Xyience, failed to comply with discovery requests for documents related to the company’s bankruptcy.

In addition to Bullard’s role with Fertitta Enterprises and Xyience, he is CEO of the Gordon Biersch Brewery/Restaurant chain. It is on the Gordon Biersch computer system where e-mails were found related to the Xyience bankruptcy.

More from Forbes.com:

The bankruptcy trustee lawyer, which oversaw the disposition of the 2008 Xyience bankruptcy, accused executives from Fertitta Enterprises of lying about the existence of e-mails which would have detailed how Fertitta Enterprises took control of Xyience with a $12 million loan.

Those documents include an e-mail to Lorenzo Fertitta one day before his firm lent the $12 million to Xyience, disclosing a potential $150 million buyout offer from Cott Corp. The buyout could have allowed Xyience to repay investors, who instead lost everything when the company defaulted and the Fertittas seized its assets.

In addition, the day that the Fertittas lent Xyience $12 million, it paid their Zuffa Marketing $4.5 million and paid another $1 million to Fertitta Enterprises.

The bankruptcy trustee filed a summary judgment motion seeking an order on two of the causes of action in its case against Fertita Enterprises and Zyen, LLC. The trustee is seeking an order which asks the court to order Fertitta Enterprises to pay the trustee in excess of $945,000 as a result of the alleged “loan to own” scheme. In addition, the trustee seeks to avoid the security interest granted Zyen, LLC in the transaction with Xyience. Thus, the trustee would not have to repay Zyen, LLC first if it receives money to distribute to creditors. A hearing on the motion for summary judgment will be heard on December 9th.

We will continue to monitor the case as it develops and report on any other court filings.

Since the initial bankruptcy, Xyience’s assets were purchased in a Chapter 11 proceeding and is one of the UFC sponsors. The current Xyience company has no relation to the bankruptcy proceedings.