Joe Francis (“Joe’s”) decision to file bankruptcy is not receiving a lot of media attention after the initial filing because frankly, bankruptcy is complicated. Like romantic relationships, you just can’t predict every turn of events.
Joe Francis, Steve Wynn
Wynn Resorts, LLC, the largest creditor of the GGW entities, has now moved to appoint a trustee over all of GGW and Joe’s corporate assets. The Court just granted an early hearing for the first week of April. A copy of the motion is here: Wynn Mtn to Appt Trustee
Joe established a very elaborate judgment protection scheme that has protected him for the past two years since Wynn Resorts obtained various judgments against him. However, the three card Monte game is about to end. Joe made a tactical error in his federal Florida civil case which caused his incarceration. That case set off a chain reaction and filing bankruptcy now is a horrible blunder. This is because when you are dealing with Steve Wynn, you are dealing with one of the world’s savviest, smartest, motivated, and well-funded litigants in the world. The debtor in this case and those in three related cases all are part of the Girls Gone Wild empire whose entire revenue stream is in front of one person, Judge Sandra R. Klein.
In case you don’t really know, the “empire” of Joseph Francis (“Joe”) is a series of businesses that generate sales of videos and paid programming. Girls Gone Wild “is an adult entertainment company” known for videos that “typically involve camera crews at party locations engaging young college aged women who willingly expose their bodies or act ‘wild.’”
For more than the past year, the GGW companies have caused substantial funds to be paid to Joe personally. This was not done by means of paying directly to Joe a salary, consulting fee or any other manner of cash payments. Instead, as part of a scheme to allow Joe to avoid his creditors, the GGW companies utilized corporate assets to pay all or substantially all of his personal expenses, including his mortgage, personal American Express bills, and hundreds of thousands of dollars of his legal fees on personal matters in which the GGW companies had no business interest.
The GGW companies made these “distributions” to Joe even though, on paper, Joe had no ownership interest in the GGW companies and was not their employee. The Girls Gone Wild companies are ultimately owned by a foreign trust (formed in the Cook Islands) for which Joe is the person who funded the trust and is one of the beneficiaries.
No money had ever been distributed to the trust—all of it going to Joe who, until late last year, was the manager of the GGW LLC’s which make up Girls Gone Wild. Joe’s management role at GGW was only changed—on paper. Late last year, Christopher Dale (“Dale”), the individual who signed the GGW bankruptcy petitions, was installed as the new manager just months prior to the commencement of the bankruptcies for the GGW companies.
Dale previously testified that he was the human resources director at the Girls Gone Wild companies and that he knew nothing about their finances, daily operations, and relationship with Joe outside of that role.
Both courts in Nevada and California have examined the facts pertaining to the manner in which the GGW companies are operated and their relationship with Joe. Both courts have made preliminary determinations that the evidence reflects an improper relationship between Joe and these companies, notwithstanding their efforts to hide that relationship through the GGW companies’ financial arrangements and the use of figurehead managers, such as Dale. Indeed, on much the same evidence as is presented here, a state court in Nevada has determined that there is a substantial likelihood that Wynn Las Vegas will prevail on its claims that the GGW companies are Joe’s alter-egos. Similarly, a state court in California has just determined that a limited receiver should be appointed to review the books and records of the companies and to determine what income of Joe has been hidden through the GGW companies’ businesses.
The diversion of the GGW companies’ assets to satisfy Joe’s personal obligations and the GGW companies’ use of “puppet” management to ensure that the GGW companies’ funds will continue to be funneled to Joe to support his lifestyle demonstrate the complete abandonment of the GGW companies’ fiduciary responsibilities to creditors. Simply stated, Joe has used the GGW companies as his personal “piggybank”. Joe’s self-dealing has been at the expense of the GGW companies and their creditors and through his de facto control over the GGW companies, Joe has misused the funds of the GGW companies for his benefit.
Under these circumstances, Wynn is asking the Court to appoint a trustee to basically shut off the cash, marshal the assets, and provide the legal death sentence to Joe Francis.
What Really is The Girls Gone Wild Enterprise
According to the www.girlsgonewild.com web-site, GGW Direct “offers products and services to adult consumers” including a “monthly program” and other products and services provided on an “interactive online service operated by GGW Direct and/or its affiliates.” The website states: “Since 2008, the Girls Gone Wild (GGW) products have been sold primarily through their website as streaming videos, downloads, and DVDs.” It also advises that information regarding Girls Gone Wild can be obtained from GGW Brands and from an entity identified as “Trebax Marketing Limited. EU Corp. 133 Grigori Afxentiou, Ag. Dometios, 2369 Nicosia, Cyprus.” The custodian of records for “Girls Gone Wild” is indicated to be located at 7120 Carlson Circle, Unit 263, Canoga Park, California 91303.
The GirlsGoneWild.com website has a link to a website entitled MeetJoeJoe.com, which provides additional information about the GGW companies’ enterprise and Joe’s relationship to it.
Among other information, the website (i) describes Girls Gone Wild as “a $100 million company”; (ii) mentions that “Girls Gone Wild acquired two million-dollar tour buses”; (iii) states that “[b]ars, clubs and entertainment venues across the country are eager to book Girls Gone Wild events for the crowds [they] bring[] in, providing yet another revenue stream for Girls Gone Wild”; (iv) reveals the existence of a “corporate retreat in Puerto Vallarta, Mexico, to serve the expanding needs of his company” and which “serves as a shooting location for infomercials, making it a valuable asset to the company and an excellent investment, much like the Playboy Mansion.”; (v) discusses additional business lines, such as a “Girls Gone Wild clothing line” and “lifestyle entertainment products. . . distributed to audiences worldwide”; (vi) notes that “[i]n 2008 Joe launched Girls Gone Wild Magazine”; and (vii) confirms that it is Joe who is “overseeing this diverse business organization.”
B. The GGW companies’ Liability to Wynn Las Vegas
1. The Nevada Marker Judgment
On June 18, 2009, Wynn Las Vegas obtained a judgment against Joe in the District Court of Clark County, Nevada, arising from unpaid gambling debts (the “Nevada Marker Judgment”).
The court awarded Wynn Las Vegas $2 million plus pre-judgment interest of $838,356.00 and post-judgment interest accruing at the rate of $986.30 per day. As of February 13, 2013, Wynn Las Vegas is owed $3,923,597.23 on account of the Nevada Marker Judgment. The Nevada Marker Judgment is a final, non-appealable order.
2. The Nevada Defamation Judgment
On April 9, 2012, Wynn Las Vegas obtained a judgment against Joe in the District Court of Clark County, Nevada, on account of claims of defamation (the “Nevada Defamation Judgment”). The court awarded Wynn Las Vegas $7.5 million, consisting of $5.0 million in compensatory damages and $2.5 million in punitive damages. As of February 13, 2013, Wynn Las Vegas is owed $8,164,340.12 on account of the Nevada Defamation Judgment.22 The court denied Joe’s motion to set aside the Nevada Defamation Judgment entered by default and Joe has appealed the court’s denial of such motion.
3. The Alter Ego Finding
On April 18, 2012, Wynn Las Vegas commenced an action in the District Court for Clark County, Nevada, against GGW Direct, GGW Brands, GGW Events, Joe, and certain other individuals and entities (the “Alter Ego Litigation”), in which Wynn Las Vegas alleges, among other things, that:
Wynn has been largely unable to collect on its Judgment against Joe because Joe is using the GGW Entities to hide his assets and income.
. . . . Specifically, Joe uses the GGW Entities’ funds to pay his personal expenses in order to prevent Wynn from collecting its Judgment.
. . . . Joe is the chief financial officer of some or all of the GGW Entities.
. . . . Joe exercises complete dominion and control over the GGW Entities.
. . . . The GGW Entities are influenced and governed by Joe, and Joe acts as the ultimate authority for their business and financial transactions.
. . . . Joe commingles his personal funds with the funds of the GGW Entities and makes unauthorized diversions of funds from the GGW Entities for his personal use.
. . . . Joe causes the GGW Entities to pay some or all of his personal expenses from the GGW Entities’ accounts.
. . . . Upon information and belief, the GGW Entities fail to comply with corporate formalities required by law.
On August 17, 2012, the court issued a Preliminary Injunction in the Alter Ego Litigation (the “Alter Ego Injunction”) barring the defendants from transferring funds of GGW Direct, including $1,846,578.28 held in an attorney’s trust account because “in the absence of such relief, one or more of the defendants is likely to transfer GGW Direct’s assets out of the State of Nevada.” The court found that Wynn Las Vegas: has a substantial likelihood of success on the merits of its claim for declaratory relief related to alter ego. . . and has presented evidence that:
(a) Joe uses GGW Direct, LLC as a shield from liability by commingling his personal funds with those of GGW Direct;
(b) Joe uses the funds of GGW Direct to pay his personal expenses;
(c) Joe is abusing the business entity form to frustrate creditors. . . ;
(d) As the person most knowledgeable of the day to day operations of GGW Direct and the sole signatory on checks issued by GGW Direct, Joe likely controls GGW Direct’s operations;
(e) There is such unity of interest between GGW Direct and Joe such that GGW Direct is the alter ego of Joe; and
(f) In this instance, to recognize the business entity form would work an injustice on Joe’ creditors, including Wynn [Las Vegas]
4. California Marker Judgment Collection Proceedings
On October 2, 2009, Wynn Las Vegas filed a Judgment Based on Sister-State Judgment in
the Superior Court of the State of California for the County of Los Angeles, thereby registering the Nevada Marker Judgment in the State of California and commencing case number BS123009 (the “California Marker Judgment Litigation”). On November 16, 2012, Wynn Las Vegas filed a Motion for Appointment of Limited Receiver in the California Marker Judgment Litigation (the “Limited Receiver Motion”), requesting that the court appoint a limited receiver
(1) to demand, enforce, collect, and receive all earnings by, and/or any entitlement to compensation (collectively, “earnings”), earned or owed to. . . Joe. . . from any and all sources, including but not limited to [the GGW companies] (together the “GGW Entities”);
(2) to enter upon the business premises of the GGW Entities and to receive, review and reconcile the books and records of the GGW Entities for the purpose of determining the earnings of Joe; and
(3) to take possession of all books and records of Joe and the GGW Entities to enable the receiver to collect the earnings of Joe,. . . .
On March 5, 2013, the court entered its Order Appointing Limited Receiver in Aid of Execution to Enforce Judgment (the “Limited Receiver Order”), appointing Jay D. Adkisson as the limited receiver and giving the receiver the powers requested in the Limited Receiver Motion, including, in addition to those noted above, the power to contact each of the accounts receivable holders of the GGW companies relating to Joe, and enjoining Joe, the GGW companies and their agents, representatives, employees and others from interfering with the receiver or collecting accounts receivable of Joe and of the GGW companies relating to Joe or transferring or hypothecating assets of Joe and of the GGW companies relating to Joe.
5. The Commencement of the GGW companies’ Cases
On February 27, 2013, each of the GGW companies filed voluntary chapter 11 petitions in this Court. Each of the GGW companies, in its List of Creditors Holding 20 Largest Unsecured Claims, identifies Wynn Las Vegas as the holder of an unliquidated and disputed (or, in the case of GGW Brands, just disputed) general unsecured claim in the amount of $10.3 million.
C. The Organizational Structure of the GGW companies and Joe’s Control
In connection with the Alter Ego Litigation, Wynn Las Vegas conducted the equivalent of a
Federal Rule of Civil Procedure 30(b)(6) deposition on the person designated by GGW Brands and GGW Direct to testify regarding their structure and their relationship with Joe. The companies designated Robert Klueger (“Klueger”), former counsel to the GGW companies. Klueger admitted that Joe personally hired him to represent the GGW companies. Klueger testified that GGW Direct is an operating company that produces videos, whereas GGW Brands is a holding company that owns GGW Direct, as well as the two other GGW companies, GGW Events and GGW Magazine. GGW Brands is the sole member of each of the subsidiary GGW companies.
GGW Brands has a single member, Pablo Holdings (“Pablo Holdings”), an overseas limited liability company located in Nevis & St. Kitts. At the time, Pablo Holdings was managed by Joe and its sole member was the Ridgewood Global Trust, established under the laws of the Cook Islands. The person who funded the Ridgewood Global Trust is Joe, who also may be one of the beneficiaries of that trust. Ultimately, as Klueger confirmed, as a manager of Pablo Holdings, Joe exercised direct control over all the GGW companies.
Klueger provided additional evidence of Joe’s de facto control over the GGW companies. At his depositions, Klueger confirmed that Joe was in charge of the company’s main function, which he described as the production of intellectual property. Klueger testified that Joe hired executive Kevin Westberg and terminated his predecessor. Klueger also stated that Joe had the ultimate authority to approve the banking relationships into which the GGW companies would enter. Simply put, Klueger confirms that Joe is “the ultimate sole owner” of the GGW companies. In his deposition in the Alter Ego Litigation, Dale—the individual now being held out as the “Manager” of the GGW companies and the person signing the bankruptcy petitions, schedules and statements of financial affairs on the GGW companies’ behalf—also confirmed Joe’s control and authority at the companies. Dale acknowledged that Joe could direct him to “fire anybody he wanted to.” Dale also revealed that Joe had at one time received W-2s from GGW Direct, and that it is Joe’s signature on all the paychecks for the GGW companies.
The companies’ former attorney, Brian Rayment, corroborates other evidence confirming Joe’s control. Rayment explained that he served somewhat as an outside general counsel to the various GGW entities. He understood Joe to be the manager of GGW Brands. Rayment reaffirms Joe was the person in charge for all of the entities. Though the GGW companies and parent entities are structured in a manner to confuse and frustrate creditors, prior testimony obtained by Wynn Las Vegas confirms the GGW companies are ultimately under the sole control of Joe.
D. Joe’s Misuse of Company Funds for His Own Personal Expenses
As discussed above, to the best of Wynn Las Vegas’s knowledge, Joe has no official individual ownership of the GGW companies. The ultimate owner on paper is the Ridgewood Global Trust. However, Ridgewood Global Trust has never received any distributions from its subsidiaries since the time it was formed. Instead, distributions are made to Joe through what Klueger referred to as a “notional” salary (face amount of note) of at least $50,000 per month. As Klueger explained, Joe “would run up credit card bills, and the entities would directly pay his credit card bills or other similar personal expenses,” regularly exceeding the set amount. The personal expenses were added up at the end of the year and Joe would pay taxes on account of them.
Significantly, there was no control over Joe’s “compensation,” because Joe determined his compensation based on what he chose to spend; his compensation was in no way tied to what he did for the GGW companies or how many hours he worked each month.
Thus, the only limit as to the amount of funds Joe could divert from the GGW companies was the financial wherewithal of the enterprise. As Klueger testified: “Mr. Joe is subject to the profits, the net profits, of the entities whether they’re distributed or not. So there’s no need to distribute it. I mean, if there is a net profit, it’s allocated to him and reported on his taxes.” After all, Joe is “the ultimate sole owner” of the GGW companies and thus “there is no one who could have vetoed an item of compensation.”
Klueger noted, “[u]ltimately, Mr. Joe has to pick up the income of these entities, the net income whether they are distributed to him or not.” The structure set up by Joe allows him to simply use the assets of the GGW companies to pay his personal obligations. As the person ultimately in charge, nothing has prevented him from taking as much as he needs or wants. An examination of limited credit card bills obtained in discovery in other actions confirms that the GGW companies are paying for Joe’s personal expenses. For example, in November 2011, Joe had a balance of $38,441.59 on an American Express credit card under Joe’s name. The bill reveals thousands of dollars spent on medical expenses, clothes, and groceries. In a ledger produced by the GGW companies as part of the Alter Ego Litigation, GGW Direct paid this bill, but referenced it in company records as a “Blue Horse” transaction.
The use of the GGW companies’ funds for Joe’s own personal interest includes the payment of substantial legal fees for wholly personal matters. His practice of diverting company money for personal legal expenses is long-standing. David Houston, a personal friend of Joe, acts as Joe’s “consulting attorney” on various matters and sometimes as his counsel of record. Houston has provided legal services to Joe in relation to numerous personal matters. In 2011, and continuing into 2012, GGW Direct began paying Houston’s bills. Joe was the signatory on every single check that GGW Direct sent to Houston.
From mid-2010 to late 2011, Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor represented Joe in a variety of personal matters and some of his entities on others. This firm settled the Jayde Nicole case for Joe Francis and others. GGW Direct began making the payments to Liner Grode in December 2010, even though Liner Grode did not begin representing GGW Direct until the summer or fall of 2011. While Joe did not make a single payment to Liner Grode, GGW Direct and another of Joe’s companies, Pepe Bus, made payments of over $270,000.00. Again, Joe signed every check from both of these entities. Perhaps the most glaring and recent example of Joe’s use of company funds for his personal legal expenses is the work performed by attorney Aaron Aftergood (“Aftergood”). Aaron Aftergood is a great attorney but relatively new to private practice. Representing Joe was more than he ever bargained for I can assure you, but he learned a lot through this process.
During 2012, Aftergood represented Joe in the California Marker Judgment Litigation. Additionally, throughout 2012, Aftergood represented Joe in a defamation case Stephen Wynn brought against Joe that resulted in a $19 million judgment against Joe, which included a nearly two week trial and post-trial motions. Both of these matters are uniquely personal to Joe. Aftergood also testified in deposition about a host of other matters in which he represented Joe, personally.
For each of these matters, Aftergood was not paid by Joe. Instead, he was paid by one of the GGW companies.
Preliminarily, recent filings in the Bankruptcy Court appear to corroborate that the GGW companies continued to pay Joe’s personal expenses up until the bankruptcy filing. For instance, GGW Direct’s Statement of Financial Affairs reveals that a total of approximately $283,000 has been paid to American Express within ninety days of the bankruptcy filing, as well as more than $300,000 of fees of various law firms, suggesting that GGW Direct is still paying Joe’s credit cards and possibly his legal bills.
E. Joe’s Propensity to Manipulate the GGW companies and Divert Their Assets to Avoid Liability or to Defeat Court Orders.
On April 18, 2012, Wynn Las Vegas commenced the Alter Ego Litigation. The court first issued a temporary restraining order freezing nearly $2 million of funds claimed to belong to GGW Brands and/or GGW Direct which were held in David Houston’s client trust account. On July 20, 2012, after finding that Wynn Las Vegas had demonstrated a substantial likelihood of prevailing on its alter ego claims, the Nevada court issued the Alter Ego Injunction, continuing to freeze the funds held by Houston. Apparently reading the “writing on the wall,” five days later, on July 25, 2012, Joe sent an agreement through his assistant to DirecTV, one of the broadcasters of Girls Gone Wild content, attempting to switch the identity of the licensor from one of the GGW companies—GGW Direct—to another company known as “Argyle Media Sales, LLC.” The email chain reflects that DirecTV balked at the change as raising “red flags” and Joe, personally, relented. Though his scheme failed, it is clear that Joe was attempting to move assets (and income flow) out of the companies (now the GGW companies) to avoid any liability.
This manipulation of the GGW companies for Joe’s purposes is not an isolated incident. As explained above, the GGW companies’ sole member is Pablo Holdings. Until late last year, Joe was the manager of Pablo Holdings, and therefore, Joe managed the GGW companies. However, in order to avoid impending court orders, the GGW companies’ management was changed in November of last year. On November 15, 2012, Wynn Las Vegas filed a motion for summary judgment in the Alter Ego Litigation, based in large part on Joe’s control of and financial dealings with the GGW companies.
On November 16, 2012, in the California Marker Judgment Litigation, Wynn Las Vegas filed its Limited Receiver Motion based on the same grounds. Three days later, the sole member of Pablo Holdings, the Cook Island trust, appointed Dale—previously merely the human resources director—as the manager of Pablo Holdings to put him in control of all management, including financial management, of the GGW companies.
WHY IS THE COURT GOING TO APOINT A TRUSTEE
The appointment of a chapter 11 trustee is governed by section 1104(a) of the Bankruptcy
Code, which provides:
(a) At any time after the commencement of the case but before
confirmation of a plan, on request of a party in interest or the United States
Trustee, and after notice and a hearing, the Court shall order the appointment
of a trustee –
(1) For cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause, but not including the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor; or
(2) If such appointment is in the interests of creditors, any equity security holders, and other interests of the estate, without regard to the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor.
The determination of “cause” under section 1104(a)(1) is within the discretion of the court. If the court finds “cause,” then appointment of a trustee is mandatory.
It is obvious that after reading the evidence, the ill-advised, poorly planned, and slapped together bankruptcy filings, this was a bad idea. The GGW companies have not filed any of the normal motions that are made after a Chapter 11, like permission to use the cash in the company to pay the bills. Based on this transparent filing which shows no good faith, the Court will find that appointment is mandatory. If it does not find mandatory appointment, the facts set forth in the motions support a permissive appointment.
Once the Trustee is appointed, Joe will lose control of all of his companies and this will be the end of the Girls Gone Wild franchise in the writer’s opinion. The Trustee will uncover many operating issues. The assets will be sold to pay the creditors and Joe will be found to be the alter ego of many of these trusts holding ownership interest of the various GGW companies.
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