Fertitta unit to settle claims over Xyience

A Fertitta entity will pay $525,000 to settle claims that a bankruptcy trustee had hoped would reap millions of dollars for creditors of the Xyience Inc. energy drink and fitness supplement company.

In a case launched late in 2009, Chicago-based trustee David Herzog contended that Fertitta Enterprises had improperly taken $1.03 million out of Xyience prior to its Chapter 11 filing in January 2008. Under his theory, Fertitta Enterprises, which oversees some of the family's non-gaming interests, qualified as a corporate insider that had to refund anything it withdrew from the company in the year prior to bankruptcy.

Fertitta attorney Gregory Garman had fought the insider designation and further argued that it had valid liens on other company assets.

Although Xyience is defunct as an independent company, the brand name and the related Xenergy drink lineup continue under the Fertitta umbrella.

Concerning the much larger issue of whether Fertitta Enterprises and its allies had covertly orchestrated Xyience's demise to gain control of the assets cheaply, Herzog conceded in court papers that he had a weak case.

"(T)he trustee has determined that the evidence does not support claims of misconduct, breaches of fiduciary duty and conspiracy," wrote Jonathan Backman, Herzog's attorney, in explaining the settlement.

Some of the people who took charge of Xyience in June 2007, after the first of two Fertitta loans intended to bail out the company, "made some questionable business judgments, (but) they were acting in what they thought were the best interests of the company," Backman added.

The settlement will face a U.S. Bankruptcy Court hearing on May 16, which was originally scheduled as the start of a trial. Even though a group of bloggers has waged an online war against the Fertittas over the demise of Xyience, no one filed an objection by the May 2 deadline.

The Fertitta interests sought to keep Xyience alive because of cross promotions with the UFC mixed martial arts league. This led to a $1 million loan to the company in July 2007, followed by a $12 million loan three months later that was used in part to repay the first loan.

But the company still fell into bankruptcy and was sold to Manchester Consolidated Corp. in 2008. Manchester defaulted in 2009, opening the way for the Fertittas to take over as the main creditors.

Herzog had built his case around the contention that the second loan came with such onerous terms that it scared away other investors. With Fertitta allies in charge of the company, he contended, the outcome was preordained.

But the Fertittas sharply resisted this contention and made it clear that no settlement dollars were paid because of it. Instead, the conspiracy allegations were dismissed outright.

"They made a loan and it just didn't pay off," said Garman. All the terms had been set through standard negotiations, he added.

As part of the settlement, Zuffa Marketing, another Fertitta entity, will put a $6 million claim behind unsecured creditors in the repayment line. That means the claim is a complete loss.

According to court documents filed in 2008, unsecured creditors were owed $14.9 million. However, Backman said accurate numbers require sifting through individual claims to determine their validity, a process that could take months.

In January, Herzog dropped a request for sanctions against William Bullard, who worked with the Fertittas in connection with Xyience. U.S. Bankruptcy Judge Lloyd King had ruled last November that Bullard, CEO of Gordon Biersch Brewing Co. and an officer in Fertitta Enterprises, had discarded some evidence, but the trustee decided it wasn't worth the legal work to pursue the sanctions further.

Contact reporter Tim O'Reiley at toreiley@reviewjournal.com or 702-387-5290.